Connecticut Federal Court Allows CFPB Claims to Sue Mortgage Company and Directors for Alleged Licensing and Other Violations | Ballard Spahr LLP

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A federal district court in Connecticut refused to fire claims filed by the CFPB against a mortgage company and three of its officers for alleged violations of the Truth in Lending Act (TILA), Mortgage Law and Practice (MAP), and Protection Act consumer finance (CFPA).

The CFPB lawsuit names as defendants 1st Alliance Lending LLC and three individuals consisting of the company’s CEO, president of production and president of Capital Marketing. The CFPB alleges:

  • From 2015 to around 2019, 1st Alliance’s business model relied on sales employees known as Submission Coordinators (SCs) or Home Loan Consultants (HLCs) as the primary point of contact with consumers during the mortgage origination process.
  • The functions performed by SC/HLCs required them to be licensed as mortgage originators in each state in which 1st Alliance operated.
  • By 2017, 1st Alliance’s compliance department began raising concerns with company management, including individual defendants, that SCs were engaging in activities that would require a license.
  • SC/HLC presented themselves as approved in solicitation emails and social media profiles, required borrowers to submit certain documents before receiving loan estimates, and made false and misleading statements to consumers about the FHA refinancing program availability and program terms.

Based on these alleged facts, the CFPB makes the following assertions:

  • 1st Alliance violated TILA and Z regulations by failing to ensure that SC/HLCs were licensed as loan originators under the SAFE Act and by requesting to verify documents before issuing an E loan
  • 1st Alliance violated the MAP Rule by making false and misleading statements to potential borrowers regarding their eligibility for refinancing programs and the terms of the program.
  • Each of the above alleged violations also constituted violations of the CFPA by 1st Alliance.
  • 1st Alliance and Individual Defendants engaged in unfair and deceptive acts or practices in violation of the CFPA due to the use of unlicensed SC/HLCs and SC/HLCs presenting themselves to consumers as licensed and making misrepresentations about the availability of FHA refinancing programs and terms of the program.

Except for the CFPB’s assertion that 1st Alliance and the individual defendants engaged in deceptive acts or practices by misrepresenting the availability of FHA refinancing programs and the terms of the programs, the court denied the defendants’ motion to dismiss. The court held the following:

  • With respect to the CFPB’s allegation that 1st Alliance violated TILA and Regulation Z by failing to ensure that SC/HLCs were licensed as loan originators under the SAFE Act, the court dismissed 1st Alliance’s arguments that (1) although a license is required for loan originators, neither TILA nor the SAFE Act require a creditor to ensure that its individual employees hold a license, and (2) to the extent that Regulation Z imposes such a requirement, it constitutes an exercise of agency authority. The court found that Regulation Z requires loan originators to ensure that their loan originators are licensed and that this requirement is clearly authorized by TILA’s grant of power to the CFPB to issue implementing regulations. .
  • Regarding the CFPB’s allegation that 1st Alliance violated TILA and Regulation Z by requiring verification of documentation before providing a loan estimate, the court dismissed 1st Alliance’s argument that asking to verify documentation before providing a loan estimate would not violate Regulation Z. The court found 1st Alliance’s argument that the prohibition against requiring verification of information is only triggered when an application is complete is “untenable”. Although the court acknowledged that the commentary to Regulation Z states that a lender may collect “information” before providing a loan estimate, it noted that the commentary specifically states that such documentation to verify the information collected from the consumer cannot be required before providing a loan E
  • Regarding the CFPB’s allegation that 1st Alliance violated the MAP rule, the court dismissed 1st Alliance’s argument that the complaint had to meet the pleading standard for allegations of fraud. The court cited cases from other Second Circuit district courts that had declined to apply the standard for fraud claims in the context of consumer protection claims. The court found that the CFPB’s allegations, such as the allegation that 1st Alliance representatives repeatedly told consumers they would qualify for a mortgage when 1st Alliance had already received information that would disqualify the consumer, was sufficient to litigate a claim.
  • Since the above claims survived the dismissal, the court found that CFPB’s CFPA claim based on such violations also survived.
  • With respect to the CFPB’s UDAAP claims against individual defendants, the court first found that the proper standard of individual liability for UDAAP claims was the Federal Trade Commission Act (FTCA) standard. Under the FTCA, individuals can be held liable for unfair or deceptive acts and practices where they directly participated in the acts or practices in question or had the power to control them and they had or should have known or had knowledge actions or practices. The court rejected defendants’ argument that because the CFPA contains a provision under which an individual can be held liable for providing “substantial assistance” to a company engaged in violations of the UDAAP, it would compromise the CFPA enforcement regime to also allow for individual liability under the FTCA. Standard. The court found that the “substantial assistance” theory of liability was not relevant to determining whether an individual had directly committed a violation of the UDAAP. The court found that the CFPB had plausibly alleged that the tasks assigned to the SC/HLCs were subject to the knowledge and approval of the individual defendants and that the individual defendants were made aware that unlicensed employees were performing activities that required a license or were at least recklessly indifferent to their activities.

With respect to the CFPB’s UDAAP claim based on alleged misrepresentations regarding the availability of FHA refinancing programs and the terms of the programs, the court found the CFPB’s claims insufficient to substantiate a claim. According to the court, to plausibly allege that the defendants were aware of the alleged misrepresentations, the complaint had to allege that the SC/HLC made the misrepresentations in accordance or at least in accordance with internal policies and that the CFPB’s current allegations do not hadn’t done enough. Although the court denied the CFPB’s request, it did so without prejudice to a new filing.

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