Category Archives: Consumer Financial Protection

Third Circuit Holds that Envelope Revealing Consumer’s Account Number Violates the FDCPA

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By:      Daniel A. Cozzi and Diana M. Eng

The Third Circuit Court of Appeals recently held that an envelope revealing a consumer’s account number through a clear plastic window constitutes a violation of the Fair Debt Collection Practices Act (“FDCPA”). In doing so, the Third Circuit reversed the District Court of the Eastern District of Pennsylvania’s holding that the disclosure of a consumer’s account number is not a “benign” disclosure and thus constitutes a violation of § 1692f(8) of the FDCPA.

In Douglas v. Convergent, the Third Circuit addressed the issue of whether “the disclosure of a consumer’s account number on the face of a debt collector’s envelope violates § 1692f(8) of the Fair Debt Collection Practices Act.” Douglass v. Convergent Outsourcing, No. 13-3588, 2014 WL 4235570 (3d Cir. Aug. 28, 2014); 15 U.S.C. § 1692 et seq.

The FDCPA prohibits debt collectors from using “unfair or unconscionable means to collect or attempt to collect any debt.” 15 U.S.C. § 1692f. Further, Section 1692f(8) specifically limits the language that debt collectors may place on envelopes sent to consumers:

Using any language or symbol, other than the debt collector’s address, on any envelope when communicating with a consumer by use of the mails or by telegram, except that a debt collector may use his business name if such name does not indicate that he is in the debt collection business. (Emphasis added).

On May 16, 2011, Plaintiff/Appellant Courtney Douglass (“Plaintiff” or “Douglass”) received a debt collection letter from Convergent Outsourcing (“Convergent”) regarding the collection of a debt that Douglass allegedly owed to T-Mobile USA. The name Convergent, followed by Convergent’s account number for the alleged debt were visible on the letter, and through the clear plastic window of the envelope. In addition, the “quick response” (“QR”) code, which, when scanned, reveals the name Convergent, the account number and the monetary amount of Douglass’s alleged debt, was also visible through the envelope window.[1]

Douglass filed a lawsuit in the United Stated District Court for the Eastern District of Pennsylvania, alleging that Convergent violated the FDCPA by including a QR code and account number in a location visible through the clear plastic window of a collection letter sent to Douglass. Convergent moved for summary judgment, arguing that displaying such information in the window of the envelope was benign. The District Court granted summary judgment in favor of Defendant Convergent under a “benign language” exception. Douglass v. Convergent Outsourcing, 963 F. Supp. 2d 440 (E.D. Pa., 2013). The “benign language” exception to Section 1692f(8) is a judicially created exception to Section 1692f(8), which allows a court to forgive a technical violation of Section 1692f(8) if the violation is benign in nature. The District Court reasoned that although Convergent may have technically violated § 1692f(8), a strict interpretation of the statute would contradict Congress’ true intent.

To reach this conclusion, the District Court cited to Waldron v. Professional Medical Management, which held that a literal application of § 1692(8) “would produce absurd results.” No. 12-1863, 2013 WL 978933 (E.D. Pa., March 13, 2013). The District Court and the Waldron court relied on similar applications of the “benign language” exception to Section 1692f(8) in the Fifth Circuit, Eighth Circuit, District of Connecticut and the Central District of California.[2] Ultimately, the District Court held that “the mere presence of an account number does not show that the communication is related to a debt collection and “[i]t also could not reasonably be said to ‘humiliate, threaten, or manipulate’ the debtor.” Douglass v. Convergent Outsourcing, 963 F. Supp. 2d at 446. Further, the District Court found that “[s]ince the ‘random series of letters and numbers’ revealed through the QR code does not ‘clearly refer to a debt,’ or ‘tend to humiliate, threaten, or manipulate’” the consumer, Convergent did not violate the FDCPA. Id. at 448. Accordingly, the District Court granted summary judgment in favor of Convergent.

Douglass appealed the order granting summary judgment. On appeal, Douglass argued that an unambiguous reading of § 1692(8) explicitly bars the disclosure of account numbers. Douglass v. Convergent Outsourcing, 13-3588, 2014 WL 4235570 (3d Cir. Aug. 28, 2014). Convergent maintained that a plain reading of § 1692(8) would lead to absurd results and thus its disclosure of Douglass’ account number is allowed under a “benign language” exception. Id. at *3. In response, Douglass argued that, even if a “benign language” exception applies, the disclosure of an account number is never benign. Id.

The Third Circuit found that “the plain language of § 1692f(8) does not permit Convergent’s envelope to display an account number” but declined to evaluate whether Section 1692f(8) allows for a “benign language” exception. Instead, the Third Circuit determined that a debt collector’s account number is never benign. Id. at *4. Specifically, the Third Circuit held that “[t]he account number is a core piece of information pertaining to Douglass’s status as a debtor and Convergent’s debt collection effort. Disclosed to the public, it could be used to expose her financial predicament. Because Convergent’s disclosure implicates core privacy concerns, it cannot be deemed benign.” Id. Based on these considerations, the Third Circuit found that “Douglass’s account number is impermissible language or symbols under § 1692f(8)” in violation of the FDCPA. Id. at *6.

On September 10, 2014, Convergent filed a Petition for Rehearing En Banc or Panel Rehearing.     

In light of this decision, entities collecting consumer debt should avoid the use of account numbers and/or QR codes on envelopes or within the viewing area of clear plastic envelope windows. Revealing such information on envelopes or through clear plastic envelope windows may expose debt collectors to liability under the FDCPA.

[1] A “QR” Code is a barcode like image which can be read from a Cell Phone.

[2] Strand v. Diversified Collection Serv., Inc., 380 F.3d 316, 318–19 (8th Cir. 2008); Goswami v. Am. Collections Enter., Inc., 377 F.3d 488, 494 (5th Cir. 2004); Lindbergh v. Transworld Sys., Inc., 846 F. Supp. 175, 180 & n. 27 (D. Conn. 1994); Masuda v. Thomas Richards & Co., 759 F. Supp. 1456, 1466 (C.D. Cal. 1991).

Flagstar Bank Agrees to $37.5 Million Settlement with CFPB

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By:  Joshua A. Huber

On September 28, 2014, Flagstar Bank, FSB (“Flagstar”) agreed to a Consent Order, under which it will pay $37.5 million to resolve allegations that it engaged in unfair acts or practices by impeding borrowers’ access to loss mitigation. Flagstar’s settlement with the Consumer Financial Protections Bureau (CFPB) marks the CFPB’s first major enforcement action under the new Mortgage Servicing Rules, which became effective January 1, 2014.[i]

The CFPB’s allegations encompassed five (5) areas of Flagstar’s default servicing practices. Specifically, the CFPB found that:

  1. Flagstar systematically failed to review loss mitigation applications in a reasonable amount of time which often caused required documents to expire. The CFPB specifically referenced Flagstar’s insufficient staffing, a significant backlog of loss mitigation applications, call wait times exceeding twenty-five (25) minutes and a ninety (90) day timeline to review a single borrower application.
  2. Flagstar withheld information that borrowers needed to complete their loss mitigation applications, such as “missing document letters” which are designed to inform borrowers of deficiencies in pending applications.
  3. Flagstar lacked a systemized, controlled process for calculating borrower income, which led to the improper denial of a large number of modifications.
  4. Flagstar impermissibly extended trial period plans beyond the timeframe permitted by investors, causing borrowers to lose out on permanent modifications.
  5. Flagstar’s ongoing administration of loss mitigation programs does not comply with the Mortgage Servicing Rules.

Flagstar consented to the issuance and enforcement of the Consent Order but neither admitted nor denied the CFPB’s findings of fact or conclusions of law. The remedial aspects of the Consent Order include a damages payment of $27.5 million ($20 million of which will be paid to foreclosed borrowers), a $10 million civil penalty pursuant to 12 U.S.C. § 5565(c) and a temporary prohibition on Flagstar’s ability to acquire servicing rights to any third-party originated loans which are in default.

The Consent Order demonstrates the CFPB’s continued focus on loss mitigation practices during the peak of the financial crisis. In light of this Consent Order, mortgage servicers would be well-served by reviewing and re-evaluating their loss mitigation processes.

[i] See 12 C.F.R. § 1024.41(b), et seq.

Maryland Court Rejects Borrowers’ Attempt to Expand FCRA Requirements on Mortgage Servicers

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By Joe Patry

Recently, in Bartlett v. Bank of Am., NA, CIV.A. MJG-13-975, 2014 WL 3773711 (D. Md. July 29, 2014), a Maryland federal court rejected borrowers’ argument that their mortgage servicer violated the FCRA by accessing their credit reports without notifying them that it had done so in connection with a loan modification application.  Id. at *1.

The Fair Credit Reporting Act (the “FCRA”), 15 U.S.C. 1681 et seq. requires that credit reporting agencies make a number of disclosures when financial institutions access a borrower’s credit report.  See, e.g., 15 U.S.C. § 1681g.  The FCRA also imposes certain requirements directly on mortgage lenders.  15 U.S.C. §1681g(g)(1).  In particular, when a consumer applies for a new mortgage loan on a residential property, the mortgage lender must notify the consumer “as soon as reasonably practicable” that the lender accessed that consumer’s credit report.  See Id.

The borrowers argued that because an application for a loan modification is an application for credit under the Equal Credit Opportunity Act (“ECOA”), 15 U.S.C. 1691 et seq., Bartlett, 2014 WL 3773711 at *4, an application for a loan modification requires that lenders must provide borrowers with the disclosures that mortgage lenders must provide under the FCRA.  Id.  Notably, ECOA is silent regarding notifying borrowers that lenders have accessed borrowers’ credit report in connection with a modification review.  However, ECOA requires that a creditor must inform a borrower of its action on a borrower’s application for a loan modification within thirty days of the receipt of a completed loan modification application. See Piotrowski v. Wells Fargo Bank, N.A., CIV.A. DKC 11-3758, 2013 WL 247549, *6 (D. Md. Jan. 22, 2013).

The Bartlett court rejected borrowers’ argument, noting that ECOA and FCRA have different requirements, and holding that an application for a loan modification is not an application for a new loan.  Bartlett, 2014 WL 3773711 at *4.  Thus, when the mortgage servicer in Bartlett accessed the borrowers’ credit reports while it was reviewing them for a loan modification, the mortgage servicer was not required to notify the borrowers that it had done so.  Id.

The Bartlett decision clarifies the interplay between ECOA and the FCRA and provides some guidance to lenders and consumers regarding what disclosures a lender must make when consumers apply for loan modifications.   

CFPB Bulletin Offers Guidance on Mortgage Servicing Transfers

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By: Michael J. Meehan

On August 19, 2014, the Consumer Financial Protection Bureau (CFPB) issued a fifteen-page bulletin addressing mortgage servicing transfers, and specifically, the potential risks to consumers that arise in connection with transferring loans that are the subject of loss mitigation efforts. This bulletin replaces the bulletin that was released in February 2013.

Under the new CFPB servicing rules (specifically, 12 C.F.R. § 1034.38(b)(4)), servicers are required to maintain policies and procedures that are reasonably designed to facilitate the transfer of information and documentation during servicing transfers. According to the bulletin, the CFPB expects that contracts governing servicing transfers will require the transferor to provide all necessary documents and information upon transfer. Further, the bulletin indicates that to facilitate the transfer, the transferor and transferee servicer should have compatible technology and data mapping systems to allow the transferee servicer to identify, among other things, applicable loan terms, relevant document indexing, and “specific regulatory or settlement requirements applicable to some or all of the transferred loans.”

The bulletin stresses these requirements in the context of loans approved for, or under review for, a loss mitigation option. It discusses the “heightened risk inherent in transferring loans in loss mitigation” and emphasizes the need to prevent loss mitigation documentation and information from being lost or insufficiently reviewed upon transfer. In addition, the bulletin indicates that the CFPB expects transferor servicers to flag loans with pending and approved loss mitigation applications (including trial modifications) and to send the information and documentation through a system that ensures the transferee can process the loss mitigation data upon transfer. In particular, the bulletin highlights that a transferee servicer should have policies and procedures requiring the transferor servicer to provide a detailed list of all loans with pending loss mitigation applications or approved plans.

Among its notable loss mitigation directions, the bulletin requires a transferee servicer to have policies allowing it to distinguish partial loan payments from payments made pursuant to a trial or permanent loan modification. It is advisable for a transferee servicer to seek missing loss mitigation information or documentation directly from the transferor servicer prior to requesting the information from borrower; the bulletin adds, “A transferee that requires a borrower to resubmit loss mitigation application materials is unlikely to have policies and procedures that comply with 12 C.F.R. 1024.38(b)(4).” Moreover, the bulletin states that a transferee servicer is also expected to adhere to the early intervention requirements under amended Regulation X and should contact the borrower on the 36th and 45th day of delinquency regardless of whether the delinquency commenced during the transferor’s servicing. Generally speaking, the bulletin anticipates that the CFPB will “carefully scrutinize” any instance where a loss mitigation evaluation takes longer than 30 days from when the transferor servicer receives the application, particularly where a borrower suffers negative consequences because of the delay.

Servicers transferring or acquiring servicing rights to consumer mortgage loans should review their policies for compliance with the recent CFPB guidance.

CFPB Extends Time for Public Comment on Proposed Policy Statement on Disclosure of Consumer Complaint Narrative Data

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By: Chrissy M. Dunn

On July 29, 2014, the Consumer Financial Protection Bureau (CFPB) announced that it would provide additional time for public comment on its recently released Notice of Proposed Policy Statement on Disclosure of Consumer Complaint Narrative Data.

The CFPB seeks comments related to the proposed extension of the policies to include complaint narratives. With that scope, the Bureau is specifically seeking public comment on the following:

  • Consumer Consent to Disclose Narratives
  • Company Response
  • Personal Information Scrubbing Standard and Methodology

The CFPB currently discloses limited information regarding complaints received about consumer financial products and services through its web-based, public-facing Consumer Complaint Database. The CFPB now proposes to expand the disclosed information to include consumer complaint narrative data (“narratives”). The CFPB states that only narratives for which opt-in consumer consent is obtained, and that have been scrubbed of personal identifying information, will be subject to disclosure.

The CFPB acknowledges certain risks related to the proposed narrative disclosures. Specifically the CFPB acknowledges the following risks in its notice of proposed policy statement:

  1. Possible re-identification of actual consumers within the Consumer Complaint Database. To de-identify data is to remove personal information from a dataset, thereby obscuring individual identities. Re-identification generally occurs when separate datasets are combined to reestablish some number of individual identities.
  2. Narratives may contain factually incorrect information. This may occur where a complainant misunderstands or misrecollects what happened. If consumers were to rely without question on all narrative data, it is possible that subsequent purchasing decisions may be based on misinformation. To the extent this risk may be realized, both consumers and the financial institutions that lose business due to misinformation would be disserved. The CFPB also notes the risk that financial institutions could incur intangible reputational damage as a result of the dissemination of complaint narratives.

The CFPB contends that these risks are mitigated because the proposed policy provides for public release of the company’s response to the consumer’s complaint, side-by-side and scrubbed of any personal information.

The CFPB initially invited public comment on the proposed policy for a period of thirty days. On July 29, 2014, it posted on its blog that, due to feedback and requests received, the comment period has been extended to September 22, 2014, 60 days from the date the proposed policy was published in the Federal Register.

Comments may be submitted as follows:

  1. Electronically at http://www.regulations.gov.
  2. Mail: Monica Jackson, Office of the Executive Secretary, Consumer Financial Protection Bureau, 1700 G Street NW, Washington, DC 20552.
  3. Hand Delivery/Courier: Monica Jackson, Office of the Executive Secretary, Consumer Financial Protection Bureau, 1275 First Street NE, Washington, DC 20002.

All submissions, including attachments and other supporting materials, will become part of the public record and will be subject to public disclosure. As such, sensitive personal information, such as account numbers or Social Security numbers, should not be included. Comments will not be edited to remove any identifying or contact information, such as name and address information, email addresses, or telephone numbers.

CFPB Targets Foreclosure Relief Scams

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By: Shane M. Biffar

In July, the Consumer Financial Protection Bureau (“CFPB”) filed complaints in the district courts of California, Florida, and Wisconsin, against certain law firms and affiliated entities that market and sell purported mortgage assistance relief services (“MARS”) to borrowers facing foreclosure.

In each of these actions, the complaints allege that the defendants violated 12 CFR 1015 (“Regulation O” of the Consumer Financial Protection Act of 2010), which prohibits MARS providers from receiving fees from a borrower until after the borrower executes a loan modification agreement obtained through the efforts of the provider.

Other Regulation O violations alleged in the CFPB complaints include misrepresentations to Borrowers regarding (1) the provider’s likelihood of success in obtaining a loan modification, (2) the amount of time that will be required to accomplish the service or result, and (3) legal representation that the consumer will receive, where no legal service is being provided.

CFPB Orders New Jersey Title Company To Pay $30,000 For Illegal “Kickbacks”

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By: Daniel A. Cozzi

On June 12, 2014, the Consumer Financial Protection Bureau (“CFPB”) entered a Consent Order with New Jersey company, Stonebridge Title Services Inc. (“Stonebridge”), whereby Stonebridge agreed to pay $30,000 for illegal referrals in violation of Section 8 of the Real Estate Settlement Procedures Act (“RESPA”). Section 8(a) of RESPA prohibits a person from paying or receiving a thing of value pursuant to an agreement or understanding to refer business, “incident to or a part of a real estate settlement service involving a federally related mortgage loan.” 12 U.S.C. § 2607. Section 8(b) of RESPA also prohibits a person from paying or receiving any amount charged for real estate settlement services involving a federally related mortgage loan, “other than for services actually performed.” 12 U.S.C. § 2607. The CFPB charged that Stonebridge paid commissions to independent salespeople for the referral of title insurance business in exchange for commissions of up to 40% of the title insurance premiums charged by Stonebridge.   The CFPB further found that Stonebridge, “sought Independent Salespeople who could solicit title insurance business for Stonebridge. These Independent Salespeople had or developed relationships with entities, typically law firms, and referred these entities to Stonebridge for title insurance and related services on behalf of consumers.” The CFPB found that the payments to these independent salespeople violated Sections 8(a) and (b) of RESPA, 12 U.S.C. § § 2607(a), (b). The determination that certain Stonebridge “employees” were actually independent contractors was important to the decision. Section 8 of RESPA permits “[a]n employer’s payment to its own employees for any referral activities.” 12 C.F.R. § 1024.14(g)(1)(vii).

Notably, the CFPB Consent Order states, “the Independent Salespeople received Form W-2s during this period of time, they were not “employees” covered by 12 C.F.R. § 1024.14(g)(1)(vii). Rather, they acted as independent contractors, and Stonebridge did not have the right or power to control the manner and means by which the Independent Salespeople performed their duties.”

This action by the CFPB follows its May 24, 2014 settlement with mortgage brokerage firm RealtySouth. The RealtySouth matter concerned a $500,000 settlement for inadequate ABA disclosure forms and an illegal referral program established with its affiliate, TitleSouth Closing Center. The CFPB continues to use its regulatory authority to govern the conduct of many participants in consumer financial services transactions.

House Passes Mortgage Choice Act Proposing Amendment to Qualified Mortgage Rule

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By:      Michael Meehan

On June 9, 2014, the United States House of Representatives passed the Mortgage Choice Act of 2014, which, among other things, revises the definition of “points and fees” under the Truth in Lending Act’s qualified mortgage rule to exempt both affiliated and unaffiliated title fees.

Under the Dodd-Frank Act, a qualified mortgage may not have points and fees that exceed three percent (3%) of the loan amount. “Points and fees” is a defined term in the statute, which currently encompasses fees paid to affiliated title companies (those companies with which the lender has an affiliated business arrangement) but not unaffiliated title companies. According to the Act’s proponents, Representatives Bill Huizenga (R-Mich) and Gregory Meeks (D-NY), the current definition precludes many affiliated loans from meeting the qualified mortgage rule’s points and fees threshold, further restricting consumer access to mortgage credit, or at a minimum, increasing the cost of such credit. The Act amends the definition under the rule to also exclude affiliated title fees, which its proponents believe will result in a greater number of qualified mortgage loans and expanded credit opportunities for low and moderate income homebuyers.

The Act has been widely supported by financial services and housing trades, including the Mortgage Bankers Association, National Association of Federal Credit Unions, National Association of Home Builders, and the National Association of Realtors. However, opponents of the Act, such as the Center for Responsible Lending and Consumer Federation of America, worry that the amendment will allow lenders to charge excessive title fees to affiliated entities while remaining within the protections that the qualified mortgage rule affords.

The Act passed the House by unanimous vote and awaits a determination in the Senate. If passed, the Act instructs the Consumer Financial Protection Bureau to finalize regulations implementing the new definition within 90 days.

 

Eleventh Circuit Defines “Called Party” for Purposes of the TCPA

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By: Manuel S. Hiraldo

In recent opinions, the United States Court of Appeal for the Eleventh Circuit addressed an issue of first impression in Osorio v. State Farm Bank, F.S.B., 746 F.3d 1242 (11th Cir. 2014) (issued on March 28, 2014) and Breslow v. Wells Fargo Bank, N.A., Case No. 1:11-cv-22681 (11th Cir. 2014) (issued on June 9, 2014). In both cases, the Eleventh Circuit held that the term “called party” as used in the Telephone Consumer Protection Act, 47 U.S.C. § 227, refers to the subscriber of a cellular telephone number, and not the individual whom the caller intended to call. Prior to these opinions, the only federal appellate court that had ruled on the issue was the Seventh Circuit. See Soppet v. Enhanced Recovery Co., LLC, 679 F.3d 637, 640 (7th Cir. 2012). In Osorio and Breslow, the Eleventh Circuit followed the Seventh Circuit’s reasoning that the TCPA consistently uses the term “called party” to mean the subscriber of the telephone number.

In part, the TCPA makes it unlawful for any person

(A) to make any call…using any automatic telephone dialing system or an artificial or prerecorded voice—
. . .
(iii) to any telephone number assigned to a paging service, cellular telephone service, specialized mobile radio service, or other radio common carrier service, or any service for which the called party is charged for the call . . . .

47 U.S.C. § 227(b)(1) (emphasis supplied).

In Osorio, Clara Betancourt provided the cellular telephone number of Fredy Osorio in connection with auto insurance and credit card applications. 746 F.3d at 1242. Betancourt subsequently defaulted on her credit card payments, which caused State Farm to attempt to contact her on the cell number provided by Betancourt. Osorio, the subscriber of the number provided by Betancourt to State Farm, sued State Farm for violating the TCPA as a result of State Farm’s use of an autodialer to contact Osorio’s cellular telephone without his consent. On summary judgment, State Farm argued that the “called party” should be interpreted to be the “intended recipient” (Betancourt) under the TCPA. “This would mean that Betancourt, as the intended recipient of State Farm’s calls, could consent to Osorio receiving the calls…” Id. at 1250. In rejecting Wells Fargo’s argument, the Eleventh Circuit held that the “called party” referred to under section 227(b)(1)(A) is not the “intended recipient.” Id.

In Breslow, Wells Fargo made calls to a cellular phone assigned to Lynn Breslow using an autodialer. Case No. 1:11-cv-22681. Breslow did not consent to Wells Fargo’s calls and she sued for alleged violations of the TCPA. Wells Fargo believed it was contacting a customer who had previously provided the number as contact number. In an affidavit filed in support of a motion for summary judgment, Wells Fargo stated that it “was unaware that the cell phone number was no longer assigned to the former customer and that the former customer never revoked his consent. . . .” Wells Fargo argued that the intended recipient of the calls (the former customer) was the “called party,” and it had therefore not violated the TCPA, because it had consent from the former customer. In rejecting this argument, and consistent with its ruling in Osorio, the Eleventh Circuit held that the “called party” for purposes of the TCPA “means the subscriber to the cell phone service.”

In all, these cases are consistent with prior interpretations of the TCPA by the Eleventh Circuit as a strict-liability statute that imposes a $500.00 per call penalty for violations, and places the burden on callers to ensure that they do not violate the TCPA. Financial institutions that utilize autodialers to contact their customers should be aware of these recent cases and this developing area of the law. Pursuant to Osorio and Breslow, an error attributable to the customer may not be a defense.

CFPB Takes Action on RESPA Disclosure Rules Concerning Affiliated Business Arrangements

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By: Shane Biffar

On May 24, 2014, the CFPB entered a Consent Order with RealtySouth, the largest mortgage brokerage firm in Alabama, which requires the company to pay $500,000 for alleged inadequate disclosures related to its affiliated business arrangements (“ABA Disclosures”).

As a general rule, Section 8(a) of the Real Estate Settlement Procedures Act (“RESPA”) prohibits giving or accepting a “fee, kickback, or thing of value” pursuant to an agreement or understanding to refer business to real estate settlement services for a federally related mortgage loan. However, RESPA Section 8(c)(4) provides a “safe harbor” which permits certain affiliated business arrangements as long as: (1) a disclosure of the existence of the arrangement and a written estimate of the charges generally made by the provider to which the person is referred (ABA Disclosure) is provided, (2) the consumer is not required to use the affiliated business, and (3) the only “thing of value” received from the arrangement is a return on the ownership interest.

In the case of RealtySouth, the company was charged with violating the above RESPA provisions in connection with title insurance and title examination referrals made to its affiliate, TitleSouth Closing Center, which provides real estate closing services. The CFPB found that RealtySouth’s referrals failed to comply with the safe harbor provision for two reasons. First, the CFPB found that the written disclosures contained in RealtySouth’s ABA disclosure forms failed to comply with the ABA Disclosure requirements as set forth in Appendix D of the implementing regulation, 12 CFR 1024. Second, the CFPB found that RealtySouth’s referral process, as evidenced by both the instructions given to its agents and the format of its purchase contracts, violated Section 8(a) of RESPA by giving a “thing of value” in connection with the affiliated business arrangement.

With respect to the written disclosures, RealtySouth’s disclosure form allegedly failed to comply with RESPA because the disclosure language was not set apart, but rather buried in a section of text that also made marketing claims about the company’s prices. RealtySouth apparently immediately changed its ABA disclosure form when advised of the Bureau’s concerns.

Perhaps more significant are the Bureau’s findings regarding RealtySouth’s ABA referral process. The Bureau concluded that RealtySouth’s form purchase contracts violated Section 8(a) of RESPA by giving and receiving a “thing of value” pursuant to an agreement or understanding that RealtySouth refer settlement services to TitleSouth. Specifically, the Bureau noted that RealtySouth’s form purchase contracts either explicitly directed or suggested that title and closing services be conducted by its affiliate, TitleSouth. By referring consumers to TitleSouth in this manner, the Bureau found that RealtySouth “affirmatively influenc[ed] the selection of TitleSouth” which amounts to a prohibited exchange of a “thing of value” under the Section 8(a). This aspect of the decision is significant because the CFPB is interpreting the act of affirmatively influencing the selection of an affiliate to constitute an exchange of a “thing of value” in violation of Section 8(a). The definition of “thing of value” as set forth in the implementing regulation, 12 CFR 1024.14(d), would not necessarily lead to this conclusion.  

In addition to taking issue with RealtySouth’s ABA disclosures and form purchase contracts, the Bureau also found a “pattern and practice” of RealtySouth encouraging its agents, and in certain instances requiring them, to use RealtySouth’s family of mortgage settlement services, in particular, TitleSouth.

In resolution of this matter, the recently entered Consent Order requires RealtySouth to ensure that its disclosures comply with RESPA and ensure that its training materials emphasize that its agents cannot require the use of TitleSouth affiliates. However, based on the Consent Order, the Bureau appears to be taking the position that mortgage brokers should do more than simply provide the required disclosures and “not require the use of the affiliated business.” Indeed, the Bureau appears to be on the lookout for any referral process that may mislead a consumer regarding his right to shop around when pursuing settlement services. With this in mind, it may be prudent for mortgage brokers to ensure that their ABA referral process highlights the consumer’s right to choose and does not undermine or detract from the required RESPA disclosures.