NJ Appellate Division Decisions Hold that, While Borrowers Do Not Have a Private Right of Action Under HAMP, Borrowers Are Not Precluded from Pursuing Valid State Law Claims

By: Donna M. Bates

It is well-established that the federal Home Affordable Modification Program (“HAMP”) does not offer borrowers a private right of action to allege a lender or servicer violated HAMP. However, the New Jersey Appellate Division recently held that borrowers may pursue state law claims that a lender or servicer engaged in the modification process in bad faith or otherwise breached the terms of a HAMP Trial Period Plan (“TPP”).

In Arias v. Elite Mortgage Group, Inc., et al.,[1] the first reported New Jersey case on this issue, the Appellate Division held that a written TPP, which allowed the borrowers to make three reduced monthly mortgage payments as a condition of the TPP, constitutes a unilateral offer by the lender to modify a mortgage loan if the borrowers completely and timely comply with their obligations under the TPP.

In Arias, the plaintiff borrowers appealed from an order granting summary judgment to the defendant servicer. On appeal, Plaintiffs claimed that they had a contractual right to a permanent loan modification under the terms of a HAMP TPP, and defendant breached the TPP when it did not give them a loan modification. They also argued that defendant breached the covenant of good faith and fair dealing when it denied them the loan modification.

The Appellate Division upheld the grant of summary judgment to defendant, but it did so for different reasons than the trial court. After acknowledging that there were no reported New Jersey cases on this issue, the Arias Court opined that current case law suggests that an agreement that binds a debtor to make payments while leaving the mortgage company free to give nothing in return may violate the New Jersey Consumer Fraud Act (“CFA”). In its analysis, the Court relied heavily on Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547 (7th Cir. 2012), which held that, even though there was no private right of action for a borrower under HAMP, a borrower may still assert a common law contract claim for a lender’s failure to honor the terms of a HAMP TPP.

The Arias Court rejected defendant’s arguments that there was no enforceable promise to modify Plaintiffs’ loan because there was no consideration given and that the lender had sole and unbridled discretion whether to give a modification, where the borrower complied with the payment terms and other requirements of the TPP. The Court reviewed the language of the TPP and noted that, even though the TPP notified borrowers that it was not a loan modification, it also contained language stating that ‘if” borrowers complied with the TPP and their representations continued to be true in all material respects, “then” the servicer will provide them with a modification agreement.

Ultimately, the Arias Court affirmed the grant of summary judgment in favor of the defendant because the terms of the TPP in this case constituted “a unilateral offer” to give plaintiffs a loan modification if and only if plaintiffs fully complied with their obligations under the TPP. In this case, the borrowers did not comply with the TPP requirements. The Court held that the summary judgment record clearly established that the plaintiffs failed to comply with the payment schedule set forth in the TPP and, therefore, defendant was justified in refusing to give plaintiffs a loan modification. Therefore, there was no breach of contract or breach of the duty of good faith and fair dealing on these facts.

In Miller v. Bank of America Home Loan Servicing, L.P.,[2] decided just over one month after Arias, the Appellate Division was again faced with deciding whether borrowers could sustain claims against a mortgagee related to a HAMP TPP. In Miller, after defendant declined to modify their mortgage under HAMP, the borrowers filed an action alleging breach of contract, violation of the CFA, promissory estoppel, and breach of the covenant of good faith and fair dealing. Defendant was granted summary judgment after the judge concluded there was no private right of action under HAMP. Plaintiffs moved for reconsideration, and their motion was denied. They then appealed both orders.

After briefly recapping the history of the HAMP program, the Miller Court specifically agreed with the Appellate Division’s holding in Arias that “HAMP’s preclusion of a private right of action does not preempt pursuit of valid state law claims arising between the parties to a TPP.” The Court then reviewed the specific facts in the record regarding plaintiffs’ loan modification efforts. The TPP at issue in Miller contained language similar to the TPP in Arias, requiring  plaintiffs to make three payments of $3,508.17, due on May 1, June 1, and July 1, 2009. Defendant’s records showed that the three TPP payments were instead received on May 14, June 18, and August 18, 2009, and plaintiffs were ultimately denied a modification “because [they] did not make all of the required [TPP] payments by the end of the trial period.” Plaintiffs argued on appeal that summary judgment was inappropriate because there were disputed issues of material facts regarding their payments under the TPP, and they challenged the reliability of defendant’s payment records.

The Miller Court affirmed summary judgment in favor of the defendant. It held that plaintiffs’ self-serving assertions regarding challenges to the payment history, unsupported by any documentary proof, were insufficient to raise a genuine issue of material fact. The Court also held that plaintiffs’ CFA claim, which suggested that the defendant engaged in elusive tactics and failed to fulfill its promise of a loan modification, was properly dismissed. Plaintiffs failed to identify the alleged unlawful conduct, they failed to detail material misrepresentations they reasonably relied upon that resulted in damages, or to proffer facts that demonstrated a business practice to materially conceal information that ultimately induced them to act. Plaintiffs’ unsupported assertions were insufficient to create a material dispute, and therefore summary judgment was appropriate.

These decisions qualify the long-standing and frequently cited principle that a borrower does not have a right to a loan modification, and a lender is not required to offer one. While the Arias and Miller decisions do not hold that a borrower is entitled to a loan modification, they do hold that the language of a TPP or forbearance agreement may require the lender to modify the loan if the borrower complies with its terms. Lenders and servicers frequently engage in loss mitigation efforts with borrowers, including loan modification reviews, whether pursuant to the HAMP program, court mediation programs, or in-house modification programs. In light of these decisions, lenders and servicers should take care when drafting the terms of a written TPP or other forbearance agreement, so that it is clear what requirements a borrower must fulfill to receive a loan modification. Lenders and servicers should also make sure to provide written and timely notification to borrowers when they fail to comply with the terms of a loss mitigation agreement. These recent cases also underscore the importance of maintaining accurate records of payments and communications regarding loss mitigation efforts, which records may be necessary to rebut a borrower’s claims that they complied with all the TPP terms. Following these steps will help provide the support needed to defend against a borrower’s claims that they were improperly denied a loan modification.

[1] Arias v. Elite Mortgage Group, Inc., et al., New Jersey Superior Court, Appellate Division, Case Number A-4599-12T1. The Appellate Division approved Arias for publication on January 23, 2015.

[2] Miller v. Bank of America Home Loan Servicing, L.P., Superior Court of New Jersey, Appellate Division, Case Number A-0169-13T2. The Appellate Division approved Miller for publication on March 5, 2015.

New Jersey Bankruptcy Court Holds that Mortgage Was No Longer Enforceable and Borrower Was Entitled to a “Free House”

By: Daniel A. Cozzi and Donna Bates

The United States Bankruptcy Court for the District of New Jersey recently held in In re Washington, No. 14-14573-TBA, 2014 WL 5714586 (Bankr. D.N.J. Nov. 5, 2014) that the mortgagee and mortgage servicer (“the Creditors”) are time-barred under New Jersey state law from enforcing either the note or the accelerated mortgage against the debtor, essentially entitling a defaulting borrower to a “free house.”[1]

The Court’s analysis focused on the issue of whether the Fair Foreclosure Act (“FFA”), N.J.S.A. § 2A:50-56.1(which governs statutes of limitations relative to foreclosure proceedings), and the Bankruptcy Code, specifically sections 11 U.S.C. §§ 502(b)(1) and 506(d) (which deal with allowable claims), operate to make the mortgage unenforceable because the creditor waited too long to institute a foreclosure after the maturity date of the loan was accelerated because the borrower defaulted.

Borrower Gordon Washington (“Debtor” or “Washington”) purchased a three-family home in Morris County, New Jersey, on February 27, 2007, paying a $130,000 deposit and obtaining a 30-year mortgage and note for $520,000 with the first payment due on April 1, 2007. In re Washington, *2. Debtor failed to make the July 1, 2007 mortgage payment, and the loan went into default and remained in default since that time. Id. On December 14, 2007, the Creditors filed a foreclosure complaint in the Superior Court of New Jersey, Chancery Division. Id. at *3. The Complaint alleged that “[p]laintiff herein, by reason of said default, elected that the whole unpaid principal sum due on the aforesaid obligation and mortgage …. shall be now due.” Id. at *5. On October 28, 2010, the Office of Foreclosure returned the foreclosure judgment package to the creditors for deficiencies, notably, failure to produce an attorney certified copy of the Note and Mortgage. Id. at *6. On July 5, 2013, the Superior Court Clerk’s Office issued an Order dismissing Creditors’ foreclosure complaint for lack of prosecution, without prejudice. Id. The foreclosure was not re-filed, and on March 12, 2014, Debtor filed a petition for Chapter 7 bankruptcy. Id. On March 18, 2014, Debtor filed an adversary complaint to determine the validity of the mortgage lien on the property. Id. at *3.

Each party moved for summary judgment in the adversary proceeding. Id. at *1. Debtor argued that the 6-year statute of limitations applicable to negotiable instruments set forth in New Jersey’s Uniform Commercial Code (“UCC”), N.J.S.A. § 12A:3-118(a), had expired and thus Defendants were out of time to sue on the mortgage note. Id. Debtor also argued that the FFA similarly had a 6-year statute of limitations, because it required that a residential mortgage foreclosure must be commenced within “[s]ix years from the date fixed for the making of the last payment or the maturity date set forth in the mortgage or the note, bond or other obligation secured by the mortgage . . .” N.J.S.A. § 2A:50-56.1(a)In contrast, the Creditors argued that they had “[t]wenty years from the date on which the debtor defaulted . . .”of to file a foreclosure action as set forth in § 2A:50-56.1(c) of the FAA, and since that time had not expired they may still foreclose on the mortgage.

The Court’s opinion focused on the narrow issue of whether “N.J.S.A. § 2A:50-56.1(a) and 11 U.S.C. §§ 502(b)(1) and 506(d) operate to make the mortgage unenforceable, to disallow the Defendants’ claim, and to void the mortgage lien so that the Defendants have no claim against the Debtor, the property or the estate.” Id. In its analysis, the Court reviewed N.J.S.A. § 2A:50-56.1, which states in relevant part the following:

An action to foreclose a residential mortgage shall not be commenced following the earliest of :

  1. Six years from the date fixed for the making of the last payment or the maturity date ….;
  2. Thirty-six years from the date of the recording of the mortgage ….
  3. Twenty years from the date on which the debtor defaulted … as to any of the obligations or covenants contained in the mortgage…

The Court reviewed N.J.S.A. § 2A:50-56.1(a) and determined that, in this case, the maturity date for the subject loan had been accelerated to either July 1, 2007 (the date of default), or December 14, 2007 (the date of the filing of the foreclosure complaint). In re Washington, *12.     Id. The mortgage had an original maturity date of the year 2037. However, the Court found that the maturity date had been accelerated to the year 2007 [2] and held that, because the maturity date was accelerated by the Creditor, the applicable statute of limitations is six years (and not the twenty years set forth in § 2A:50-56.1(c)), which statute of limitation runs from the date of the accelerated maturity date. Since the accelerated maturity date in this case was either July 1, 2007 or December 14, 2007, the foreclosure had to be commenced no later than July 1, 2013 or December 14, 2013, which it was not. In re Washington, *12.    The Court noted that even though the foreclosure complaint was originally filed on December 14, 2007, it was dismissed in 2013, was never reinstated, and neither Debtor nor Creditors took any action under the mortgage instruments or the FFA to de-accelerate the maturity date.[3] The Court held that therefore the Creditors “are time-barred under New Jersey state law from enforcing either the note or the accelerated mortgage.”

The Court went on to determine that, because the Creditors could not foreclose on Debtor’s loan, Creditors’ proof of claim in bankruptcy also was barred because the underlying lien is unenforceable. The Court relied on11 U.S.C. § 502(b)(1), which states in pertinent part that, for disputed claims, the court shall determine the amount of the claim unless, “such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured.” The court also relied on 11 U.S.C. § 506(d), which states that if the claim underlying the lien is disallowed, the lien is void. [4]

In light of this decision, lenders should evaluate their loan portfolios for mortgages which have been in default for five (5) or more years. On a case by case basis, lenders may want to ensure that a mortgage foreclosure has been filed on the property, and if one has not been filed, expedite the foreclosure filing process to avoid running afoul of the six-year statute of limitations. Lenders should also exercise caution in dismissing foreclosures without prejudice while the loan is in default. The mortgage and note may be rendered void and unenforceable if the foreclosure is not re-filed prior to the six year statute of limitations.

[1] The Court expressed its distaste for rendering a decision that retreated from the long standing admonition that “No one gets a free house.” Nevertheless, it opined that the current statutes and the facts of the case warranted summary judgment in favor of the Debtor.

[2] In determining that the maturity date had been accelerated, the Court referenced the language in an Assignment of Mortgage, effective November 12, 2007, that listed the accelerated balance as the amount due as of June 1, 2007, as well as the allegations contained in the December 14, 2007 foreclosure complaint, which stated that the Plaintiff has elected that the whole unpaid principal balance and all interest and advances made were now due. In re Washington, *8-9. It was not relevant to the Court’s decision whether the original maturity date was accelerated to the date of default or the date the foreclosure complaint was filed, because in either case, the statute of limitations had clearly expired.

[3] The Court noted that the Creditors argued at the September 30, 2014 hearing that a foreclosure complaint filed now would “relate back” to the original complaint filed on December 14, 2007. The Court did not specifically rule on this issue, but merely noted that Debtor opposed that argument.

[4] Even though this case involves a bankruptcy and denial of a proof of claim, the same New Jersey statutes and analysis would apply to determine if a creditor is precluded from foreclosing on a property because the statute of limitations has expired.

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

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).

New Foreclosure Rules In New Jersey Concerning the Foreclosure of Vacant and Abandoned Properties

By: Daniel A. Cozzi

On July 22, 2014 the Supreme Court of New Jersey adopted amendments to the Rules Governing the Courts of the State of New Jersey. The majority of the amendments became effective on September 1, 2014, the remaining amendments take effect on January 1, 2015. Among the amendments is a new rule governing the foreclosure of vacant properties, N.J. Rule 4:64-1A, “Foreclosure of Vacant and Abandoned Residential Property.” A full copy of the new rules and amendments can be found Here. Rule 4:64-1A sets out the rules and requirements for summary foreclosure of vacant and abandoned property.

In order to proceed summarily the mortgagee must file a Verified Complaint and Order to Show Cause which establish the vacancy of the property. Vacant and abandoned properties are defined by N.J.S.A. 2A:50-73. Real property shall be deemed “vacant and abandoned” if:

The court finds that the mortgage property is not occupied by a mortgagor or tenant as evidenced by a lease agreement entered into prior to the notice of intention to commence foreclosure … and at least two of the following conditions exist:

(1) overgrown or neglected vegetation;
(2) the accumulation of newspapers, circulars, flyers or mail on the property;
(3) disconnected gas, electric, or water utility services to the property;
(4) the accumulation of hazardous, noxious, or unhealthy substances or materials on the property;
(5) the accumulation of junk, litter, trash or debris on the property;
(6) the absence of window treatments such as blinds, curtains or shutters;
(7) the absence of furnishings and personal items;
(8) statements of neighbors, delivery persons, or government employees indicating that the residence is vacant and abandoned;
(9) windows or entrances to the property that are boarded up or closed off or multiple window panes that are damaged, broken and unrepaired;
(10) doors to the property that are smashed through, broken off, unhinged, or continuously unlocked;
(11) a risk to the health, safety or welfare of the public, or any adjoining or adjacent property owners, exists due to acts of vandalism, loitering, criminal conduct, or the physical destruction or deterioration of the property;
(12) an uncorrected violation of a municipal building, housing, or similar code during the preceding year, or an order by municipal authorities declaring the property to be unfit for occupancy and to remain vacant and unoccupied;
(13) the mortgagee or other authorized party has secured or winterized the property due to the property being deemed vacant and unprotected or in danger of freezing;
(14) a written statement issued by any mortgagor expressing the clear intent of all mortgagors to abandon the property;
(15) any other reasonable indicia of abandonment.

N.J.S.A. 2A:50-73. Additionally, a residential property shall not be considered “vacant and abandoned” if, on the property:

(1) there is an unoccupied building which is undergoing construction, renovation, or rehabilitation that is proceeding diligently to completion, and the building is in compliance with all applicable ordinances, codes, regulations, and statutes;
(2) there is a building occupied on a seasonal basis, but otherwise secure; or
(3) there is a building that is secure, but is the subject of a probate action, action to quiet title, or other ownership dispute.


An important provision of the new rule is the procedure for the Entry of Judgment. If the court determines that residential property is vacant and abandoned as established by N.J.S.A. 2A:50-73, the court may enter final judgment on the return date of the Order to Show Cause. Rule 4:64-1A(c)(3). Ordinarily, an application for final judgment in uncontested matters must be made, “on motion with 10 days notice if there are no other encumbrancers and on 30 days notice if there are other encumbrancers.” Rule 4:64-1(d)(2).

In addition to N.J. Rule 4:64-1A, several other New Jersey Rules have been enacted or amended. Any party interested in Consumer Finance Litigation should review the changes to Rules 4:64-1 (Foreclosure Complaint, Uncontested Judgment Other Than In Rem Tax Foreclosures); 4:64-2 (Proof; Affidavit) and 4:64-9 (Motions in Uncontested Matters).

Mortgagees Face Increased Penalties for Failure to Remedy Municipal Violations on New Jersey Properties in Foreclosure

By:  Donna Bates and Rachel Packer

As a result of the recent changes in New Jersey law, mortgagees and servicers should review their practices and procedures to ensure timely response to notices of municipal code violations on abandoned or vacant properties in foreclosure in New Jersey.  Click here for further discussion of these changes.

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

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.