Court Hits Biweekly Payment Firm with $7.9 Million Penalty for UDAAP

A federal judge in California has ordered a loan-payment firm, along with its owner and a subsidiary, to pay $7.9 million in statutory penalties for deceptive acts or practices after the firm made allegedly misleading representations in its marketing materials for a biweekly mortgage payment service.

The CFPB brought an enforcement action against the firm, alleging that it used “abusive” and “deceptive” marketing tactics and representations to persuade buyers to sign up for its biweekly mortgage payment product.  The CFPB alleged that through mailers and scripted phone calls, the firm advertised the product using “false or misleading statements” about the nature of savings and omitted material information regarding fees.

The court agreed with the CFPB that the firm created a misleading impression about its relationship with customers’ lenders.  The marketing materials contained disclaimers that the firm was not affiliated with the lender that the court said would normally be considered sufficient.  However, because some of the mailers contained language that suggested customers had an “obligation by virtue of their loan” to respond and used descriptors that might suggest that the firm was a department of the lender, the court found that the net impression created by the mailers was likely to mislead a reasonable consumer into believing that the firm was affiliated with the lender.

Further, the court found that the disclosures and calculations that the firm used to explain the timing and amount of interest savings were likely to mislead consumers into believing that their monthly and total savings would be much higher than they would actually be.  The court wrote that even though the figures provided were “not literally false,” the firm risked misleading reasonable consumers about the true nature of short-term savings by calculating total potential savings over the entire loan period, dividing those figures into monthly and yearly increments, and advertising those figures as monthly and yearly savings.  The court found the firm’s disclaimers explaining that their figures were based on the “life of the loan” insufficient.  Lastly, it found that during enrollment telephone calls, the firm materially misled consumers into believing that there were very few other biweekly payment plans in the market for consumers to choose from.

For the above-mentioned activities, the court ordered the firm to pay the maximum first tier penalty under the Consumer Financial Protection Act (CFPA), which is Title X of the Dodd-Frank Act. The court imposed a penalty of $5,000 per day for a period of approximately four and a half years of asserted violations—a total award of $7,930,000.  The firm must also negotiate with the CFPB regarding the future operation of any substantially similar program.  It avoided the imposition of a larger penalty for “reckless and purposeful” violations of the CFPA because it took “affirmative steps such as training, quality control, and seeking legal counsel” in an effort to comply with regulations.

The case is Consumer Financial Protection Bureau v. Nationwide Biweekly Administration Inc. et al., and the opinion is available here.