Federal Reserve Orders Bank to Pay $2.8 Million for FTCA Violations

The Federal Reserve Board recently issued a $2.8 million consent order against a large national bank for its alleged “unsafe or unsound banking practices” and “deceptive acts or practices in or affecting commerce” in violation of section 5(a)(1) of the Federal Trade Commission Act.  The order focused primarily on perceived “mischaracterizations” of the nature of loan costs which were found in the bank’s various disclosures to its borrowers.

As background, the bank provided prospective borrowers with an opportunity to lower their interest rates by purchasing discount points for an additional amount at closing.  Many of the borrowers who purchased discount points either did not receive a reduced interest rate, or they received a rate that was “not reduced commensurate with the price they paid” for the points.

Throughout the loan origination process, the bank had provided borrowers with several disclosures which “indicated the interest rate that the borrower had purchased through earning discount points.”  The Federal Reserve took issue with those of the bank’s disclosures which indicated that “a specific portion of the fees at closing were being used to purchase a lower, discounted rate,” even though that assertion was not true in every case.

The Federal Reserve found that the bank provided consumers with an accurate quantitative assessment of a loan’s costs, but that it materially mischaracterized the nature of the costs of the loan in its disclosures concerning discount points and interest rates.  The Federal Reserve believed that a borrower “acting reasonably under the circumstances could have concluded” from reading the disclosures that the interest rate he or she was “purchasing” with discount points was lower than what the bank would have otherwise offered to that borrower if he or she had not made the purchase.  The Federal Reserve asserted that these alleged mischaracterizations violated Section 5(a)(1) of the FTC Act, which resulted in the $2.8 million payment mandated by the consent order.

The affected bank is now in the process of winding down its national mortgage business.  It is not clear whether this consent order at all influenced the bank’s decision to do so.

The consent order is accessible here.