Consumer Financial Protection Bureau Refers to “Substantiation” for the First Time; Federal Trade Commission and Consumer Financial Protection Bureau File First Joint Order
On April 21, 2015, in the most recent in a series of enforcement actions aimed at mortgage servicing- related misconduct, the Consumer Financial Protection Bureau (the “CFPB”) and the Federal Trade Commission (the “FTC” and, together with the CFPB, the “Agencies”) announced a joint action against Green Tree Servicing LLC (“Green Tree”).1 In their complaint (the “Complaint”) and proposed joint order (the “Joint Order” and, together with the Complaint, the “Green Tree Action”), the Agencies allege that Green Tree engaged in a number of unfair or deceptive acts or practices in violation of the Federal Trade Commission Act (the “FTC Act”),2 and the Consumer Financial Protection Act (the “CFP Act”),3 as well as conduct that violated the Fair Debt Collection Practices Act,4 the Fair Credit Reporting Act,5 and the Real Estate Settlement Procedures Act.6 Specifically, the Agencies allege that Green Tree failed to honor modifications for loans transferred from other servicers and engaged in other misconduct with respect to delinquent borrowers.
To resolve the Green Tree Action, Green Tree agreed to pay $48 million to consumers and an additional $15 million penalty to the CFPB. Green Tree also agreed to correct the practices that were the subject of the Complaint and the Joint Order and to establish and maintain a “comprehensive data integrity program” designed to ensure the “accuracy, integrity and completeness of the data and other information” with respect to accounts for which Green Tree performs servicing functions.7
The Green Tree Action is notable for two reasons. First, it appears to be the first action in which the CFPB has proceeded under the FTC’s long-standing “substantiation doctrine”, which requires advertisers (or, in this case, consumer debt servicers) to have “substantiation”8 for a claim (express or implied) made to a consumer at the time the claim is made, in order for the claim to not be “deceptive”. Second, the Green Tree Action appears to be the first joint action by the CFPB and the FTC, marking what could be an important development in the relationship between the Agencies, which have separate authority to pursue unfair or deceptive acts or practices. The Green Tree Action also confirms that the Agencies remain focused on abusive practices by mortgage servicers.
Section 5(a) of the FTC Act9 prohibits “unfair or deceptive acts or practices in or affecting commerce” while Sections 1031 and 1036(a)(1)(B) of the CFP Act10 prohibit covered persons from engaging “in any unfair, deceptive, or abusive act or practice”. Generally, an act or practice is deceptive when it misleads or is likely to mislead a consumer, the consumer’s interpretation is reasonable under the circumstances, and the misleading act or practice is material. Misrepresentations or deceptive omissions of material fact are considered deceptive acts or practices. Acts or practices are unfair if they cause substantial injury to consumers that consumers cannot reasonably avoid themselves and that is not outweighed by countervailing benefits to consumers or competition. In the Green Tree Action, the CFPB appears to have relied on its authority under the CFP Act to pursue “deceptive” and “unfair” (but not “abusive”) acts or practices.
As a mortgage servicer, Green Tree enters into contracts with mortgage lenders for the right to service the mortgages for a fee. Servicing activities include creating and sending monthly statements to borrowers, collecting payments, processing payments, ensuring that the mortgaged property is insured properly, and processing property tax payments.
The Complaint and the Joint Order allege that Green Tree engaged in the following unfair or deceptive acts or practices, in violation of the FTC Act and the CFP Act:
- making false or “unsubstantiated” representations to consumers that the consumers’ mortgage loans had certain unpaid balances, payment due dates, interest rates, monthly payment amounts, delinquency statuses, and unpaid fees or other amounts due (together, the “Loan Data”);
- representing that consumers had to make a payment on their loans before Green Tree would consider them for a loan modification, where such payment was not required or permitted by law;
- failing to review and respond to consumers’ requests to be considered for a short sale in a timely manner;
- representing to consumers that nonpayment of a mortgage loan would result in the arrest or imprisonment of consumers or the seizure, garnishment, attachment, or sale of the consumers’ property or wages, where such nonpayment would not have resulted in such actions;
- causing consumers’ bank accounts to be debited without their consent;
- breaching contracts that consumers negotiated with prior servicers of the loans by not honoring in-process loan modifications; and
- contacting consumers’ employers and co-workers without the consumers’ consent.11
CFPB REFERENCE TO SUBSTANTIATION
The Green Tree Action appears to be the first instance in which the CFPB has taken action when the charge has been that the claim was “unsubstantiated” at the time it was made, rather than only false.12
The FTC has long asserted that, under Section 5 of the FTC Act, an advertiser must have a “reasonable basis” for express or implied claims that make objective assertions about an item or service advertised in order for the claim to not be considered “deceptive”.13 In the Complaint, the Agencies allege that, on numerous occasions, Green Tree’s representations to consumers regarding Loan Data were false or were “not substantiated” at the time the representations were made.14 The Complaint provides some insight into what the Agencies view as inadequate substantiation:
- if there is reason to believe that a loan portfolio has unreliable data, failing to obtain information substantiating the accuracy of the data prior to collecting;
- if there is reason to believe that a consumer had a loan modification with the prior mortgage loan servicer, continuing to seek to collect payments from the consumer under the original (unmodified) loan terms;15 and
- if a consumer disputes the validity or accuracy of the amount of the debt, failing to review information substantiating the amount of the debt or not considering the consumer’s dispute before continuing collection.
The Complaint also asserts that these unsubstantiated representations constitute deceptive acts or practices in violation of the CFP Act.16 Moreover, the Joint Action states that Green Tree is permanently restrained and enjoined from making any representation, express or implied, regarding any Loan Data unless Green Tree can “substantiate such a representation. . . .”17
The representations to individual consumers in the Green Tree matter about their own loans are significantly different from advertising claims to a broad audience that are involved in classic FTC substantiation cases. As a result, it is by no means certain that the CFPB’s use of “substantiation” terminology in a joint action with the FTC is laying out a new framework for targeting claims made by financial institutions to consumers. However, a substantiation requirement effectively shifts the burden of proof so that the agency does not have to demonstrate falsity. Instead, the financial institution or other business must prove that it had concrete evidence that the claim was true and had the evidence in hand at the time the claim was made. Accordingly, the Green Tree Action raises important questions for financial institutions that in interacting with consumers—to collect debt or otherwise—rely on data collected or compiled by third parties. Similar issues are presented to debt servicers and other service providers that rely on a financial institution’s system of records in interacting with consumers. If the doctrine is employed broadly, financial institutions may have to be more scrupulous in documenting the basis for any claims made to consumers prior to them being made in order to have an acceptable compliance management system.
The Green Tree Action appears to be the first instance in which the FTC and the CFPB have taken joint action since the CFPB’s formation in 2011. The Green Tree Action is part of a trend of increased cooperation between the two agencies.
In January 2012, the FTC and the CFPB signed an MOU to coordinate efforts to protect consumers and avoid duplication of federal law enforcement and regulatory efforts.18 Since then, the Agencies have coordinated efforts in connection with specific policy initiatives, but it appears that they never have participated in a joint enforcement action. For example, the Agencies share information regarding consumer complaints19 and enforcement priorities,20 comment on the other’s proposed rulemakings,21
and participate in joint roundtables to discuss issues affecting consumers.22 Additionally, in November
2012, the FTC and the CFPB announced a joint review of advertisements for mortgage loans, refinancings, and reverse mortgages to uncover inaccurate or misleading promotions and misleading statements about the costs of reverse mortgages.23 In February 2015, pursuant to this initiative, the CFPB announced that it was taking action against three mortgage companies that allegedly misled consumers by implying that the U.S. government had approved of their products.24 The FTC, although part of the joint review of such advertisements, did not participate in the enforcement action.
It is unclear whether the Agencies’ cooperation and joint participation in the Green Tree Action is part of a broader effort to align the enforcement activities of the two Agencies or whether their efforts were combined in response to the specific practices by Green Tree. Importantly, the Green Tree Action provides additional evidence of a broader trend of regulatory enforcement authorities simultaneously taking a bite at the same apple through cascading, and arguably additive, actions.