On May 11, 2015, the Consumer Financial Protection Bureau (“CFPB”) filed suit against Nationwide Biweekly Administration, Inc. (“Nationwide”) and its owner, Daniel Lipsky, charging both with misrepresenting the costs related to, and falsely representing potential interest savings from, Nationwide’s biweekly mortgage payment program. A close examination of the CFPB’s complaint, which is available here, reveals the CFPB’s concern not with the biweekly product itself, but with the way the product was marketed.
Nationwide’s biweekly product operates in an identical manner to a host of similar products offered to consumer borrowers. Nationwide electronically deducts one-half of a consumer’s contractual monthly payment every 2 weeks, aggregates the funds in an account maintained at a financial institution, and then remits a full payment each month to the respective lender. As the biweekly schedule results in a consumer paying to Nationwide an extra half payment every 6 months, Nationwide in turn remits those extra funds to the respective lender. The extra half payment every 6 months provides for faster amortization and less overall interest charges (i.e., the principal balance is more quickly reduced, thereby lowering the total amount of interest paid over the life of the loan). However, the potential benefit of any biweekly program must be balanced against any costs charged to facilitate such a payment program.
In the subject case, Nationwide charges up to $995 as a “setup” fee, which is taken from the consumer’s first extra half payment. Additionally, Nationwide charges a $3.50 processing fee for each biweekly withdrawal. As one might imagine, the upfront setup fee and continuing processing fee negatively impact the economic benefit that a consumer enjoys from the reduced interest charges. In order for the program to provide a net economic benefit, total interest savings must outweigh the cumulative cost of the setup fee and processing fees. Due to the underlying math, a majority of the interest savings occurs at the end of a consumer’s loan term.
The CFPB complaint alleges violations of certain provisions of the Consumer Financial Protection Act of 2010 (“CFPA”) and the Telemarketing and Consumer Fraud and Abuse Prevention Act and its implementing regulation, the Telemarketing Sales Rule (“TSR”). These allegations are discussed below:
- The CFPB alleged that Nationwide’s marketing practices are “abusive” under the CFPA because, among other things, such marketing materials guarantees consumers that they will save money using the biweekly program. However, such statements are false, as Nationwide’s own statistics reveal that many consumers will leave the program prior to enjoying an economic benefit. As discussed above, interest savings come near the end of a consumer’s loan term.
- The CFPB alleged that Nationwide’s marketing practices are “deceptive” under the CFPA because, among other things, such marketing materials, along with the company’s internal telemarketing script for salespersons, seeks not to disclose the existence or amount of the setup fee.
- The CFPB alleged that Nationwide’s marketing practices are “deceptive” under the TSR because, among other things, such marketing materials fail to disclose “truthfully and in a clear and conspicuous manner” the fees related to the biweekly program.
It is important to note what the CFPB’s complaint did not address. The complaint does not take issue with the biweekly product itself, nor does it attempt to restrict the amount of any fee related to such a product. Instead, the complaint focuses entirely on the way that Nationwide’s product is marketed to the general public. Nationwide put itself in the regulatory crosshairs by making explicit guarantees of interest savings and not properly disclosing required fees. Any business that provides a biweekly payment service would be wise to review the CFPB complaint and tailor its marketing program accordingly.