MBA Advocacy Spurs Crackdown on Deceptive VA Loan Marketing

In recent weeks, the Consumer Financial Protection Bureau announced settlements totaling more than $2.6 million against eight mortgage lenders and brokers it said engaged in deceptive advertising practices targeting veterans holding loans guaranteed by the U.S. Department of Veterans Affairs.

The settlements signal a remarkable effort by the CFPB to hold lenders accountable for their dealings with the nation’s veterans—and the culmination of advocacy by the Mortgage Bankers Association to protect earned benefits for servicemembers, veterans and surviving spouses.

“We learned from our members there were some deceptive marketing practices targeting veterans,” said Dan Fichtler, MBA Associate Vice President of Housing Finance Policy. “In 2019, we raised these concerns with VA and recommended steps to deter these types of advertising.”

MBA’s concerns over how VA borrowers were treated in the market dated back even further; to 2017, amid reports some lenders were engaging in loan “churning”—aggressively targeting VA borrowers to refinance their already-low-rate VA loans into new loans that lowered their interest rate by a very small amount, while adding fees to the loan balance that far outweighed the monthly savings from the lower interest rate.

“Such serial refinancing, or churning, provides little or no long-term benefit to the borrower while essentially stripping their equity and further extending the overall recoupment period,” said former MBA Chairman J. David Motley, CMB, in January 2018 testimony before a subcommittee of the the House Committee on Veterans’ Affairs.

In May 2018, Congress passed legislation that did limit churning for VA Interest Rate Reduction Refinance Loans (IRRRLs), though the legislation unintentionally created the so-called “orphaned loan” problem of valid VA-guaranteed loans that could not be included in Ginnie Mae securities. In July 2019, after a lengthy advocacy campaign by MBA, Congress passed legislation to fix this problem.

The May 2018 legislation also required VA to address separately churning in the cash-out refinance market. In December 2018, at the urging of MBA, VA put out a rule to address churning in the cash-out refinance market as required by the legislation. MBA continued to urge VA to further strengthen the protections against churning.

MBA then turned its attention to deceptive advertising. In June 2019, MBA President and CEO Robert Broeksmit, CMB, sent a letter to VA, asking the department to address problems with potentially deceptive marketing practices associated with VA refinances.

“We have become concerned about increasing anecdotal reports of solicitations for refinances of VA loans that may be designed to mislead consumers regarding the nature of the loan or the institution providing the loan,” Broeksmit wrote. “Such solicitations can be very harmful to veterans, as they may lead them to obtain refinances that they do not fully understand or are not in their financial interest. MBA therefore encourages VA to use its existing authorities to deter these misleading solicitations in accordance with its mission to ensure appropriate consumer safeguards in its home loan program.”

MBA highlighted reported refinance solicitations with one or more of the following problematic features:

–Vague language or symbols such as logos or stamps to imply affiliation with, or endorsement by, the federal government;

–False sense of urgency or a strict deadline to imply that the borrower will face some type of penalty if (s)he does not take action; and

–Misleading descriptions of interest rates or other loan terms, such as representing an adjustable-rate loan as a fixed-rate loan or promising the ability to skip one or more payments.

“While these solicitations appear to be coming from a very small subset of program participants, they are nonetheless having an adverse effect on veterans,” Broeksmit said. “Further, if such solicitations are allowed to continue unchecked, they may only increase in volume, which could threaten broader confidence in the program.”

Over the past year, the CFPB began several investigations into marketing for VA refinances, notifying more than a dozen lenders and brokers that it was examining their advertising practices targeting veterancs. In July, the Bureau began announcing settlements, alleging some companies mailed consumers advertisements for VA-guaranteed mortgages that contained false, misleading and inaccurate statements or lacked required disclosures, in violation of the Consumer Financial Protection Act’s (CFPA) prohibition against deceptive acts and practices, the Mortgage Acts and Practices – Advertising Rule (MAP Rule) and Regulation Z.

“The Bureau commenced this sweep in response to concerns about potentially unlawful advertising in the market that the VA identified,” the Bureau said in a statement. “This ongoing sweep of investigations reflects the Bureau’s commitment to enforcing the laws that ensure the financial marketplace is fair and accurate for all consumers, including servicemembers, veterans and surviving spouses whom VA-guaranteed mortgages are designed to benefit.”

Typical of the Bureau’s investigation, for example, it found that lender/broker advertisements misrepresented the credit terms of the advertised mortgage loan by stating credit terms that the company was not actually prepared to offer to the consumer, including misrepresenting the annual percentage rate applicable to the advertised mortgage. They also misleadingly advertised rates or payments as fixed, even though the advertised mortgage was an adjustable-rate mortgage or the payment was not fixed for the indicated duration. The lenders/brokers also misrepresented the existence, nature or amount of cash or credit available to the consumer, and the existence or amount of fees or costs to the consumer, in connection with the advertised mortgage.

The Bureau also found that lender/broker advertisements created the false impression that they were affiliated with the VA. Some advertisements also failed to properly disclose, when required by Regulation Z, credit terms for the advertised mortgage, such as the number and time period of payments associated with the consumer’s repayment obligations over the full term of the loan. Additionally, the Bureau found that some advertisements used the name of the consumer’s lender in a misleading way by not adequately disclosing the lender/broker name and the fact that it was not associated with, or acting on behalf of, the consumer’s current lender, as required by Regulation Z.

The Bureau announced settlements with the following companies:

—Prime Choice Funding Inc., Tustin, Calif. The Bureau alleged Prime Choice has sent consumers “millions of advertisements that violate federal law because of misleading and deceptive statements and inadequate disclosures.” The consent order requires Prime Choice to pay a civil penalty of $645,000.

—Sovereign Lending Group Inc., Costa Mesa, Calif. Sovereign has sent consumers “hundreds of thousands of advertisements that violate federal law” because of misleading and deceptive statements and inadequate disclosures, the Bureau said. The consent order requires Sovereign to pay a civil penalty of $460,000.

—Go Direct Lenders Inc., Encino, Calif. The Bureau said from March 2017 to April 2019, Go Direct sent consumers more than 700,000 advertisements that violate federal law because of misleading and deceptive statements and inadequate disclosures. The consent order requires Go Direct to pay a civil penalty of $150,000.

—Hypotec Inc., a mortgage broker based in Miami. The Bureau found that in advertising VA-guaranteed mortgages Hypotec sent consumers numerous mailers that contained false, misleading and inaccurate statements or that lacked required disclosures. The consent order requires Hypotec to pay a civil penalty of $50,000. 

—PHLoans.com Inc., Irvine, Calif. The Bureau found that PHLoans sent consumers numerous mailers for VA-guaranteed mortgages that contained false, misleading and inaccurate statements or that lacked required disclosures. The consent order requires PHLoans to pay a civil penalty of $260,000. 

—Service 1st Mortgage Inc., Glen Burnie, Md. The Bureau found that in advertising VA-guaranteed mortgages, Service 1st sent consumers “millions” of mailers that contained false, misleading and inaccurate statements or that lacked required disclosures. The consent order against Service 1st requires it to pay a civil penalty of $230,000. 

—Accelerate Mortgage LLC, Newark Del. The Bureau said Accelerate sent consumers mailers for VA-guaranteed mortgages that contained false, misleading and inaccurate statements or that lacked required disclosures. The consent order requires Accelerate to pay a civil penalty of $225,000. 

—Clear Path Lending Inc., Irvine, Calif. The Bureau found that ClearPath disseminated advertisements that contained false, misleading and inaccurate statements or that failed to include required disclosures. The consent order requires ClearPath to pay a civil penalty of $625,000.  

Fichtler said it is possible the CFPB could announce more settlements in the coming weeks—and that these investigations could make all market participants re-evaluate the ways in which they communicate with servicemembers and their families.

“We’re adhering to our mission statement of promoting fair and ethical lending practices,” Fichtler said. “We don’t condone deceptive advertising, and it is absolutely appropriate for regulators to police the market and ensure that any materials sent to consumers are clear and accurate.”