Consumer Finance Insights
September 21, 2017

It’s About Context: CFPB Wins Bench Trial Against Third Party Servicer for Deceptive Advertising

On September 8, 2017, a judge in the Northern District California assessed a statutory penalty of $7,930,000 against Nationwide Biweekly Administration, Inc. (Nationwide) and issued an injunction prohibiting further deceptive advertising, after a bench trial in CFPB v. Nationwide Biweekly Administration, Inc., Case No. 3:15-cv-02106-RS (N.D. Cal. Sept. 8, 2017). The judgment was based on Nationwide’s advertising for a fee-based accelerated mortgage loan repayment service, which the Consumer Financial Protection Bureau (CFPB) had alleged was unfair and deceptive. The court concluded that, taken individually, none of Nationwide’s statements were untruthful, but taken together, the court found that the “net effect” of the advertising would be misleading to the average consumer.

The facts, as summarized in the court’s opinion, were that, in exchange for a fee, Nationwide—a third-party service provider—offered a service enabling borrowers to schedule auto-debited payments of additional mortgage principal on a monthly basis. Nationwide advertised the service as a way for borrowers to save substantial sums of money in interest payments over the life of the loan. The CFPB alleged, among other things, that Nationwide did not clearly disclose that there was a fee associated with its service, and that it misled consumers about the amount of interest payment savings they could expect to realize through the service. With respect to interest savings, the CFPB claimed that borrowers would need to subscribe to the service for at least nine years just to break even with the fee charged for the service—an unlikely occurrence, the CFPB argued, given that borrowers typically refinance before that time. Nationwide countered, arguing that savings must be measured over the life of the loan—i.e., even by making a single payment of extra principal, consumers would benefit by not being charged interest on that portion of principal for the remainder of the loan term—and that Nationwide’s services were transferable to other loans once the fee was paid. The court concluded that Nationwide’s conduct was deceptive and unfair.

The court’s analysis of the CFPB’s claims is noteworthy for three reasons. First, the court found that Nationwide’s advertising did not include any false statements of fact about the terms of its service, but the advertising was nevertheless deceptive because the “net effect” of all of Nationwide’s advertising was deceptive. The court rejected the CFPB’s arguments that Nationwide concealed facts relating to its services from the consumer, finding that Nationwide’s advertising disclosed that it charged a fee for its service and that the promised savings was over the “life of the loan” rather than immediate. Despite the technical accuracy of Nationwide’s advertising, however, the court found that the advertising’s “net effect” was deceptive because it was likely to lead the average consumer to believe that the promised monthly savings would be realized immediately, rather than over the life of the loan. Thus, the court made it clear that context is important:  although Nationwide was careful to disclose the pertinent facts about its service, its advertising was nonetheless deceptive because of the way it was presented to Nationwide’s prospective customers.

Second, the court held that the CFPB could not substantiate some of its damages, because Nationwide’s statements were only deceptive to some (but not all) of its customers. For example, Nationwide’s advertisements may have misled some consumers into believing that Nationwide was affiliated with the customer’s lender, or that no other mortgage loan servicer offered similar services to Nationwide. Thus, because the CFPB could not show that all consumers were likely to be misled by Nationwide’s advertising in those contexts, the CFPB could only address that deceptive conduct by injunctive relief and not monetary damages.

Third, the court rejected the CFPB’s request to award restitution to affected consumers (which would have resulted in nearly ten times the damages award) and instead opted to award statutory damages against Nationwide. The court found that restitution was unnecessary, given Nationwide’s attempts to comply with the law—given that all of its statements were technically accurate—and because the restitution would have resulted in a windfall to consumers who received a refund but opted to continue using Nationwide’s service. The court also elected to award the “lowest tier” of statutory damages, finding that, despite pushing the limits of the law, Nationwide showed that it took steps to attempt to comply with the law, by retaining counsel and instituting training programs for its employees.

The Nationwide decision is instructive, in that it shows that there are steps that a company can take to limit its exposure in the event that it finds itself in the cross-hairs of a CFPB investigation for alleged unfair, deceptive, or abusive acts or practices (UDAAP). Disclosing all the pertinent facts about a product or service can help mitigate a potential damage award, as well as continuously seeking compliance advance and maintaining training programs. In Nationwide, that may have been the difference in the court’s finding that Nationwide’s conduct was not reckless or intentional, resulting in a correspondingly lower damages award.