Continuing to fill in gaps at the federal level, state attorneys general are keeping busy with enforcement actions, and on issues that might have received more CFPB attention under the old Cordray regime.
A new lawsuit in Alabama targets allegedly deceptive loans, while Massachusetts reached two settlements: one with a national mortgage servicer and a second, in conjunction with the Delaware AG, with a Texas-based lender.
What happened
State regulators across the country continue to step in and fill the void left at the federal level.
- Alabama—In Alabama, the state’s Banking Department, Securities Commission and AG Steve Marshall filed suit against a company operating an allegedly illegal lending scheme in violation of state law. The company—a frequent subject of litigation—offered high-interest loans disguised as “pension sales,” the regulators alleged in their complaint.
The defendant engaged in deceptive practices by exploiting individuals who urgently needed cash for family emergencies or healthcare, saddling consumers with unlicensed loans, many of which were made at unlawful interest rates, the regulators said.
In addition, the defendant then bundled the pension streams and marketed them to investors as “structured cash flows” but misled investors to believe that any associated risks were mitigated by reserve accounts. No reserve accounts actually existed, the regulators said, and investors have stopped receiving returns.
The company has previously faced similar enforcement actions in Illinois, Massachusetts, Minnesota, North Carolina and Virginia.
- Massachusetts—Massachusetts AG Maura Healey reached a deal with a national mortgage servicer for $2 million in restitution and policy changes, resolving allegations that the servicer overcharged consumers in violation of state laws.
Specifically, the servicer forced borrowers to purchase unnecessary and expensive flood insurance, failed to disburse insurance premiums from escrow accounts, charged duplicative pre-foreclosure fees and failed to respond in a timely manner to borrowers’ requests and complaints, according to the AG’s 2017 complaint.
To settle the charges, the servicer will pay $2 million in restitution, including direct cash refunds and account credits. The company also agreed to halt foreclosure proceedings for certain homeowners, implement new policies relating to the handling of customer complaints, and pay three times the damages for borrowers to whom it failed to disburse escrowed insurance premiums and unnecessarily charged for flood insurance policies, the AG said.
“Keeping families in their homes remains a top priority for my office,” Healey said in a statement. “This settlement will provide relief to thousands of Massachusetts homeowners harmed by abusive and unfair mortgage servicing practices.”
- Delaware—Together with the Delaware Attorney General, Healey reached a second agreement with a lender based in Texas that allegedly financed unfair subprime auto loans for vehicle buyers in both Delaware and Massachusetts.
Courts have held that lending may be unlawful under state law if lenders do not have a basis for believing that borrowers will be able to repay their loans in certain circumstances and the lender facilitated the origination of auto loans in the states that it knew or should have known violated this standard, the AGs said. Servicing and collection activities also violated the states’ debt collection regulations.
Pursuant to the assurance of discontinuance in Massachusetts, the lender will provide $4.675 million to borrowers and make an $825,000 payment to the state. The lender will also waive deficiencies on certain subprime loans and reach out to the major credit bureaus to clean up consumers’ credit reports with regard to the loans at issue.
The Delaware deal features similar terms, along with $550,000 for borrowers and a $50,000 payment to the state.
Both Healey and Delaware AG Kathy Jennings noted that the settlements are part of an industrywide investigation of securitization practices in the subprime auto market, a review that remains ongoing.
- Other activity—Attorneys general are not just active on the enforcement front. In places like Maryland, they are also pushing legislation that impacts lenders. A recent example? Maryland Attorney General Brian Forsh has pushed for legislation, introduced in April 2019 as House Bill 594, that would more broadly define “student education loan” and prohibit various defined “deceptive practices” by those making such loans.
Why it matters
Financial institutions should continue to be aware that regulatory oversight at the state level remains active and that state attorneys general continue to bring enforcement actions against a wide range of financial products and services even when the CFPB soft-pedals its role.