On July 24, 2020, the CFPB announced the issuance of consent orders against Sovereign Lending Group, Inc. (Sovereign) and Prime Choice Funding, Inc. (Prime Choice). The CFPB indicated in their announcement that these consent orders originated from a number of investigations by the CFPB into companies allegedly using deceptive direct mail campaigns to advertise VA guaranteed mortgages. Both consent orders provide for civil money penalties, with Sovereign ordered to pay $460,000 and Prime Choice ordered to pay $645,000.

Both consent orders assert violations of Regulation Z and the Mortgage Acts and Practices—Advertising Rule (the “MAP Rule” or Regulation N), and Title X of the Dodd-Frank Act (the Consumer Financial Protection Act) for Sovereign’s and Prime Choice’s advertising of VA mortgages to service members and veterans dating back to January 1, 2016. Major themes of the asserted violations in both orders include (1) “false, misleading and inaccurate representations” about credit terms and inadequate disclosures, (2) the inability of consumers to obtain the advertised terms, and (3) falsely representing affiliation with the government.

The CFPB cites several examples of asserted false, misleading and inaccurate representations of costs and terms. In the Prime Choice consent order, the CFPB asserts that an advertisement sent to 84,000 consumers misrepresented and under-disclosed the APR on an advertised ARM loan because it did not take into account the fully indexed rate, required discount points for the disclosed interest rate, or origination charges. The CFPB asserts that by under-disclosing the APR based on the actual loan terms, Prime Choice did not disclose terms actually available to the consumers.

With regard to Sovereign, the CFPB asserts that a mailer sent to 87,000 consumers included a statement that read “Take $27,909 CASH-OUT FOR ONLY $113.94 PER MONTH!” The CFPB asserts that this statement was inaccurate and misleading because the advertised payment was calculated on the cash-out portion of $27,909, and did not consider the payment amount covering the refinance of any existing loan that would be paid off, which would result in a payment higher than $113.94 per month.

With regard to both lenders, the CFPB also asserts that advertisements from both lenders were often missing additional terms triggered by the disclosure of a rate or payment that are required under Regulation Z. By way of example, in the Sovereign consent order the CFPB asserts that an advertisement stated the amount of a payment that would apply to the first five years of the loan, but failed to disclose the amount of each payment and number and period of the payments during the remaining adjustable rate period, years 6 through 30, of the loan, as required by Regulation Z.

The CFPB asserts that numerous advertisements by both Sovereign and Prime Choice were cited for misrepresenting the consumers’ likelihood of actually obtaining or qualifying for the advertised mortgage, such as by stating that a consumer had been “pre-selected” or had “prequalified” when, in fact, the consumer had not been prescreened based on credit score or other credit data. Another example of asserted misleading statements related to the consumer’s ability to qualify cited by the CFPB were Sovereign advertisements that included statements of “Low FICO Score OK” but then included in fine print that terms advertised assumed credit scores of at least 740.

Finally, in both consent orders the CFPB asserts that advertisements from Sovereign and Prime Choice either “directly or by implication” represented that the companies were affiliated with the government. Advertisements from both Sovereign and Prime Choice were cited by the CFPB for their formatting and use of text boxes and form numbers that the CFPB asserts resemble IRS forms. Additionally, the CFPB asserts that certain Sovereign advertisements sent to consumers with VA loans were “published on light green paper that is similar to light green paper that the VA has used for Certificates of Eligibility” along with “reference numbers” that were similar to those used on Certificates of Eligibility.

The specific characteristics of the advertisements that the CFPB asserts constituted a misrepresentation about affiliation with the government or a government agency were not as clear as an attempt to suggest a government affiliation than we have seen in other advertisements addressed in prior matters. This suggests that lenders should be diligent in their review of their advertisements with regard to the MAP Rule prohibition against a lender misrepresenting an affiliation with a government entity. Lenders also should review their advertisements with regard to the other assertions made by the CFPB in the consent orders.

The full content of the consent orders can be viewed via the links below.

Sovereign Consent Order

Prime Choice Consent Order