CFPB order against reverse mortgage servicers could have wider implications

The Consumer Financial Protection Bureau (CFPB) last month issued an enforcement order against former Home Equity Conversion Mortgage (HECM) servicing contractor NOVAD Management Consulting and subcontractor Sutherland Global for what the bureau called “illegal activities that harmed older homeowners and caused them to fear losing their homes.” An attorney said the decision could have broad implications for mortgage servicing.

In an article published by The National Law Review, attorney Jonathan R. Kolodziej of Bradley Arant Boult Cummings LLP said that the order could have broad implications, particularly as it pertains to establishing what constitutes abusive conduct toward a borrower.

“The groundwork for this line of thinking was laid out by the current CFPB administration through various statements and guidance documents, but the public order represents the first time it was formally put in action against a loan servicer,“ Kolodziej wrote. “While the consent order involves a reverse mortgage servicer, the implications of this theory of liability are far reaching, and certainly not limited to just reverse mortgages.”

The bureau, he wrote, indicated that ineffective loan servicing rose to the standard of abusive conduct.

“Tying this back to the elements of an abusive act or practice from the [Consumer Financial Protection Act (CFPA)], the CFPB explained that the ‘failure to respond to inquiries from reverse-mortgage borrowers undermined consumers’ ability to protect their interests in using a reverse mortgage.’ Furthermore, ‘[c]onsumers did not choose to have [the servicer] service their reverse mortgage and could not protect their interests by selecting a different servicer,’” he explained.

The CFPB alleged that the servicer “gained an unreasonable advantage by avoiding the cost of providing adequate resources and staffing for the loan-servicing operation,” resulting in what the bureau calls abusive conduct for failing to adequately service these borrowers’ loans.

“The implications of the theory relied upon by the CFPB in the NOVAD consent order could be far reaching,” Kolodziej said. “While the consent order is between the CFPB and a single reverse mortgage loan servicer, it would be a mistake to think that the same arguments could not be levied against other types of third-party servicers. Indeed, there is nothing specific or unique to the HECM or reverse mortgage product in the argument relied upon by the CFPB.”

He added that it “now seems likely that any ineffectiveness in performing servicing duties could result in an abusive claim. This consent order further demonstrates that a servicer’s duties aren’t limited to things required by law.”

According to the original enforcement order, Sutherland and its subsidiaries will “pay $11.5 million in redress to affected consumers, and [the order] requires all companies to pay a civil penalty of approximately $5 million, which will be deposited in the CFPB’s victims relief fund.”

NOVAD’s fine is limited to $1 due to its declaration of an inability to pay. The $1 fine allows “the CFPB [to] make consumers eligible for additional relief from the CFPB’s victims relief fund in the future,” the bureau explained.

NOVAD declined to comment when the order was publicly released. In a statement, a representative of Sutherland told HousingWire that the company reached a voluntary agreement with the CFPB regarding work it performed as a subcontractor for NOVAD, and it agreed to the payment while disagreeing with the CFPB’s findings and denying its allegations.