January 22, 2021

State Licensing and Federal UDAAP – One More Take


As one of her last acts before resigning as Director of the Consumer Financial Protection Bureau (CFPB), Kathleen Kraninger once again brought a federal UDAAP claim predicated on violation of state law. On January 15, 2021, the CFPB filed a lawsuit against a nonbank mortgage lender and its three managing members, asserting a variety of legal violations, including two UDAAP claims based on the mortgage lender’s use of unlicensed mortgage lenders. This is the latest example of the CFPB’s reliance on state law violations to allege federal UDAAP claims but the first time the agency has done so in the context of loan origination. We expect the reliance on state law violations to allege federal UDAAP claims to continue under new CFPB leadership.

The CFPB first relied on state law to allege federal UDAAP violations in a series of cases that alleged that attempting to collect on loans that are deemed void under state law—either because they were made by an unlicensed lender or because they were usurious—constituted unfair, deceptive and abusive conduct. As we’ve discussed previously (here, here and here), those cases were first brought by the CFPB when Richard Cordray was the Director, but the agency continued to pursue them under both Acting Director Mick Mulvaney and Director Kraninger. At least one court agreed that such collection activity was deceptive because it created “the ‘net impression’ that the loans were enforceable and that borrowers were obligated to repay the loans in accordance with the terms of their loan agreements.” 

Then, last month, the CFPB again asserted that state law violations in the collections context could constitute a federal UDAAP violation. As we discussed here, the CFPB entered a consent order against a debt collector, finding the collector threatened to sue, and did sue, consumers for unpaid debts in states that required a license to recover payment of consumer debts through the judicial process. The collector, however, did not have such a license. The CFPB found that this conduct violated both the Fair Debt Collection Practices Act (FDCPA)—which expressly prohibits “tak[ing] any action that cannot legally be taken” in collecting a consumer debt—and the prohibition against deceptive practices. Given the applicability of the FDCPA to the conduct at issue, the CFPB’s assertion of a separate UDAAP claim seemed to be sending a message about its willingness to rely on UDAAP for state law violations. The CFPB’s deception theory was that “threats to sue and actual lawsuits . . . implicitly represented that [the collector] had a legally enforceable right to recover payment from consumers through the judicial process when, in fact, its failure to adhere to applicable state-licensure laws meant it had no such right.” While this action represented a novel twist in the CFPB’s reliance on state debt-collection-licensing laws, as opposed to the state lender-licensing and usury laws underlying the CFPB’s first set of cases, the deception claim was similar—that, as a result of the state law violation, there was no legally enforceable right to collect and that the collection activity implicitly represented otherwise.

In its latest case, the CFPB has expanded its reliance on state law violations. The CFPB alleged, among other things, that the mortgage lender employed individuals working as loan originators, but who were not licensed as loan originators as required by state law. The CFPB asserted that this constitutes a violation of Regulation Z, which expressly provides that a loan originator “must, when required by applicable State or Federal law, be registered and licensed in accordance with those laws.” As with the FDCPA violation discussed above, this reliance on state law to assert a federal law violation fits comfortably within the express language of the relevant law—in this case, Regulation Z. 

But as in the debt collector case, the CFPB was not satisfied with pleading the straightforward and expressly authorized regulatory violation. Instead, the CFPB also alleged that this conduct was deceptive. The CFPB’s deception allegation was based on both express misrepresentations (where employees allegedly relied on other, licensed employees’ license numbers) and on implied misrepresentations of licensed status. In the CFPB’s words, the unlicensed employees “created the impression that they were licensed loan originators through social-media profiles and solicitations to consumers for preapprovals,” and when these employees performed tasks that require licensing, “they caused consumers reasonably to believe that the [employees] were legally authorized to do those things when, in fact, [they] were not legally authorized.”

A deception claim, however, requires more than an allegation of a false representation. That representation must be material and likely to mislead a consumer acting reasonably under the circumstances. In the debt collection cases discussed above, the CFPB’s deception theory was based on the notion that a misrepresentation that a debt was legally collectible was material, as it would impact a consumer’s decision regarding whether to pay the debt. Here, by contrast, the conduct at issue involved loan origination and not collections. What, then, was the CFPB’s materiality theory? The CFPB alleged that the misrepresentations were material “because a reasonable consumer might have acted differently, including by taking their business elsewhere, saving time and money, if informed of the truth.” That is, the CFPB alleged that a consumer’s knowledge of the licensing status of the mortgage loan officer they were dealing with might have impacted the consumer’s decision to continue dealing with that individual. 

That may well be true, although the CFPB seems uncertain of this. Notably, the CFPB’s complaint only asserted that consumers “might have acted differently” had they known of the loan officer’s licensing status. As the CFPB is well aware, however, that is not the standard for materiality. As the Federal Trade Commission laid out nearly 30 years ago, and as the CFPB states in its UDAAP examination manual, a representation is only material if it is “likely” to affect a consumer’s behavior—that a consumer “might have acted differently” is not enough. Indeed, elsewhere in the same complaint against the mortgage lender, the CFPB asserted a deception claim based on the mortgage lender’s alleged misrepresentations of the availability and terms of a certain loan product. In framing that deception claim, the CFPB alleged that the lender’s alleged misrepresentations were material because they “were likely to influence consumers’ behavior concerning the loans.” 

It is hard to know if the CFPB’s use of “might have” with respect to the state licensing issue is simply sloppy drafting, but it suggests at a minimum that CFPB staff themselves recognize that the materiality of an individual’s licensing status in the origination context is not as straightforward as the legal validity of a debt being collected. In light of this, it is all the more remarkable that the CFPB chose to allege a deception violation for this conduct, which seems plainly covered by Regulation Z. The additional claim does not entitle the CFPB to any additional relief or remedy; its sole purpose seems to be to send the message that the agency will continue to creatively think about state law violations that may be characterized as federal UDAAP claims. Financial services companies should be on notice and consider the potential federal ramification of state licensing requirements across the life cycle of consumer financial products.

One final note: the CFPB was not content to assert a Regulation Z and deception claim regarding the alleged unlicensed loan originators. The CFPB also brought an unfairness claim predicated on the same set of facts. That claim did not turn directly on the individuals’ licensing status but, rather, alleged that the lack of a license rendered the individuals “unqualified” because they were not subject to the training that is required for licensure, had no license that could be revoked or suspended in the event of misbehavior, and were not listed in the NMLS directory, where consumers could find past disciplinary action. Unlike the deception claim, therefore, this claim actually concerns the substantive benefits of a licensing regime. It does not predicate the federal UDAAP violation directly on a state law violation but instead looks to the purposes to be accomplished by that law and frames a UDAAP claim based on the allegedly attendant harm. Of course, the CFPB could have brought a claim alleging unfairness based on unqualified loan originators even if there were no underlying state licensing regime, but it would have been more challenging to do so without the more objective benchmarks offered by that regime (training, license suspension, NMLS registration). This is yet another aspect, therefore, of the increased reliance on state law to assert federal UDAAP claims, and further drives home the importance of robust compliance programs attuned to both state and federal requirements.

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