QUESTION
I am the CEO of
our company, and we were recently referred to your firm for assistance with our
review of advertisements. We’re currently talking to your people about making
sure we have reliable advertising review procedures. And we’ve already purchased
your advertising manual. We hope to engage Lenders Compliance Group to work
with us on our advertising procedures.
We do a lot of direct
mail pre-approvals. I am writing to you because I am concerned about two recent
consent orders from the CFPB that involve direct mail. Both of these cases involve
direct mail advertising issues, caused by prescreening, relating to VA loans
in particular.
I want to do
whatever is necessary to comply with proper prescreening procedures.
What are some
basic procedures we need to be following on our prescreened advertisements?
ANSWER
Thank you for
your question. It is a timely inquiry. The two companies are Sovereign Lending
Group, Inc. (“Sovereign”) and Prime Choice Funding, Inc. (“Prime Choice”). The
CFPB issued consent orders to both of them on July 24th. These
actions stem from the Bureau’s sweep of investigations of multiple mortgage
companies that use deceptive mailers to advertise VA-guaranteed mortgages. Some
state banking departments have been actively pursuing similar examinations and
enforcement.
In the case of
Sovereign, the consent order requires the company to pay $460,000 in civil
monetary penalties and imposes requirements to prevent future violations. In
the case of Prime Choice, the consent order requires the company to pay $645,000
in civil monetary penalties and imposes requirements to prevent future violations.
In both cases, the principal means of advertising is through direct-mail
campaigns targeted primarily at the United States military service members and
veterans.
The Bureau
alleged that Sovereign sent consumers hundreds of thousands of mailers for
VA-guaranteed mortgages that contained false, misleading, and inaccurate
statements or that lacked required disclosures, in violation of the Consumer Financial Protection Act’s (CFPA) prohibition
against deceptive acts and practices, the Mortgage Acts and Practices –
Advertising Rule (“MAP Rule”), and Regulation Z. Sovereign allegedly
sent consumers numerous advertisements for VA-guaranteed mortgages that, among
other things, misrepresented the credit terms of the advertised mortgage,
misleadingly described an adjustable-rate mortgage as having a “fixed” rate,
falsely stated that the consumer had been prequalified for the advertised
mortgage, created the false impression that Sovereign was affiliated with the
government, used the name of the consumer’s current lender in a misleading way,
and failed to include multiple disclosures required by Regulation Z.
With respect to
Prime Choice, the Bureau alleged that the company sent consumers millions of
mailers for VA-guaranteed mortgages that contained false, misleading, and
inaccurate statements or that lacked required disclosures, in violation of the CFPA’s prohibition against deceptive acts and practices, the MAP
Rule, and Regulation Z. Prime Choice allegedly sent consumers
numerous advertisements for VA-guaranteed mortgages, causing violations similar
to those made by Sovereign.
There are several
acceptable reasons for obtaining and using consumer reports, one of which is
the intent to use them in connection with a prescreened “firm offer of credit
or insurance.” This use is often referred to as “prescreening.” This type of
marketing requires considerable regulatory compliance knowledge and support. Most
financial institutions do not have the adequate level of expertise needed to review such marketing techniques to know how to prevent deceptive acts and practices, ensure compliance with the MAP Rule, and comply with Regulation Z.
Retaining a firm like Lenders
Compliance Group for such support should be part of your prescreening
review process. Just one, single error in prescreened marketing can cost
considerable financial and regulatory risk. Please contact me HERE if you want
to talk about your compliance concerns.
Your institution
engages in prescreening activities if it either:
- Obtains specific customer authorization for any prescreening; or
- Extends a firm offer of credit or insurance to each consumer identified by the prescreening.
The firm offer
must be honored if the consumer is determined, based on information in a
consumer report, to meet the specific criteria used to select the consumer for
the offer.
There are several
factors that you will need to state in your policy and implement in your
procedures (and those procedures should be tested periodically). Four factors come
to mind: disclosure, the record of criteria, opt-outs, and limited information.
I will provide a brief overview of each factor.
Disclosure
With each
prescreened solicitation, your institution should provide a clear and
conspicuous statement that:
- Information contained in the consumer’s consumer report was used in connection with the transaction.
- The consumer received the offer of credit because the consumer satisfied the criteria for creditworthiness or insurability under which the consumer was selected for the offer.
- If applicable, your institution may choose not to extend credit if, after the consumer responds to the offer, the consumer does not meet the criteria used to select the consumer for the offer or any applicable criteria bearing on creditworthiness or insurability or does not furnish any required collateral.
- The consumer has a right to prohibit information contained in the consumer’s file with any consumer reporting agency from being used in connection with any credit or insurance transaction not initiated by the consumer. The consumer may exercise the right by notifying a notification system set up for that purpose.
- Includes the address and a toll-free number for the notification system.
- Is presented in a format, type size and manner that is simple and easy to understand, in accordance with FTC regulations (not yet adopted as of the date of publication of this book).
Record of Criteria
Your institution should
keep on file the criteria used to select consumers for any prescreened offer.
Examples of
criteria would include:
- All criteria bearing on credit worthiness or insurability, as applicable, that are the basis for determining whether to extend credit or insurance pursuant to the offer.
- Any requirement for the furnishing of collateral as a condition of the extension of credit or insurance, until the expiration of the three-year period beginning on the date on which the offer is made to the consumer.
Opt-outs
Any prescreening must
not include customers who have opted out of prescreening.
Limited
information
In connection
with any prescreening, your institution should receive from the consumer reporting
agency only:
- The name and address of each consumer.
- An identifier not unique to the consumer and used solely for the purpose of verifying the identity of the consumer.
- Other information pertaining to a consumer that does not identify the relationship or experience of the consumer with respect to a particular creditor or other entity.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group
