In a consent order with a reverse mortgage servicer on June 18, 2024, the Consumer Financial Protection Bureau (CFPB) made the argument that failing to effectively service loans is abusive. 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. 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 “Abusive” Standard

As background, the Consumer Financial Protection Act of 2010 (CFPA) prohibits covered persons — like loan servicers — from either (1) materially interfering with the ability of a consumer to understand a term or condition of a consumer financial product or service, or (2) taking unreasonable advantage of:

• A lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
• The inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or
• The reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

In its Policy Statement on Abusive Acts or Practices, released on April 3, 2023, the CFPB focused on how a borrower is not able to choose their loan servicer, laying the groundwork for how third-party servicing could lend itself to abusive acts or practices. The policy statement explains that a consumer’s inability to select their loan servicer at any point during the life of a loan means that the consumer is unable to protect their interests:

People are often unable to protect their interests when they do not elect to enter into a relationship with an entity and cannot elect to instead enter into a relationship with a competitor. These consumer relationships, including but not limited to those with . . . third-party loan servicers, are generally structured such that people cannot exercise meaningful choice in the selection or use of any particular entity as a provider. In these circumstances, people cannot protect their interests by choosing an alternative provider either upfront (i.e., they have no ability to select the provider to begin with) or during the course of the customer relationship (i.e., they have no competitive recourse if they encounter difficulty with the entity while using the product or service).

While the relationship between a third-party servicer and a loan borrower is “not per se abusive” because of the consumer’s inability to choose their servicer, the CFPB warned that servicers “may not take unreasonable advantage of the absence of choice in these types of relationships,” and that servicers “may not take unreasonable advantage of the fact that they are the only source for important information or services.”

Ineffective Loan Servicing as an Abusive Act or Practice

Fast forward to June 18, 2024, and we see the CFPB put this theory into action against NOVAD Management Consulting, LLC, a servicer of home equity conversion mortgages (HECM), or reverse mortgage loans, on behalf of the Department of Housing and Urban Development (HUD). In the consent order, the CFPB explains that the servicer “routinely failed to effectively service consumers’ reverse mortgages.” Specifically, this meant “failing to respond to borrowers’ time-sensitive information requests and error notices, failing to acknowledge, investigate, and correct servicing errors, and failing to engage in two-way communications with borrowers.”

Tying this back to the elements of an abusive act or practice from the 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.” And finally, to explain how the servicer may have “taken unreasonable advantage” of the consumer’s inability to choose their servicer, the CFPB notes that the servicer “gained an unreasonable advantage by avoiding the cost of providing adequate resources and staffing for the loan-servicing operation.”

Altogether, this resulted in the reverse mortgage servicer engaging in abusive acts or practices when it failed to effectively service loans. Because the borrowers could not select their servicer, they were unable to protect their interests and the servicer was able to take advantage of that fact by not dedicating sufficient resources to adequately service their loans.

Future Implications

The implications of the theory relied upon by the CFPB in the NOVAD consent order could be far reaching. 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.

In a third-party loan servicing scenario where the consumer is unable to choose their servicer, 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. In addition to piggybacking on to alleged violations of the Real Estate Settlement Procedures Act (RESPA) and Regulation X, such as failing to acknowledge or respond to written notices of error and requests for information, the CFPB also specifically notes in its abusiveness claim that NOVAD failed “to engage in two-way communications with borrowers” and failed to respond to “inquiries” from reverse mortgage borrowers. Neither of those are obligations that can be clearly traced to another federal law. Rather, they are better categorized as minimum expectations by the CFPB.

Therefore, any time a loan servicer does not meet the CFPB’s expectations in terms of how it services loans, there is now risk of being considered to have engaged in abusive acts or practices. For example, could long call wait times or taking too long to respond to written correspondence — without any clear guidelines for what is required — now be considered abusive? It certainly seems likely.

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