“He’s intimately involved,” U.S. District Judge Richard Seeborg said of Nationwide Biweekly Administration CEO Daniel Lipsky. “If those statements are deceptive, because he’s intimately connected to the development of those materials, how can he not be held personally liable?”
The Consumer Financial Protection Bureau is seeking to claw back $33 million from Lipsky, on top of $73.9 million from his company, for misleading borrowers about the fees and benefits of an Interest Minimizer program for mortgage payments.
During a six-day bench trial that ended May 1, the bureau presented a dozen witnesses to make its case against the Ohio-based mortgage payment firm. The CFPB said Nationwide lied about how quickly borrowers would save money, misrepresented its relationships with lenders, failed to disclose a hidden setup fee, and instructed employees to be dishonest during sales calls.
Nationwide denies it, and accused the bureau of overzealous prosecution, alleging in counterclaims that the 6-year-old government regulator abused its power and disrupted the company’s banking relationships without due process.
On the issue of personal liability, the bureau says Lipsky should be held accountable because he edited and approved misleading telemarketing scripts and direct-mail letters to consumers.
The bureau says the mailers falsely suggested Nationwide was affiliated with mortgage lenders, and that the company’s telemarketing script instructed employees not to say “No” if consumers asked if Nationwide worked with their lender.
Nationwide claims the mailers included a disclosure about its non-association with lenders. It says the bureau took the “Don’t say no” direction in its telemarketing script out of context. It says the intention was to provide a broader explanation and not give a one-word answer to consumers.
Nationwide attorney Lisa Messner argued that Lipsky developed scripts that explicitly disclosed fees, and that he disciplined employees who “went rogue” and were dishonest with consumers. Because of that, the CEO should not be held liable for any alleged deceptive practices, she said.
“Good faith is a consideration in assessing civil penalties,” Messner said.
Judge Seeborg replied that Messner was suggesting an “extra level of intent” is needed to establish liability.
“The standard you’re proposing is higher than what’s required,” Seeborg said.
Turning to the proposed disgorgement of $73.9 million in allegedly undisclosed setup fees, Messner called that demand severely overinflated.
The purpose of disgorgement is to prevent unjust enrichment, not to strip companies of legitimately obtained profits, she said.
“A reasonable approximation is not every dime this company has made since 2011,” Messner said. “That’s an overreach, and it’s overbroad.”
Messner urged the judge to reject the bureau’s request for a permanent injunction that would bar Nationwide from offering, selling or telemarketing its Interest Minimizer program.
There is no risk of future harm, she said, as Lipsky and Nationwide would comply with the law and refrain from engaging in any practice deemed deceptive by the court.
Regarding counterclaims, Nationwide claims the bureau sidestepped the separation of powers and acted as judge, jury and executioner when it issued a news release with unfounded accusations against the company in May 2015.
“The bureau was stepping into your shoes,” Nationwide attorney Helen Mac Murray told Seeborg. “That’s the separation of powers issue we’re talking about.”
After the bureau issued the press release and sued Nationwide, four banks terminated their relationships with the company, effectively blocking it from administering its mortgage payment program.
Thomas McCray-Worrall, an attorney for the bureau, said Nationwide failed to establish proof to support its counterclaims or its request for an injunction to bar the bureau from “interfering” with its banking relationships.
“Nationwide can’t establish that any bank was even aware of the press release,” McCray-Worrall said.
The bureau’s refusal to write a “comfort letter” to banks to “eliminate concern” that they might be prosecuted for working with Nationwide is not something the regulator can be sued for, McCray-Worrall said. Nationwide offered no evidence that such a letter would have persuaded banks to continue working with the company, he added.
After more than four hours of post-trial arguments, Seeborg ended the hearing.
The judge said he found some deceptive aspects of Nationwide’s mailers “troubling,” but also suggested that the bureau failed to articulate why it was seeking disgorgement of setup fees as the remedy for all other unrelated claims of deceptive marketing practices.
Nationwide, its subsidiary Loan Payment Administration and Lipsky are accused of violating the Consumer Financial Protection Act of 2010, the Telemarketing and Consumer Fraud and Abuse Prevention Act and its implementing regulation, the Telemarketing Sales Rule.
If Seeborg grants the bureau’s request for up to $101 million in disgorgement, the regulator will distribute the money to 126,500 consumers who signed up for the Interest Minimizer program from 2011 to 2015, according to bureau attorney Patrick Gushue.
The bureau also seeks additional civil penalties of $7.3 million.