Consumer Fin. Prot. Bureau v. 1St All. Lending

• Decision Date: 31 March 2022
• Docket Number: 3:21-cv-55 (RNC)
• Parties: CONSUMER FINANCIAL PROTECTION BUREAU, Plaintiff, v. 1ST ALLIANCE LENDING, LLC, JOHN CHRISTOPHER DIIORIO, KEVIN ROBERT ST. LAWRENCE, and SOCRATES ARAMBURU, Defendants.
• Court: U.S. District Court — District of Connecticut

CONSUMER FINANCIAL PROTECTION BUREAU, Plaintiff,
v.
1ST ALLIANCE LENDING, LLC, JOHN CHRISTOPHER DIIORIO, KEVIN ROBERT ST. LAWRENCE, and SOCRATES ARAMBURU, Defendants.

No. 3:21-cv-55 (RNC)

United States District Court, D. Connecticut

March 31, 2022

RULING AND ORDER

ROBERT N. CHATIGNY, UNITED STATES DISTRICT JUDGE.

The Consumer Financial Protection Bureau (“CFPB”) brings this suit against 1st Alliance Lending, LLC (“1st Alliance”) and its owners and corporate officers John DiIorio, Kevin St. Lawrence, and Socrates Aramburu (“the individual defendants”), alleging violations of federal consumer financial laws. 1st Alliance has moved to dismiss the Amended Complaint in part, and has moved in the alternative for a more definite statement as to Count One. The individual defendants have moved to dismiss all claims against them. For the reasons below, 1st Alliance's motion is denied, and the individual defendants' motions are granted in part and denied in part.

I. Background

The Amended Complaint alleges the following. 1st Alliance is a non-depository mortgage company, ECF No. 27 ¶ 1. At all

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relevant times, DiIorio was 1st Alliance's CEO, id. ¶ 13, St. Lawrence was its President of Production, id. ¶ 14, and Aramburu was its President of Capital Markets, id. ¶ 15.

From around 2015 to 2019, 1st Alliance's business model relied on sales employees called Submission Coordinators (“SCs”) or Home Loan Consultants (“HLCs”), who were the “primary consumer point of contact throughout the mortgage-origination process.” Id. ¶¶ 18-21. As such, the SCs/HLCs performed duties that would have required them to hold a mortgage-originator license in every state in which 1st Alliance operated, id. ¶ 22, but 1st Alliance never required its SCs or HLCs to be licensed in any state, id. ¶ 23. By 2017, 1st Alliance's compliance department began raising concerns to company leaders, including the individual defendants, that SCs were engaging in activities that would require licensing under state and/or federal law. Id. ¶¶ 35-36.

Unlicensed SCs/HLCs held themselves out as licensed via solicitation emails and social media profiles. Id. ¶ 48-50. Further, 1st Alliance representatives required prospective borrowers to submit certain documents before receiving Loan Estimates, id. ¶ 76, denied them credit without giving required written notices, id. ¶¶ 38-41, and made false and misleading statements regarding their eligibility for refinancing programs and those programs' terms, id. ¶¶ 44-47.

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Each individual defendant was “responsible for and approved 1st Alliance's business model, including the particular duties assigned under that model to unlicensed personnel such as SCs and HLCs, as well as to licensed MLOs.” Id. ¶ 55. Each one also had “knowledge of and approved” 1st Alliance's “policies and procedures, ” including those related to federal and state licensing laws, as well as its “sales practices and the specific functions performed by those in particular job roles.” Id. ¶¶ 56-57; 62.

DiIorio, as CEO, was responsible for the day-to-day executive management of 1st Alliance, and “frequently interacted with others at 1st Alliance concerning the structure and nature of the company's mortgage-origination business, including the specific roles played in that structure by sales staff and others, including SCs, HLCs, and MLOs. DiIorio directed and approved changes to those roles and interacted with 1st Alliance's compliance and legal functions in doing so.” Id. ¶ 58. St. Lawrence, as President of Production, was responsible for and oversaw the structure and operation of sales, which included SCs, HLCs, and MLOs. Id. ¶ 60. He also controlled the offices where the sales staff worked and where the call center was located. Id. ¶ 61.

Counts One and Two charge 1st Alliance with violating Regulation Z, which implements the Truth in Lending Act

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(“TILA”), by failing to ensure that its loan officers were licensed and requiring verifying documents from the consumer before a Loan Estimate was issued. Counts Three, Four, and Five charge all defendants with violating the Consumer Financial Protection Act of 2010 (“CFPA”) by engaging in deceptive and unfair acts and practices. Count Six charges 1st Alliance with violating the Mortgage Acts and Practices (“MAP”) Rule by making material misrepresentations to consumers. Counts Seven and Eight charge 1st Alliance with violating the Equal Credit Opportunity Act (“ECOA”) and the Fair Credit Reporting Act (“FCRA”) by failing to provide required notices to consumers who were denied credit. Finally, Count Nine charges 1st Alliance with violating the CFPA based on its violations of “federal consumer financial law.”

1st Alliance has moved to dismiss Counts One, Two, Six, and Nine (to the extent it incorporates Counts One, Two, and Six) for failure to state a claim. ECF No. 33. The individual defendants have moved to dismiss all claims against them. ECF No. 32.

I. Legal Standard

Under Rule 12(b)(6), a complaint is properly dismissed when it fails to state a claim upon which relief may be granted. To withstand a properly supported motion to dismiss under this Rule, a complaint must present a claim that is “plausible on its

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face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The plausibility standard requires a plaintiff to plead factual allegations permitting a reasonable inference that the defendant is liable for the alleged wrong.

II. 1st Alliance's Motion to Dismiss

a. Count One: Regulation Z - Failing to Ensure that Loan Originators Were Licensed

The CFPB alleges in Count One that 1st Alliance failed to ensure that its SCs and HLCs were licensed, in violation of Regulation Z. 12 C.F.R. § 1026.1. Regulation Z was promulgated to implement the Truth in Lending Act (“TILA”), 15 U.S.C § 1601 et seq., which was itself enacted to encourage the informed use of credit by assuring meaningful disclosure of credit terms to consumers. Under Regulation Z, a “loan originator organization” must ensure that “each individual loan originator who works for [it] is licensed” to the extent required “under the SAFE Act, its implementing regulations, and State SAFE Act implementing law before the individual acts as a loan originator in a consumer credit transaction secured by a dwelling.” 12 C.F.R. § 1026.36(f)(2).

The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (“SAFE Act”), 12 U.S.C. § 5101, et seq., encouraged states to implement state versions of the SAFE Act, with the minimum standards in the federal statute as a floor. 12 C.F.R. § 1008.1(b).

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The federal SAFE Act defines “loan originator” as an individual who (A) takes a residential mortgage loan application and (B) offers or negotiates terms of a residential mortgage loan for compensation or gain. 12 U.S.C. § 5102(4) (emphasis added). Under its implementing regulations, an individual engages in the business of a loan originator if the individual, “in a commercial context and habitually or repeatedly: (i) takes a residential mortgage loan application; and (ii) offers or negotiates terms of a residential mortgage loan compensation or gain.” 12 C.F.R. § 1008.103(a)(b)(1) (emphasis added).

CFPB alleges that since enactment of the SAFE Act, every state has enacted implementing legislation that expands the category of individuals who must be licensed by broadening the definition of “loan originator” to include an individual who, for compensation or gain or the expectation of compensation or gain, either “takes a residential mortgage loan application” or “offers or negotiates terms of a residential mortgage loan.” ECF No. 27 ¶ 68. It also alleges that each S.C. and HLC performed either or both of the above functions, so that in every state in which 1st Alliance operated, they should have been licensed under state SAFE Acts. Id. ¶ 72. Because Regulation Z requires 1st Alliance to ensure that its employees are licensed in compliance with the federal and state SAFE Acts, CFPB alleges,

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1st Alliance violated Regulation Z (and therefore TILA, which Regulation Z implements).

1st Alliance contends that this count must be dismissed on the ground that, although TILA and the federal SAFE Act each require licensing for statutorily defined “loan originators” (or “mortgage originators”), neither statute requires a creditor to ensure that its individual employees are licensed and, to the extent Regulation Z does so, it constitutes an impermissible exercise of agency authority. ECF No. 33 at 9-10.

This argument is unavailing. TILA, as amended by the Dodd-Frank Act, provides in part that “[s]ubject to regulations prescribed under this subsection, each mortgage originator shall . . . be qualified and, when required, registered and licensed as a mortgage originator in accordance with applicable State or Federal law, including the Secure and Fair Enforcement for Mortgage Licensing Act of 2008.” 15 U.S.C. § 1639b(b). And TILA directs the Bureau to “prescribe regulations to carry out the purposes of [TILA], ” which “may contain such additional requirements, classifications, differentiations, or other provisions . . . as in the judgment of the Bureau are necessary or proper to effectuate the purposes of [TILA], to prevent circumvention or evasion thereof, or to facilitate compliance therewith.” 15 U.S.C. § 1604(a). In other words, in order for a mortgage originator to be qualified in compliance with TILA,

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it must also comply with requirements promulgated by the CFPB. One such requirement obligates loan originator organizations to ensure that individual loan originators working for them are licensed or registered as required by state and federal laws. This requirement is clearly authorized by the statutory grant of authority - if loan originator organizations were allowed to employ unlicensed loan originators to do work that requires a license under state and federal law, TILA's requirement that...