Paying for Advertising based on its Results

QUESTION

We are a mortgage broker company that would like to advertise in a local newspaper. Rather than pay the newspaper a flat fee for the advertisement, we would like to pay based upon the number of leads we receive in response to the advertisement. Is this permissible?

ANSWER

The primary concern is whether the marketing plan, as described above, violates the Real Estate Settlement Procedures Act (RESPA) and its implementing regulation, Regulation X. In particular is the concern as to whether Section 8 of the Act regarding illegal kickbacks is violated.

RESPA Section 8 reads as follows:

“No person (broker) shall give and no person (newspaper) shall accept any fee (advertising fee based on loans closed or leads), kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a real estate settlement service (mortgage origination) involving a federally related mortgage loan shall be referred to any person (broker).” (Interpolations in parentheses added.)

Thus, there are three elements to an illegal kickback: (1) a “thing of value,” (2) an “agreement or understanding,” and (3) a “referral” of a real estate settlement service (mortgage origination is a “settlement service”). If any of these three essential elements is missing, the activity is not illegal under RESPA.

Oftentimes, one misconstrues Section 8 to only apply to referrals among settlement service providers.  However, that is an erroneous interpretation. The RESPA definition of “person” is not limited to settlement service providers. Rather, the term includes all individuals, corporations, associations, partnerships, and trusts. [12 CFR 1024.3; 12 USC 2602(5)] Thus, “person” encompasses a newspaper publisher.

The next question is, what constitutes a referral?

RESPA defines “referral” to include “any oral or written action (advertisement) directed to a person which has the effect of affirmatively influencing the selection by any person (consumer audience) of a provider (broker) of a settlement service or business incident to or part of a settlement service when such person (consumer) will pay for such settlement service or business (broker) incident thereto or pay a charge attributable in whole or in part to such settlement service or business”. (Interpolations in parentheses added.) [12 CFR 1026.14(f)] The RESPA definition of “referral” is extremely broad.

So, let’s apply the three elements to our scenario. As to the first and second elements, clearly these elements are satisfied as the broker will be paying a fee to the newspaper based upon an agreement between the two parties. Which brings us to the question as to whether an advertisement can  be deemed a “referral.” As the advertisement is directed to those consumers viewing same with the intention of persuading the consumer to use the broker’s services, the advertisement falls under the definition of “referral.”

However, RESPA provides certain exceptions to the broad reach of Section 8 liability. In particular, RESPA provides that “nothing in this section shall be construed as prohibiting…the payment to any person…compensation…for services actually performed.” [12 USC § 2607(c)(2)] Under Section 8(c), flat fees for advertising services are viewed as exempt from Section 8(a), so long as the value of those services is reasonably related to the fees paid, without considering the value of any referrals that might occur. It is generally accepted that “reasonable payments for goods, facilities or services actually furnished are not prohibited by RESPA.”

Clearly, if the newspaper were charging a flat fee for the advertising, which fee would be the same charged to any other non-settlement service provider, there would be no issue, as the broker would be paying the fair market value of the advertising. However, in our scenario, payment to the newspaper is dependent upon the number of responses (or referrals) the mortgage broker receives with respect to the advertisement. If the newspaper is receiving less than fair market value for the advertising space, there is a potential RESPA violation. 

Under the outlined scenario, one can argue that the broker is paying the newspaper for leads. However, in order for that to hold true, the consumer would have to contact the newspaper in response to the advertisement, rather than the broker directly, and the newspaper would then have to sell the lead to the broker. If acting as a lead generator, in order for the lead not to be deemed a referral, the newspaper must be careful not to introduce the consumer to the broker purchasing the leads, endorse or recommend the broker, or use a designation such as a “preferred” or “recommended” broker. Note that once the newspaper has direct access with a consumer, a regulator will assert that the newspaper is engaging in the licensable activity. Moreover, the newspaper would have to disclose to the consumer its financial relationship with the broker. In somewhat similar situations, the Consumer Financial Protection Bureau has found that failure to disclose such a relationship constitutes a UDAAP violation. [In the Matter of NewDay Financial LLC, 2015-CFPB-0004, Feb. 10, 2015]

Joyce Wilkins Pollison, Esq.

Executive Director/Lenders Compliance Group

Director/Legal and Regulatory Compliance

Revised Loan Estimate: If Address Change in New Construction is a “Changed Circumstance”

QUESTION

I have a file that is new construction and the city has changed the numerical part of the address since initial disclosures were sent. Would this be a valid change of circumstances requiring a revised Loan Estimate?

ANSWER

This question really has two parts, one that is express, the other implied:  (1) Does a change in the address of the real property security for a mortgage loan require a revised Loan Estimate; and (2) if so, does this qualify as a “valid changed circumstance” under 12 CFR §1026.19(e)(3)(iv) authorizing revisions to the disclosures of settlement charges in the original Loan Estimate?

The answer to the first part is “yes,” even though the physical location of the property has not changed.  Under 12 CFR §1026.17(e) of Regulation Z, the implementing regulation for the Truth in Lending Act (TILA), “[i]f a disclosure becomes inaccurate because of an event that occurs after the creditor delivers the required disclosures, the inaccuracy is not a violation of this part, although new disclosures may be required under paragraph (f) of this section, §1026.19, §1026.20, or §1026.48(c)(4).

Paragraph (f) provides:

“Except for private education loan disclosures made in compliance with §1026.47, if disclosures required by this subpart are given before the date of consummation of a transaction and a subsequent event makes them inaccurate, the creditor shall disclose before consummation (subject to the provisions of §1026.19(a)(2), (e), and (f))…(1) Any changed term unless the term was based on an estimate in accordance with §1026.17(c)(2) and was labeled an estimate…” (Emphases added.)

Here, the address of the property securing the loan is a basic “term” of the loan. [See e.g., the Official Mortgage Loan Transaction Loan Estimate Model Form (Appendix H24A to 12 CFR 1026)] It has changed. Therefore, under §1026.17(e) and (f)) a revised Loan Estimate is required to disclose the changed address.

The answer to the second part of the question is a little more complicated. Under the RESPA-TILA Integrated Disclosure Rule (TRID), mortgage lenders are held to a “good faith” standard in disclosing fees and charges on the Loan Estimate. [12 CFR 1026.19(e)(1)] The general rule is that “good faith” is measured by comparing what is disclosed in the original Loan Estimate with what the consumer actually pays at consummation. [12 CFR 1026.19(e)(3)(i)]

There are certain exceptions to this general rule, however. Section 1026.19(e)(3)(iv) of Regulation Z specifies six (6) circumstances under which a Revised Loan Estimate can be issued, the first of which (and that which is relevant here) is a “changed circumstance affecting settlement charges.”[1] In that regard, 1026.19(e)(3)(iv)(A) provides:

 

(A) Changed circumstance affecting settlement charges. Changed circumstances cause the estimated charges to increase or, in the case of estimated charges identified in paragraph (e)(3)(ii) of this section, cause the aggregate amount of such charges to increase by more than 10 percent. For purposes of this paragraph, “changed circumstance” means:

(1) An extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or transaction;

(2) Information specific to the consumer or transaction that the creditor relied upon when providing the disclosures required under paragraph (e)(1)(i) of this section and that was inaccurate or changed after the disclosures were provided; or

(3) New information specific to the consumer or transaction that the creditor did not rely on when providing the original disclosures required under paragraph (e)(1)(i) of this section. (Emphases added.)

Here, since the city’s change to the numerical part of the project address is specific to the transaction and was apparently unexpected and/or beyond the control of any interested party, the address change may qualify as a “valid changed circumstance” authorizing changes to settlement charges in the original Loan Estimate under 12 CFR §1026.19(e)(3)(iv)(A). However, only those settlement charges that the address change “caused” to be increased may be reflected in the revised Loan Estimate.  In that regard, the Official Commentary for § 1026.19(e)(3)(iv) indicates that you can revise the original Loan Estimate disclosure “only to the extent that the reason for the revision…increased the particular charge.” Thus:

“2. Actual increase. A creditor may determine good faith under § 1026.19(e)(3)(i) and (ii) based on the increased charges reflected on revised disclosures only to the extent that the reason for revision, as identified in § 1026.19(e)(3)(iv)(A) through (F), actually increased the particular charge. For example, if a consumer requests a rate lock extension, then the revised disclosures on which a creditor relies for purposes of determining good faith under § 1026.19(e)(3)(i) may reflect a new rate lock extension fee, but the fee may be no more than the rate lock extension fee charged by the creditor in its usual course of business, and the creditor may not rely on changes to other charges unrelated to the rate lock extension for purposes of determining good faith under § 1026.19(e)(3)(i) and (ii).” (Emphases added.)

The address change you have described would not permit a revised Loan Estimate across a whole spectrum of settlement charges, but only as to those changed settlement charges “caused” by the numerical address change. Your question does not indicate what, if any, specific settlement charges have changed due to this address change. And the only one that comes to mind immediately might be the appraisal charges under 12 CFR 1026.37(f)(2) if, for example, the appraisal needs to be revised because of the address change and the appraiser wants an increased fee to prepare that revision.

On new construction, however, it is not unusual for there to be a change to the official address before the final inspection, so this may have been anticipated by the appraiser and no new appraisal or increased appraisal charges needed. Thus, the determination of whether specific increases in settlement charges can be disclosed in a revised Loan Estimate occasioned by the property’s address change must await receipt of further information.

Michael R. Pfeifer
Director / Legal & Regulatory Compliance
Lenders Compliance Group

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[1] The other five are as follows: (1) “Changed circumstances” that affect the consumer’s eligibility for the loan or affect the value of the property securing the loan; (2) Consumer-requested changes; (3) Interest rate dependent charges; (4) Expiration of the original Loan Estimate; and (5) Construction loan settlement delays.

UDAAP: Definition and Best Practices

QUESTION

My colleagues and I love your weekly FAQs. Thank you for this obvious labor of love! You have written many FAQs about UDAAP. As a compliance attorney, I realize that UDAAP violations are broadly applied. What I would like to see is a general definition of UDAAP. Also, what do you recommend for a policy statement affirming a company’s commitment to UDAAP? What do you consider the high-risk areas of UDAAP? Finally, can you let us know some Best Practices for UDAAP compliance?

ANSWER

Thank you for your kind words. It is a labor of love – one that we embrace gladly! The weekly FAQ is an extension of our commitment to provide an elevated level of compliance services from a dedicated team!

We feel so strongly about the importance of monitoring UDAAPs that we provide the UDAAP Tune-up!™

Let’s lay out some basic details. Section 5(a) of the Federal Trade Commission Act (“Act” or “FTCA”) [15 USC 45(a)(1)] prohibits "unfair or deceptive acts or practices” (“UDAP”) in or affecting commerce. The Act applies to all entities engaged in commerce, including banks. Federal regulators are charged with taking appropriate action when unfair or deceptive acts or practices are discovered. For instance, the Federal Reserve Board’s (FRB) Regulation AA specifically proscribes unfair or deceptive practices. The Consumer Financial Protection Bureau (CFPB) has set forth rules about UDAAPs, and the Federal Trade Commission (FTC) helps enforce them. Indeed, federal and state regulatory examiners are looking for UDAAP violations as a part of their routine compliance examinations.

Put more concretely, the Dodd-Frank Act made it unlawful to engage in any “unfair, deceptive or abusive act or practice” – “UDAAP,” note the two As. [Dodd-Frank Act, Title X, Subtitle C, Sec. 1036; PL 111-203 (July 21, 2010)] The responsibility for enforcing the prohibition against "abusive" acts or practices was given to the Consumer Financial Protection Bureau (CFPB) under Dodd-Frank, but the prudential regulators still retain their authority to enforce UDAP under Section 5 of the FTCA.

With regards to a brief, general UDAAP definition, I will venture the following:

An act or practice that is unfair if it (1) causes or is likely to cause substantial injury to consumers, (2) cannot be reasonably avoided by consumers, and (3) is not outweighed by countervailing consumer benefits. An act or practice is deceptive when a representation, omission, or practice misleads (or is likely to mislead) consumers, and the misleading representation, omission, or practice is material. An act or practice is abusive when (a) it materially interferes with the ability of consumers to understand a term or condition of a consumer financial product or service; (b) takes unreasonable advantage of consumers’ lack of understanding of the material risks, costs, or conditions of the product or service; (c) disadvantages consumers in protecting their interests in selecting or using a consumer financial product or service; and (d) exploits the consumers’ reasonable reliance on an institution to act in the consumers’ interests.

Most of our clients ask us to provide policies and procedures, either for new versions or by reviewing existing versions. We encourage an affirmation statement – which we sometimes call a “Preamble” – in the policy document. For a UDAAP policy, the following is some helpful verbiage (though a company’s size, complexity, and risk profile would affect the wording of the statement):

It is the policy of this financial institution to fully comply with FRB Regulation AA and Section 5(a) of the Federal Trade Commission Act (FTCA). Both Regulation AA and the FTCA prohibit unfair or deceptive acts or practices. The Consumer Financial Protection Bureau (CFPB) makes rules about UDAAPs, and the Federal Trade Commission (FTC) enforces them. This financial institution fully recognizes that unfair or deceptive practices are prima facie wrong, and it also recognizes that it must have compliance procedures in place to prevent unintended violations of Regulation AA and the FTCA. Therefore, the Board has directed that management develop a document containing appropriate compliance procedures and train employees periodically regarding unfair, deceptive, or abusive acts or practices.

There are numerous ways to trigger UDAAP violations. Here are just a few.

Advertising Representations made in a financial institution’s advertising must be accurate and clear. When preparing an advertisement, omission of important information or failure to fairly disclose the terms and conditions of a product or service would be a UDAAP violation and is therefore against the institution’s policy.

Disclosures Representations made in disclosure documents must be accurate, clear, and informative. When preparing a disclosure document, the omission of important information or failure to fairly disclose the terms and conditions of a product or service is a UDAAP violation and against an institution’s policy.

Debt Collection Laws

QUESTION

I see that the CFPB has been busy with debt collection issues. We are a lender that also does some servicing. We have a few questions. First, who is considered a debt collector? Second, how does the CFPB get involved in handling debt collection problems? And, three, what are the laws that apply to debt collection?

ANSWER

Debt collection compliance should be fully understood and implemented by a variety of entities, including originating creditors, third-party collectors, debt buyers, and collection attorneys, engage in debt collection.

Here are the salient entities:

• Originating creditors attempting to obtain payment from the consumer, typically by sending letters and making telephone calls to convince the consumer to pay.
• Originating creditors that outsource the collection of debt to third-party collection agencies or attorneys or sell the debt to debt buyers after an account has been delinquent for a period of time.
• Third-party collection agencies collecting debt on behalf of originating creditors or other debt owners, often on a contingency fee basis.
• Debt buyers purchasing debt, either from the originating creditor or from another debt buyer, usually for a fraction of the balance owed.
• Debt buyers using third-party collection agencies or collection attorneys to collect their debt, or undertaking their own collection efforts.
• Debt buyers selling purchased debt to another debt buyer.

The CFPB is directly involved in the examination and enforcement of debt collection compliance. The Dodd-Frank Act (DFA) gave the CFPB supervisory authority over many types of institutions that may engage in debt collection, including certain depository institutions and their affiliates; nonbank entities in the residential mortgage, payday lending, and private education lending markets; and, of course, their service providers. The DFA also gave the CFPB supervisory authority over “larger participants” of markets for consumer debt collection, as the CFPB defines by rule, and their service providers. [12 U.S.C. 5514(a)(1)(B)]

On October 24, 2012, the CFPB issued a larger participant regulation in the market of consumer debt collection. The consumer debt collection larger participant rule, as appearing 12 CFR Part 1090, was effective January 2, 2013. It provides that a nonbank covered person is a larger participant of the consumer debt collection market if the person’s annual receipts resulting from consumer debt collection – as defined in the rule – are more than $10 million.

Concerning the laws related to debt collection, when supervised entities seek to collect debt from consumers, those entities must comply with various laws to the extent applicable, including: 

• The Fair Debt Collection Practices Act (FDCPA). The FDCPA governs collection activities and prohibits deceptive, unfair, and abusive collection practices. The FDCPA applies to entities that constitute “debt collectors” under the Act, which generally includes:

-Third parties such as collection agencies and collection attorneys collecting on behalf of lenders;

-Lenders collecting their own debts using an assumed name; and

-Collection agencies that acquire debt at a time when it is already in default.

Please note, the FDCPA applies to debts incurred or allegedly incurred primarily for the consumer’s personal, family or household purposes.

• The Fair Credit Reporting Act (FCRA). The FCRA and its implementing regulation, Regulation V, require that furnishers of information to consumer reporting agencies follow reasonable policies and procedures regarding the accuracy and integrity of data they place in the consumer reporting system. The FCRA and Regulation V require furnishers and consumer reporting agencies to handle disputes and impose other obligations on furnishers, consumer reporting agencies, and users of consumer reports. 
• The Gramm-Leach-Bliley Act (GLBA). The GLBA and its implementing regulation, Regulation P, impose limitations on when financial institutions can share nonpublic personal information with third parties. They also require under certain circumstances that financial institutions disclose their privacy policies and permit customers to opt out of certain sharing practices with unaffiliated entities. 

Flood Insurance Exam Preparation

QUESTION

We have been told that you provide flood insurance audits. Your firm was referred to us by a company that you assisted in getting ready for their flood insurance policies review prior to their examination. We have received notice that our company's forthcoming examination is going to include a flood insurance audit. What should we do to get ready for the flood examination? Also, can you tell us about the Biggert-Waters Act?

ANSWER

Yes, we provide compliance audits, examination readiness, and policies for flood insurance.

Contact us at Compliance@LendersCompliance Group for more information or click the Contact button.

The first thing to do is review your policies, both written and informal, and internal controls concerning flood insurance, particularly the method you use to make the flood hazard determination. Make sure you interview the appropriate personnel to ascertain that these policies are implemented in the prescribed manner.

With respect to preparation, obtain and review copies of the following: 

• If you use a third-party provider, ensure that the contract requires the third party to use the most recent Community Status Book on the Federal Emergency Management Agency’s (FEMA’s) website.
• Written notices (and forms) that inform borrowers that the property securing a loan is in a standard flood hazard area (SFHA) and whether federal disaster relief assistance will be available if the property is damaged by flooding.
• Written acknowledgments from borrowers indicating their understanding that the property securing the loan is or will be located in an SFHA and that they have received the notice regarding the availability of federal disaster relief assistance.
• A sample of loans secured by real estate in all lending areas, including commercial lending.
• A list from your company’s third-party flood determination company of loans with properties in a flood hazard area that require insurance. Choose a sample of those loans to review.

Importantly, determine whether you have taken steps to correct violations regarding flood insurance that may have been exceptions in previous audits.

With regards to the Biggert-Waters Flood Insurance Reform Act (“Biggert-Waters”), the banking agencies and the National Credit Union Administration (NCUA) issued a joint final rule to implement provisions of the Biggert-Waters, requiring regulated institutions to accept certain private flood insurance policies in addition to National Flood Insurance Program (NFIP) policies.

An overview of the rule, which took effect July 1, 2019, would include these features: 

• Implements the Biggert-Waters requirement that regulated lending institutions accept private flood insurance policies that satisfy the criteria specified in the Act;
• Allows institutions to rely on an insurer’s written assurances in a private flood insurance policy stating that the criteria are met;
• Clarifies that institutions may, under certain conditions, accept private flood insurance policies that do not meet the Biggert-Waters criteria; and
• Allows institutions to accept certain flood coverage plans provided by mutual aid societies, subject to agency approval.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group