QUESTION
Last week, you wrote about Digital Mortgage Comparison Platforms. Your article was eye-opening. Thank you!
The article triggered a lot of feedback and concerns from our management. We advertise on one of these platforms. As the Compliance Officer, I put together a task team to determine which laws and regulations these platforms impact, especially with respect to the CFPB's advisory opinion.
I was hoping you would elaborate on how the comparison platforms can affect compliance with mortgage advertising, RESPA, and UDAAP. Maybe you can offer some scenarios.
How can comparison platforms cause mortgage advertising, RESPA, and UDAAP violations?
Also, what scenario involving a "warm handoff" can impact RESPA section 8?
ANSWER
Last week's article, Digital Mortgage Comparison Platforms, provided an overview of the CFPB's position regarding online comparison platforms involved in lead generation. Let's do a little recapitulation to get started.
The Bureau issued an advisory opinion to address certain circumstances in which operators of digital mortgage comparison-shopping platforms may violate the Real Estate Settlement Procedures Act (RESPA).[i]
The advisory opinion describes how a digital mortgage comparison-shopping platform operator violates RESPA section 8 if its platform provides enhanced placement or otherwise steers consumers to platform participants based on compensation that the platform operator receives from those participants rather than based on neutral criteria.
Specifically, the advisory opinion states that an operator of a digital mortgage comparison-shopping platform receives a prohibited referral fee in violation of RESPA section 8 when:
1. The digital mortgage comparison-shopping platform "non-neutrally" uses or presents information about one or more settlement service providers participating on the platform;
2. That non-neutral use or presentation of information has the effect of steering the consumer to use or otherwise affirmatively influences the selection of those settlement service providers, thus constituting referral activity; and
3. The operator receives a payment or other thing of value that is, at least in part, for that referral activity.
Indeed, if an operator of a comparison platform receives a higher fee for including one settlement service provider compared to what it receives for including other settlement service providers participating on the same platform, that can be evidence of an illegal referral fee arrangement absent other facts indicating that the payment is not for enhanced placement or other form of steering.
Digging deeper, I will discuss some ways that RESPA section 8 is triggered as it relates to the operational factors of online comparison platforms.
RESPA section 8 applies broadly and, in many circumstances, covers conduct by persons connecting settlement service providers to consumers interested in purchasing a home, applying for a mortgage, or otherwise using a settlement service provider in a RESPA-covered transaction. This may include selling the consumer's contact information (i.e., leads) to settlement service providers. Leads are increasingly sold through various digital platforms and related business agreements.
In particular, some digital platforms are structured as consumer-facing websites or online applications allowing consumers to search for and compare mortgage options or other settlement services. These digital platforms – in some cases called online marketplaces – can facilitate a consumer's choice among alternative products or settlement service providers and may be operated by settlement service providers or third parties. Consumers often provide their contact information to set up an account through interaction with these digital platforms. Sometimes, they may provide additional information, typically part of a mortgage application, or fill out an online long form.
The platform operator then purports to use the consumer's information to help the consumer compare a range of options to find a suitable lender or other settlement service provider that the consumer can contact. The platforms typically generate leads for the participating lender or other settlement service provider by facilitating the consumer's click-through to the website of the participating provider, selling the consumer's contact information to the provider, or both.
The comparison information may be presented to the consumer viewing the platform in a static or interactive format. In the latter case, the platform may give consumers the ability to sort the options or rankings based on different criteria or to customize the presentation of options or rankings based on factors they can select (sometimes after default options or rankings are presented).
Furthermore, digital platforms may also combine online marketplace and lead generation activities with other services, such as advertising to consumers.
There are several ways that comparison platforms can violate RESPA. I will describe a few scenarios. The advisory opinion provides examples of digital mortgage comparison-shopping platforms where the CFPB would find a RESPA section 8 violation.
Pay to Play and Steering to the Highest Bidder
In an example of conduct that would violate RESPA section 8, let's make these assumptions:
· Assume the operator permits the consumer to input relevant information on the digital mortgage comparison-shopping platform to aid in the consumer's search for mortgage options (i.e., location, anticipated loan amount, credit score) and represents that the platform will use the information to identify the best match; and
· Assume that the platform presents a supposedly "best match" lender to the consumer or ranks the lenders but skews the comparison function results to ensure that the best match is the highest bidding lender participating on the platform.
Such a process would violate RESPA section 8 because the operator non-neutrally uses the information to preference the highest bidding lender, resulting in the operator steering the consumer to that lender. The operator's actions imply an endorsement by leading the consumer to believe that the operator did an analysis behind the scenes (possibly driven by an algorithm) to determine the most suitable lender for the consumer, thereby influencing the consumer to select that lender.
Moreover, the operator is not merely receiving a bona fide payment for services under RESPA section 8(c)(2). The CFPB notes that this example could also potentially implicate the prohibition against unfair, deceptive, or abusive acts or practices (UDAAPs), particularly if the digital mortgage comparison-shopping platform were to contain misrepresentations about the accuracy of the information on the platform (including about the objectivity of the rankings). Deceptive misrepresentations could serve to accentuate the affirmative influence noted above.
Payments Only From and Promotion of Lenders Rotating in Top SpotThis scenario is a little complicated. It is a variation of the previous scenario.
Consider this sequence:
1) A comparison platform allows consumers to input information about their needs and then generate lender rankings,
2) All lenders participating on the platform take turns appearing in the top spot randomly or based on a predetermined schedule (i.e., the rankings do not reflect tailoring to the consumer's needs based on their inputted information),
3) The operator is paid by only the lender appearing in the top spot, or lenders pay in advance for the opportunity to appear in the top spot randomly or based on the predetermined schedule.
This is an example of a referral because a consumer would reasonably perceive that, after entering information about their needs and using the platform to call up a ranking of participating lenders, the lender appearing in the top spot would be the one determined by the operator to be best suited to the consumer's needs, not the lender who is next in a round robin.
The operator is not merely receiving a bona fide payment for services under RESPA section 8(c)(2). This scenario likewise would also raise UDAAP concerns. The payment would be considered a referral fee even if it does not differ from the payments made by other lenders participating in the referral sequence.
Preferencing Platform Participants That Are Affiliates
In this scenario, here is the lead generation flow:
· A comparison platform is designed and operated in a manner that steers consumers to use settlement service providers that are affiliates of the operator. (For example, perhaps a mortgage lender develops a comparison platform permitting consumers to search for information about and view rankings of comparable mortgage brokers, and that platform includes both affiliated and nonaffiliated mortgage brokers.)
· The mortgage lender/operator manipulates the application of the ranking criteria so that its affiliated mortgage brokers appear higher than the nonaffiliated mortgage brokers.
· The operator receives payment for the higher-ranking of affiliated mortgage brokers.
In this scenario, the operator's receipt of payments from the affiliated mortgage brokers for the higher ranking would violate RESPA section 8. A platform that preferences affiliated settlement service providers non-neutrally uses or presents information. Therefore, the operator is affirmatively influencing the consumer's selection of the providers on the platform and is referring the consumer. The operator is receiving payment for the preferential treatment (i.e., the referral).
Indeed, this scenario may also implicate the RESPA section 8(c)(4) provisions regarding affiliated business arrangements. Whether a particular arrangement is an affiliated business arrangement depends on various factors, including the nature of the relationship between the parties and whether the operator is "in a position to refer [settlement service] business." Perhaps the operator could follow the conditions for affiliated business arrangements and then claim that the platform is permissible under RESPA section 8.
However, other than payments separately permitted under RESPA section 8(c), the only thing of value that persons in an affiliated business arrangement may receive is a return on ownership interest (or franchise relationship). In the scenario described above, the operator would receive a thing of value other than payments separately permitted under RESPA section 8(c) or a return on an ownership interest (or franchise relationship).
Furthermore, for reasons similar to the other examples, that payment would not be merely for compensable services under RESPA section 8(c)(2). Thus, the RESPA affiliated business arrangement provisions would not permit this arrangement.
Additional Services That Promote Platform Participant
Promoting platform participation can set up a sequence, as follows:
· An operator designs a comparison-shopping platform that gathers the consumer's contact information and permits the consumer to generate a ranking of lender options based on criteria selected by the consumer. The ranking reflects neutral use and display of information.
· The operator also contracts with one of the participating lenders (which is not necessarily the top-ranked lender) to promote that lender by sending a text message or email to any consumer who uses the platform to generate a ranking of lender options, encouraging the consumer to submit an application to that lender because it would be a good fit for the consumer's needs.
The promotional activity by the operator undermines the platform's neutral presentation of information by steering the consumer to use a particular provider soon after the consumer has searched for comparison information.
The operator's promotional activity, either by itself or when combined with the effect of the operator's action in presenting the comparison options to the consumer, affirmatively influences the consumer's selection of that lender and is a referral. Therefore, payment in exchange for promotional activity is not merely a payment for compensable services under RESPA section 8(c)(2).
Warm Handoff
Regarding the warm handoff, the sequence is designed to establish direct contact between a consumer and a particular lender. The following sequence below is but one variation of a lead generation practice that industry stakeholders sometimes call a warm handoff or live transfer. Through its enforcement activity, the CFPB has identified other examples of so-called warm handoff or live transfer activities that lead to RESPA section 8 violations. Here's a scenario.
· The operator of a comparison platform presents comparison information on multiple lenders and uses an online form to gather detailed information from a consumer browsing the platform. The consumer's information relates to the consumer's particular borrowing needs, such as credit score and target loan amount.
· The operator then calls the consumer to offer an immediate phone or live chat transfer to, or callback from, a lender participating on the platform and tells the consumer that "they will be in good hands" (or a similar statement) with that lender. However, the lender that receives the lead is merely the first lender to respond to the operator's push notification alerting a network of lenders that a consumer is available for an immediate transfer, rather than a lender the operator identified as meeting the consumer's needs based on the consumer's inputted information.
The operator's actions convey to the consumer an implied endorsement of the lender when the operator tells the consumer that they will be in good hands with that lender. Further, regardless of the specific words used when the transfer occurs, a consumer who inputs detailed information to the operator immediately before a transfer to a lender would reasonably infer that the consumer is being connected to the lender that best meets their needs.
Moreover, the first lender to respond to the push notification receives the lead exclusively; thus, a referral arrangement is present because the Department of Housing and Urban Development identified exclusivity as a relevant factor in determining whether there is a referral arrangement. Therefore, the operator's actions exert affirmative influence and constitute a referral.
An operator that receives payment for a warm handoff is not merely receiving payment for a compensable service for the reasons described above. The payment itself would be considered a referral fee even if it does not differ among the providers participating in the warm transfer process.
Jonathan Foxx, Ph.D., MBAChairman & Managing Director
