QUESTION
We are facing a lawsuit and potential administrative action for steering. For several years, we have run a successful website that compares rates for mortgage lenders. When a visitor selects a mortgage lender, we refer them to the lender. We charge the lender for the referral. We believe we act as only an intermediary, passing on the referral. We only get paid for the referral whether or not the lender closes the loan. We provide a disclosure regarding our terms.
However, a lawyer is starting a lawsuit against us for violating RESPA Section 8. They claim our referrals are illegal. We’ve hired some top lawyers to defend us, but they’re not particularly optimistic about the outcome going in our favor. They say we may be violating RESPA and the CFPB will likely get involved.
We are not the only comparison platform that refers people for a fee. Our attorneys want us to change our website and terms immediately. I am looking for another opinion. I have read your FAQ emails for years and trust you to give me your candid opinion.
Are payments for referrals from rate comparison websites a violation of RESPA?
What are the guardrails we need to know to comply with RESPA?
ANSWER
Several years ago, we provided compliance support to an online comparison website. We found RESPA 8 violations, such as compliance concerns involving referrals, and offered guidance to cure the violations proactively. We also asked the client to revise their contracts with the posted lenders.[i] The client refused to follow our advice.
The lawsuit and the potential for CFPB’s investigation are red flags. It is one thing to be alerted to possible RESPA violations. I do not know how your referral model works for being paid by the lenders with respect to a shopper’s selection.
Indeed, earlier this year,[ii] the CFPB made known its considerable interest in companies operating digital platforms that appear to shoppers as providing objective lender comparisons but may illegally refer people to only those lenders paying referral fees. The Bureau issued an Advisory Opinion[iii] outlining how companies violate RESPA when they steer shoppers to lenders by using pay-to-play tactics rather than providing them with comprehensive and objective information.
Three prongs are associated with evaluating if a platform receives a prohibited referral fee, and these are triggered when the platform:
1.
non-neutrally
uses or presents information about one or more settlement service providers
2.
in
a way that has the effect of steering the consumer to use (or affirmatively
influences the selection of) those settlement service providers, constituting
referral activity,
3. in exchange for a payment or other thing of value that is, at least in part, for that referral activity.
Let’s cut to the chase: the CFPB maintains that operators of online comparison platforms receive a prohibited referral fee when they use or present information in a way that steers consumers to mortgage lenders in exchange for a payment or something else of value.
For more context and information, I have written extensively about the compliance of digital mortgage comparison platforms here and here.
Now, let’s turn to those guardrails!
This area of mortgage compliance requires an expansive understanding of your particular operations. Thus, I will offer only some generic pitfalls to watch out for, derived from our professional experience, the aforementioned Advisory, RESPA Section 8,[iv] HUD’s Statement of Policy,[v] and HUD CLO Policy Statement,[vi] among other things.
Indeed, these online mortgage comparison platforms could implicate the Dodd-Frank Act’s prohibition on unfair, deceptive, or abusive acts or practices (UDAAP), Truth in Lending Act (TILA), Equal Credit Opportunity Act (ECOA), Telemarketing Sales Rule (TSR), Federal Trade Commission Act (FTCA), Telephone Consumer Protection Act (TCPA) and Fair Credit Reporting Act (FCRA), including state and federal privacy and licensing laws.
I begin with an outline of some pitfalls and follow with a few scenarios that lead to RESPA 8 violations involving mortgage comparison platforms.
PITFALLS OF ONLINE MORTGAGE COMPARISON PLATFORMS
Non-neutral Presentations constitute a Referral
· RESPA prohibits payments under an agreement for referrals of settlement-service business.
· The CFPB says digital platform operators make a referral when they “non-neutrally” use or present information that steers a consumer to a settlement service provider or otherwise influences the consumer’s selection.
· Neutral presentations and similar fees are critical to avoiding allegations of steering consumers to providers paying the highest fees to the platform operator.
Disclosure is not Necessarily Protective
· Some platforms disclose how they use and present information. However, such disclosure would not, absent other facts, turn a directed action that has the effect of affirmatively influencing into one that does not so influence.
Referrals encompass Multiple Parties
· The applicable regulation defines a referral as an “oral or written action directed to a person.”
· That includes consumers, appraisers, real estate agents, title companies and agents, lenders, mortgage brokers, or other companies that provide information in connection with settlements, such as credit reports and flood determinations.
Algorithms are not a Defense
· The CFPB says “it is no defense” if a platform’s non-neutral use or presentation of information “was allegedly the product of a complex algorithm.
· Operators are expected to know whether their platform uses or presents information in a non-neutral manner, even if the platform may employ complex algorithms in using or presenting the information.
Non-neutral Steering (i.e., Referrals)
· Non-neutral use of information can involve “manipulation or biasing of the inputs or formula” an operator uses to generate comparisons. For example:
o A company could let consumers compare options based on purportedly objective criteria, such as interest rates, but make sure lenders who pay rank high anyway.
o Platforms can exclude or place low weight on criteria favoring a competitor and manipulate formulas to favor certain providers.
· Platform operators may stray from neutrality in their presentation of information by:
o Providing names and phone numbers of all participating providers but providing links only for higher-paying providers.
o Listing lenders that pay more on the first page of results ranked by interest rate. That position creates the impression the platform has ranked all participants by interest rates, even though a check on a second or third page of results would reveal lenders offering the same or lower rate.
o Highlighting a top-ranked (and high-paying) lender by showing competitors in a smaller font or requiring users to scroll down.
o Labeling a lender as “sponsored” or “featured.” Lenders typically pay for this enhanced placement, but some platforms imply the lender earned that placement due to a ranking of neutral criteria.
o Listing a lender that has paid for enhanced placement multiple times, using the same or an affiliated name.
o Showing a “top-ranked” lender alongside other options but only showing the “top-ranked” lender when a consumer returns to the site.
Paying “a thing of value” for a Referral
· A “thing of value” includes payments a platform operator receives as part of a contract.
· If the lender receives enhanced or non-neutral placement, there presumably would be an express agreement or understanding to pay for the improved placement.
· Even absent an express agreement or understanding for enhanced placement, an agreement or understanding for referrals likely can be established through a pattern, practice, or course of conduct.
Violations for charging the Same or Different Fees
· Charging different fees to similarly situated service providers can constitute evidence of an illegal referral fee.
· Nevertheless, an operator can violate RESPA’s ban on referrals even if charging service providers the same fees.
RESPA does not permit Payments for Non-Neutral Steering
· RESPA allows payments for goods or facilities furnished or services performed,[vii] but the CFPB says it does not apply to online mortgage comparison platforms.
· Referrals resulting from non-neutral steering are not compensable services under RESPA.
Number of Lenders may qualify for a CLO
· There is no clear guidance on the number of lenders or providers a platform must feature to qualify as a valid computer loan origination (CLO) system.
·
Presenting
a greater number of lender comparisons rather than fewer may demonstrate that
the operator is not steering the consumer to one or more settlement service
providers. Because there is no guidance, an operator with “many” lenders does
not have a dispositive defense.
VIOLATION SCENARIOS
Ensuring the “best match” is the highest bidder
·
Consumers
often share criteria to find the best match, such as their desired location,
loan amount, and credit score.
·
When
a platform skews results to display the highest bidding participant as the
“best match,” that may violate a prohibition on unfair, deceptive, or abusive
acts or practices (UDAAP) if the platform misrepresents the accuracy of
platform information, including objectivity in rankings.
Ranking Lenders by Rotation
·
Platforms
may run afoul of RESPA by purporting to rank lenders on a consumer’s input but,
in reality, displaying top lenders as part of a structure where lenders take
turns in the top spot.
Favoring an Affiliate
·
Digital
platform operators should avoid promoting an affiliate.
·
Significantly,
the RESPA exemption related to affiliated business arrangements may not apply.
Sending texts or emails favoring a Lender
·
If
a platform is paid to encourage a consumer to apply with a lender by engaging
in promotional activity that undermines its neutral presentation, that activity
influences the consumer’s selection and amounts to a referral.
Offering to connect a Consumer with a Lender
·
Some
platforms offer consumers a call or chat with a lender, known as a “warm
handoff” or “live transfer.”
· A platform may tell the consumer they will be “in good hands,” but, in fact, the lender receiving the lead may be the first lender to respond when the platform flags a prospect. In such cases, the operator is providing a promotional service that is not actual, necessary, and distinct from the operator’s comparison function.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
[i] Structuring
or implementing a contractual agreement to participate on a Digital Mortgage
Comparison Shopping Platform that results in steering or other affirmative
influence based on non-neutral criteria, settlement service providers likely
would know that the operator is non-neutrally using or presenting information.
[ii] CFPB
Issues Guidance to Protect Mortgage Borrowers from Pay-to-Play Digital
Comparison-Shopping Platforms, Announcement, Consumer Financial Protection Bureau, February 7, 2023
[iii] See
12 CFR Part 1024, Advisory Opinion, Real Estate Settlement Procedures
Act (Regulation X); Digital Mortgage Comparison-Shopping Platforms and Related
Payments to Operators, Bureau of Consumer Financial Protection. FR Vol. 88, No.
29, February 13, 2023 (Rules and Regulations)
[iv] 12
U.S.C. 2607(a). Regulation X, 12 CFR 1024.14(b), implements RESPA section
8(a)’s prohibition.
[v] HUD,
RESPA Statement of Policy 1996–1, Regarding Computer Loan Origination Systems
(CLOs), 61 FR 29255 (June 7, 1996)
[vi] The
HUD CLO Policy Statement was issued as part of a broader set of HUD regulations
and interpretations that addressed employer-to-employee payments. CLO is the acronym
for Computer Loan Orrigination systems. See 61 FR 29238 (June 7, 1996). Because
some of these regulations and interpretations were never finalized, see 61 FR
58472 (November 15, 1996), certain aspects of the HUD CLO Policy Statement not
relevant to this Advisory Opinion – for example, Section 4, addressing
“Payments of Commissions or Bonuses to Employees” – were not made effective by
HUD and would not be applied by the CFPB.
[vii] Section
8(c)(2)
