QUESTION
A few months ago, you wrote about the regulatory challenges associated with comparison platforms. It was eye-opening to us. Because of your guidance, we revised our relationship with a comparison platform. Thank you!
But I must write you about a recent problem with the comparison platform. The platform offers placement for our loan products because of financial inducement, making the listing likely to be seen by the consumer. The preferred placement has many more features, such as requiring fewer clicks to access product information or increasing the likelihood that a consumer will consider or select our listing. We paid extra for the placement to be "featured." We also found that the platform was even putting itself in the digital comparison versus our listing.
Our Compliance Officer believes that we have become entangled in a steering scenario. She has met with management to get them to cancel the arrangement with the platform altogether. They are reluctant to cancel because they think she is exaggerating the risk. They get a lot of business from the leads generated from the comparison platform.
I would like your view. You are always direct and abide by legal and regulatory guidelines.
Do digital comparison platforms or lead generators cause potential regulatory violations by preferencing products or services based on financial or other benefits to the platform operator?
COMPLIANCE SOLUTION
ANSWER
Yes. The comparison platform may violate the prohibition on abusive acts or practices if they distort the shopping experience by steering consumers to certain products or services based on adjusted remuneration to the operator. And, to be clear, this is steering. If steering is implemented, it violates the Consumer Financial Protection Act (CFPA).
Similarly, lead generators can violate the prohibition on abusive practices if they steer consumers to one participating financial services provider instead of another based on compensation received. It is often the case that consumers rely on a digital comparison platform or a lead generator to act in their interests. Unfortunately, however, it is also the case that platforms and lead generators may take unreasonable advantage of consumers by giving preferential treatment to their own or other products or services through steering or enhanced product placement for financial or other benefits. This way leads to UDAAP violations.
My article, Pitfalls of Mortgage Comparison Platforms, focused on RESPA Section 8 violations triggered by referrals from rate comparison platforms. I noted the Consumer Financial Protection Bureau (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.
Another article I published, RESPA Section 8 Triggers on Mortgage Comparison Platforms, focused on several circumstances where digital mortgage comparison-shopping platforms may violate RESPA.
For a wider view, you can read my article, Digital Mortgage Comparison Platforms, where I stated, among other things, that the CFPB appears to suggest RESPA may be violated even where every lender pays the same compensation to the platform operator, if the information provided has the effect of steering a consumer to a particular lender.
You may want to read the aforementioned articles in the context of my response to your question about preferencing products and services on a digital comparison platform. Your use of the verb "preferencing" is correct because the CFPB uses this word to flag steering!
At its core, preferencing involves compensation arrangements associated with digital comparison platforms.[i] Loan product providers pay some platforms on a fee-per-action basis (i.e., by receiving fees per click, per application, per conversion, per offer, or per sale). Often, the platform may allow firms to bid against each other for advantageous placement by paying "bounties," which target consumers fitting certain consumer characteristics or aimed at meeting certain volume goals.
Lead generators sell consumer information to lenders. Sometimes, they provide this service without contacting the consumer. But, regulatory concerns grow when these entities collect data directly from consumers by advertising websites that present themselves as helping consumers get a loan or connect with lenders. There has been plenty of litigation in this area, such as in Federal Trade Commission v ITMedia Solutions, LLC.[ii] The complaint alleged that the lead generator "unlawfully used a 'loan application' form to collect consumers' information by deceptively presenting itself as connecting consumers with lenders.”[iii]
If you want a
basic guideline, here it is:
You must protect and facilitate the consumers' ability to effectively compare and choose among options for consumer financial products or services. If you are not doing so or involving yourself in arrangements that contravene this guideline, you are exposing yourself to regulatory violations.
Indeed, this guideline is a foundational, statutory objective of the CFPB.[iv] Consider it a mandate. The CFPA legislative history states that an important purpose of the CFPB is to ensure that "a consumer can shop and compare products based on quality, price, and convenience without having to worry about getting trapped by the fine print into an abusive deal."[v]
As I noted above, unreasonable advantage is tantamount to a threshold issue implicating UDAAP.[vi] So, let's describe this concept in the context of digital comparison platforms and lead generators:
These entities leverage consumer reliance to take unreasonable advantage of consumers where they preference particular providers or products over others in exchange for financial or other benefits to the operator, as opposed to making presentations or lead distribution decisions using other factors not relating to the platform operator's or lead generator's relative compensation from different providers, including where consumers put reasonable reliance on the entity to act in accordance with consumers' interest.[vii]
The phrase "reasonable reliance" and "consumers' interest" can mean many things. Litigation often turns on the interpretation of these terms. However, a growing body of federal agency guidelines and case law has pretty much determined their regulatory parameters. Once a comparison platform or lead generator puts itself into a position to assist people in selecting a provider, the door opens to consumer reliance. The entities’ representations and communications can be explicit or implicit.
For instance, reasonable consumer reliance may exist when a platform or lead generator assumes the role of acting on consumers' behalf or helping them select products or services based on consumers' interests.[viii] If you visit digital comparison platforms, you may see that some of them "match" consumers to specific products and services, whether done by automated algorithms, artificial intelligence, or curated recommendations.
Some lead generators promote themselves as intermediaries between themselves and well-known financial institutions. That in itself can engender consumer reliance[ix] because their real, market-enterprising role may be hidden by presenting themselves as a tool for consumers to connect with trusted lenders or receive the best available terms for a consumer financial product or service. This means of contact with the public, given the consumer's individual circumstances, may lead the consumer to reasonably rely on the entity to act in the consumer's interests.[x]
Here's a brief
explanation of how a comparison platform or lead generator explicitly or
implicitly engenders consumer reliance:
If a comparison platform or lead generator explicitly or implicitly holds out its services as presenting information based on a consumer's interests, it may be reasonable for the consumer to rely on the service to respond accordingly.
I have seen comparison platforms openly stating that their service is "objective!" Now, that may be so, or it may not, but the service certainly claims it to be so – and that is sufficient for explicitly engendering consumer reliance.
In fact, even if the platform does not openly state its service is objective, it may use certain words or phrases that implicitly engender consumer reliance, such as using the word "expertise" in helping consumers evaluate options; describing their service as providing "research-based" rankings of options for consumers; stating that they will "help you today" to "achieve your financial goals"; purporting to match consumers with the "best" or "right" offers; claiming to "put consumers first;" or providing a "one stop shop" claiming all the information consumers need to make informed selections among potential providers.[xi]
To expand on the aforementioned "consumers’ interest” stated in my description of unreasonable advantage, comparison platforms and lead generators may adjust their presentations of consumer products and services based on fees or other benefits that are not in a consumer’s interest. These adjustments occurring in digital comparison platforms and lead generators are a form of steering. There is a significant body of law, federal agency guidelines, and consumer disclosure regulations that have concluded consumers’ interests are not served when consumers are steered toward more expensive or less favorable products, and would be the case when those products are offered by digital comparison platforms and lead generators (or their affiliates) where those products generate more revenue for these entities.[xii]
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
[i] Preferencing
and Steering Practices by Digital Intermediaries for Consumer Financial
Products or Services, Intermediaries for Consumer Financial Products or
Services, Consumer Financial Protection Circular 2024–01, Consumer
Financial Projection Bureau, 12 CFR Part X, FR: Vol. 89, No. 49, March 12, 2024
(Rules and Regulations 17706-17709)
[ii] Federal Trade Commission v. ITMedia Solutions LLC et al., FTC Matter/File Number 1523225, Civil Action Number 2:16-cv-09483, C.D. Cal. January 5, 2022 (Complaint and Order)
[iii]
Idem
[iv] Under
the CFPA, a central purpose of the CFPB is to promote ‘‘fair, transparent, and
competitive’’ markets. See 12 USC 5511(a).
[v] S.
Rep. No. 111–176, at 11, 229 (2010).
[vi]
There are violation triggers in many other prongs of the abusive prohibition,
such as under 12 U.S.C. 5531(d), 12 U.S.C. 5531 and 5536(a)(1)(B)’s
prohibitions against unfair or deceptive acts or practices, or other Federal,
State, or local laws.
[vii]
See 12 U.S.C. 5531(d)(2)(C), and generally, Policy Statement on Abusive Acts
or Practices, April 3, 2023, Consumer Financial Protection Bureau
[viii]
Idem
[ix]
See CFPA §
2031 (d)(2)(C)
[x]
Op. cit. i., Reasonable Reliance, at 17708
[xi]
Op. cit. ii
[xii] See,
i.e., FTC v. Blue Global, LLC, No. 2:17–cv–2117, D. Ariz. July 3, 2017.
Blue Global collected loan applications and promised to match consumers with
loans that had the best interest rates, finance charges, and repayment periods
when, in fact, they indiscriminately sold leads.
