Affiliate Marketing: Information Sharing

QUESTION
We are a lender with several affiliates. We have been cross-marketing with the affiliates for a long time. However, our regulator now is examining us and our affiliates to find out if we have “information sharing” violations. A complaint to the CFPB triggered the examination. 

Their main concern seems to center on potential violations of the Fair Credit Report Act. 

So, our question is, are there restrictions on using our affiliates’ information for marketing purposes? 

ANSWER
A word of caution at the outset: work with a compliance professional for guidance on information sharing between affiliates. Information sharing is a very challenging area of compliance and involves several regulations. Your question specifies the Fair Credit Report Act (FCRA), so I will respond exclusively in the context of the FCRA. 

It is important to know what information is subject to affiliate marketing. The provisions apply to the use of “eligibility information” of consumers, where you receive such information from your affiliate for purposes of marketing products or services to those consumers. 

“Eligibility information” means any information that, if communicated by a consumer reporting agency, would be a consumer report but for the exclusions set forth under the definition of “consumer report” in the FCRA for 

(1) transaction or experience information regarding a consumer, or 

(2) non-transaction or experience information regarding a consumer that affiliates may share with one another if notice and opt-out procedures are followed and the consumer does not opt out. 

It is worth noting that eligibility information excludes aggregate or blind data that does not contain personal identifiers, such as account numbers, names, or addresses. 

The communication of transaction or experience information among companies related by common ownership or affiliated by corporate control is not considered sharing consumer report information. 

Furthermore, companies related by common ownership or affiliated by corporate control may communicate among one another information regarding a consumer that 

(1) is not transaction or experience information, and

(2) would otherwise be considered consumer report information, if a notice and opt-out procedure are followed and the consumer does not opt out. 

However, even though such information may be shared among affiliates, the information is subject to FCRA affiliate marketing provisions, including affiliate marketing rules adopted by the federal financial institution regulators and the Federal Trade Commission (FTC). 

The rules impose restrictions on the use of consumer report information regarding a consumer whom a company receives from an affiliate for the purpose of the company marketing its products or services to the consumer. Therefore, the affiliate marketing provisions impose restrictions on the use, not the sharing of information. 

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

Marketing Services Agreements: RESPA Section 8 Pitfalls

QUESTION
We are a large mortgage lender that uses a Marketing Service Agreement (“MSA”) in many relationships. I am the company’s General Counsel. We have a Compliance Manager. 

Recently, the Consumer Financial Protection Bureau (CFPB) cited us for violations of RESPA Section 8 with respect to defective MSAs. I realize that this is a highly litigious area. We have retained outside counsel for these agreements, yet we still seem to be locking horns with the CFPB.

My staff and the compliance people are avid readers of your Mortgage FAQs. We believe that you can shed additional light on how to go about training our management on the risks of MSAs.

We are drafting a PowerPoint for our Executive Management on the risks associated with MSAs. In preparing it, we would like to get your view of the following four areas in particular.

(1) What are Marketing Services Agreements?

(2) What distinction may be made between referrals and marketing services?

(3) What criteria may be applied to determine if an MSA is unlawful?

(4) Are there some examples of MSAs that are prohibited?

ANSWER
Thank you for your question. The risks relating to MSAs are enormous not only in incurring potential litigation but also in operational, strategic, financial, and regulatory risks. Enter these waters very cautiously and guardedly. If you are not thoroughly versed in MSAs, bring in legal counsel or highly competent compliance professionals to guide you. As General Counsel, you must understand that MSAs have far-reaching implications beyond contract law.

I will answer each of your questions with the proviso that you understand I cannot here provide legal advice and my remarks are not to be construed as such. Each MSA must be separately evaluated, and the entire corporate and legal structure on which each and every MSA sits must be taken into consideration.

(1) What are Marketing Services Agreements?

First, let us define a Marketing Services Agreement (“MSA”). It is an agreement that commonly involves an arrangement where a person or entity agrees to market or promote the services of another and receives compensation in return.

MSAs may involve only settlement service providers or may also involve third parties that are not settlement service providers. For instance, an MSA exists when a mortgage loan originator agrees to market or promote the services of a real estate agent in return for compensation.

Now, what is a lawful MSA? A lawful MSA is an agreement for the performance of marketing services where the payments under the MSA are reasonably related to the value of services actually performed.[i] To be clear, this is distinguished from an MSA that – whether oral, written, or indicated by a course of conduct, and looking to both how the MSA is structured and how it is implemented – involves an agreement for referrals. But, unlike referrals, marketing services are compensable services under RESPA.[ii]

Moreover, when a person performing settlement services receives payment for performing marketing services as part of a real estate transaction, the marketing services must be actual, necessary, and distinct from the primary services performed by the person. These marketing services cannot be nominal, and the payments cannot be for a duplicative charge or referrals.[iii]

(2) What distinction may be made between referrals and marketing services?

This is a fact-specific question as to whether a particular activity is a referral or a marketing service for purposes of the analysis under RESPA Section 8(a).

In RESPA Section 8(a), referrals include any oral or written action directed to a person where the action has the effect of affirmatively influencing the selection of a particular provider of settlement services or business incident thereto by a person paying a charge attributable to the service or business.[iv] For instance, referrals include a settlement service provider directly handing clients the contact information of another settlement service provider that happens to result in the client using that other settlement service provider.

However, a marketing service is not directed to a person; rather, it is generally targeted at a wide audience. Thus, placing advertisements for a settlement service provider in widely circulated media (i.e., a newspaper, a trade publication, or a website) is a marketing service.

MSAs that involve payments for referrals are prohibited under RESPA Section 8(a), whereas MSAs that involve payments for marketing services may be permitted under RESPA Section 8(c)(2), based on the facts and circumstances of the structure and implementation. In furtherance of explicating this question about referrals and marketing services, please read my answers to questions (3) and (4).

(3) What criteria may be applied to determine if an MSA is unlawful?

MSAs are not referenced in RESPA or Regulation X. Although entering into, performing services under, and making payments under MSAs are not, by themselves, prohibited acts under RESPA or Regulation X, the determination of whether an MSA itself or the payments or conduct under an MSA is lawful depends on whether it violates the prohibitions under RESPA Section 8(a) or RESPA Section 8(b), or is permitted under RESPA Section 8(c). And that analysis under RESPA Section 8 depends on the facts and circumstances, including the details of the MSA and how it is both structured and implemented.

The following describes how specific provisions of RESPA may be used to frame that analysis.

Under RESPA Section 8(a), if an MSA involves an agreement or understanding to refer business incident to or part of a settlement service in exchange for a fee, kickback, or thing of value, then the MSA or conduct under the MSA is prohibited. Therefore, this includes, but is not limited to, agreements structured or implemented to provide payments based on the number of referrals received.

Under RESPA Section 8(b), if the MSA serves as a method of splitting charges made or received for real estate settlement services in connection with a federally related mortgage loan, other than for services actually performed, the MSA or the conduct under the MSA is prohibited. MSAs would violate RESPA Section 8(b) if they disguise kickbacks by purporting to provide payment for services, but a split charge is paid even though the person receiving the split charge does not actually perform services. Or, a violation of RESPA Section 8(b) occurs if the services are performed, but the amount of the split charge exceeds the value of the services performed by the person receiving the split.

Under RESPA Section 8(c)(2), however, if the MSA or conduct under the MSA reflects an agreement for the payment for bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed, the MSA or the conduct is not prohibited.[v]

RESPA Section 8(c)(2) does not apply to MSAs that involve payments for referrals because they are not agreements for marketing services actually performed. RESPA Section 8 does not prohibit payments under MSAs if the marketing services are actually provided, and if the payments are reasonably related to the market value of the provided services only.

Note: Under Regulation X, the value of the referral (i.e., any additional business that might be provided by the referral) cannot be taken into consideration when determining whether the payment has a reasonable relationship to the value of the services provided.[vi]

(4) Are there some examples of MSAs that are prohibited?

Obviously, there are a plethora of scenarios where MSAs are prohibited.

Let’s reiterate that an MSA can be lawful under RESPA if it is structured and implemented consistently as an agreement for the performance of actual marketing services and where the payments under the MSA are reasonably related to the value of the services performed.[vii]

However, MSAs can be unlawful when entered into based on their structure or can become unlawful based on how they are implemented. The CFPB has enforced violations of RESPA Section 8 in investigations that involved the use of oral or written MSAs. An MSA is or can become unlawful if the facts and circumstances show that the MSA as structured, or the parties’ implementation of the MSA – in form or substance, and including as a matter of course of conduct – involves the following features:

• An agreement to pay for referrals.
• An agreement to pay for marketing services, but the payment is in excess of the reasonable market value for the services performed.
• An agreement to pay for marketing services, but either as structured or when implemented, the services are not actually performed, the services are nominal, or the payments are duplicative.
• An agreement designed or implemented in a way to disguise the payment for kickbacks or split charges.

Consider this scenario: a lender enters into an MSA with a real estate agent that also makes referrals to the lender. The MSA requires the real estate agent to perform marketing services, including deciding on and coordinating direct mail campaigns and media advertising for the lender. But, the real estate agent either does not actually perform the MSA’s identified marketing services or the real estate agent is paid compensation that is in excess of the reasonable market value of those marketing services.

In this scenario, the lender and real estate agent would not meet the standard in RESPA Section 8(c)(2), because the marketing services are not actually provided or the payments are not reasonably related to the value of the marketing services provided.[viii] Furthermore, in this scenario if the MSA was structured or implemented as a way for the lender to compensate the real estate agent for client referrals to the lender, the MSA would violate RESPA Section 8(a).

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group
_____________________________
[i] 12 USC § 2607(c)(2); 12 CFR § 1024.14(g)(1)(iv)
[ii] 12 CFR § 1024.14(b) and (g)(2)
[iii] 12 CFR § 1024.14(b), (c), and (g)(3)
[iv] 12 CFR § 1024.14(f)(1)
[v] 12 USC § 2607(c)(2); 12 CFR § 1024.14(g)(1)(iv)
[vi] 12 CFR § 1024.14(g)(2). See also 12 CFR § 1024.14(b)
[vii] 12 USC § 2607(c)(2); 12 CFR § 1024.14(g)(1)(iv) and (g)(2)
[viii] 12 CFR § 1024.14(g)(1)(iv)

Fair Housing Act – Advertising Violations

QUESTION
We had a Fair Housing Act examination recently by our state banking department and got hit with a citation for violations. This came as a real shock to us. 

 We have 30 days to fix the issues and also prove that we have done a thorough review of our advertising to look for potential Fair Housing violations. We only have one person in compliance – me! I have done a lot of research for this response. But this seems like an overwhelming task. 

So, I’m turning to you for some guidance. 

Are there some basic things I should be looking for in our advertising?

ANSWER
I recognize this may cause some pressure, but you’ll do fine as long as you undertake the review in a careful and procedural way. You need to produce a report that provides specimens of the advertisements (before and after revisions), the remedial actions taken with respect to those particular advertisements, and the advertising policies and procedures that your financial institution implements. 

My firm does advertising compliance reviews all the time and, if you need assistance, please contact me HERE. I’ll have your advertisements reviewed immediately by competent subject matter experts.

Keep in mind, advertising compliance draws on numerous interlocking regulations, Acts, Best Practices, rules, disclosure mandates, and so forth. A small mistake can get magnified quickly into a litigious class action issue, let alone a federal or state administrative action. So, make it your business to review each advertisement before it is published. Seek appropriate compliance support if there is a scintilla of doubt or uncertainty.

As to a consideration of things to be on the look out for, I would put the following on the list. Though it is not comprehensive, I think it serves to set the tone for further reviews on your part. 

And, as I said, contact me if you need further support. 

My comments are based on Fair Housing Act mandates.

• Advertisements must include the equal housing logo a statement that you are an equal housing lender. In printed advertising, the logo must be no smaller than:
• 1/2 page or larger ad (2 × 2 inches) 
• 1/8 page up to 1/2 page ad (1 × 1 inch)
• 4 column inches to 1/8 page ad (1/2 × 1/2 inch)
• Less than 4 column inches (Need not use the logo, but must use the legend “Equal Housing Lender”) 

• In any advertising other than printed advertising, the logo must be at least as large as any other logo used. If no other logo is used, then the fair housing logo must be clearly visible in boldface type or at least 3 percent of the advertisement should be devoted to a statement of the fair housing policy.

• For oral advertising, you may satisfy the Fair Housing Act advertising requirement by stating that you are an “equal housing lender.”

• When advertising is both verbal and visual, you should use either method (a visual logo or a spoken statement) to meet the requirement.

• Each public office should prominently post an equal housing lender poster.

• Advertising may not contain any words, symbols, models, or other forms of communication suggesting a discriminatory preference or policy of exclusion because of race, color, religion, national origin, sex, handicap, or familial status. When using models in advertising, you should use models from different racial groups.

• You should avoid the following:

• Words descriptive of a dwelling, landlord, or tenants, such as white private home, colored home, Jewish home, Hispanic residence, or adult building.

• Words indicative of a prohibited basis, such as: 

— Race: Negro, Black, Caucasian, Oriental, American Indian.

— Color: White, Black, Colored.

— Religion: Protestant, Christian, Catholic, Jew.

— National Origin: Mexican American, Puerto Rican, Philippine, Polish, Hungarian, Irish, Italian, Chicano, African, Hispanic, Chinese, Indian, Latino.

— Sex: The exclusive use of words in advertisements (such as “he” or “she”), stating or tending to imply that the loans being advertised are available to persons of only one sex and not the other.

— Age: Senior citizens.

— Handicap: Crippled, blind, deaf, mentally ill, retarded, impaired, handicapped, physically fit.

— Familial Status: Adults, children, singles, mature persons.

• Words and phrases used in a discriminatory context, such as “restricted.”

• “Red light” words. Examples of “red light” words include “sports enthusiasts,” which could discourage the handicapped, and “quiet neighborhood,” which could be a code word for “no children.” 

• Symbols or logotypes that imply or suggest race, color, religion, sex, handicap, familial status, or national origin.

• Colloquialisms used regionally or locally that suggest race, color, religion, sex, handicap, familial status, or national origin.

• You should avoid the selective use of advertising media or content, such as:

• The use of the English language alone or the exclusive use of media catering to the majority population in an area, when non-English language or other minority media also are available.

• The strategic placement of billboards, brochures distributed within a limited geographic area, or displays or announcements only available in selected branches.

• The use of human models primarily in media that cater to one racial or national origin segment of the population without a complementary advertising campaign directed at other groups.

Be sensitive to the potential discriminatory effects of your marketing practices! For example, if you often focus on contacts with real estate agents and mortgage brokers as a primary marketing strategy to generate loan applications, you should be careful to include contact with minority real estate agents and loan brokers and other real estate agents and loan brokers serving predominantly minority areas.

Like the Equal Credit Opportunity Act, creditors under the Fair Housing Act may affirmatively solicit or encourage members of traditionally disadvantaged groups to apply for credit.

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group

Influencer Guidelines for Financial Institutions

QUESTION

We have affiliates that sell products and services. As the Compliance Manager, I was recently tasked by our CEO to make sure that we are not giving the impression that we’re recommending something being sold by our affiliates, even if our websites already mention their products and services. This seems like a contradiction. 

On the one hand, we are told to not recommend the affiliates’ products and services, and, on the other hand, we are told to make sure our websites mention them. 

Are there some guidelines we can follow to make sure we are not promoting the products and services while also mentioning them on our websites?

ANSWER

These days, there is a term for the power to affect the purchasing decisions of others. It’s called an “influencer.” You may have heard this term in the last few years. It is associated often with social media. The influencer is somebody who supposedly has the authority, knowledge, relationship, position, expertise, experience, and competence to “influence” somebody’s purchasing decisions. In fact, there are courses now available for people to learn how to be an influence!

The world of financial services has its own form of influencers. And the scenario you describe is one such instance where influence crosses into regulatory territory. That territory is the regulatory framework of the Federal Trade Commission (FTC). Using the FTC standards, it is possible to provide a set of guidelines that, hopefully, will make it possible for you to both mention the affiliates’ products and services without giving the impression that you are promoting them without proper disclosure.

The FTC has the power to issue trade regulation rules declaring acts, practices, and conduct in or affecting interstate commerce to be unfair or deceptive practices. As a point of reference, Dodd-Frank generally displaced the FTC with the CFPB as the coordinator of consumer complaints and principal regulator regarding consumer financial products or services provided by banks, federal savings association, and nonbank creditors (except for motor vehicle dealers).

Prior to the enactment of Dodd-Frank, the FTC Act required banking regulators to issue similar rules within 60 days after an FTC rule’s effective date, unless the banking agency found that similar acts and practices of depository institutions were not unfair or deceptive. Although, Dodd-Frank deleted this requirement, financial institutions may still find it worthwhile to understand FTC rules, if only to understand the rules with which their FTC-regulated competitors must comply.

So, the following is a brief list of guidelines that my firm would be considering if we were doing an audit your scenario. It is based on years of working with FTC standards and website reviews. If we were to do an audit, there would be many other moving parts to consider, including an influencer disclosure review, but I think this outline will give you a head start!

Influencer Guidelines for Financial Services Affiliates 

• The institution (“influencer”) should clearly and conspicuously indicate the relationship between the influencer and its affiliate (i.e., “we’re affiliated companies owned by the same parent company”).
• If the other company (the affiliate) gives the influencer a benefit in return for mentioning its products and services, the influencer should mention that benefit (i.e., “we receive [compensation/similar promotion by [the other firm]] in return for mentioning its products and services”).
• The influencer should treat tags, likes, pins, and similar ways of showing the influencer likes a product or service as endorsements that require disclosures.
• The influencer should place each disclosure so it’s hard to miss. A disclosure should appear along with the endorsement message and should not appear only if the viewer must click more to reach it.
• The influencer should not mix the disclosure with a group of hashtags or links, although the disclosure could include a hashtag such as #ad or #sponsored.
• If an endorsement appears in a picture on a platform like Snapchat or Instagram Stories, the disclosure should be superimposed over the picture in a way that ensures viewers have time to notice and read it.
• If the endorsement appears in a video, a disclosure should appear both in audio and in video as part of the video and not just in a description uploaded with the video and not only in words superimposed on a video.
• If the endorsement is made in a live stream, the disclosure should be repeated periodically so viewers who see only part of the stream will get the disclosure.
• Disclosures should use simple and clear language, without vague or confusing terms such as uncommon abbreviations or shorthand.
• A disclosure should be in the same language as the endorsement.
• An influencer should not assume that a platform’s disclosure tool is sufficient, but should consider using that tool in addition to the influencer’s own, good disclosure.
• An endorsement should be honest and truthful. For example, an influencer should not mention experience with a product the influencer has not tried, or say the product is terrific if the influencer thinks it’s terrible, or make up a claim that would require proof the influencer does not have.
• The influencer should ensure its disclosures are made, not rely on someone else to make them.

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group

Affiliate Marketing: Eligibility Information

QUESTION

One thing we have always been confused about is how we can use eligibility information from affiliates. The part about affiliate marketing that particularly confuses me is if we do not use eligibility information from an affiliate, but the affiliate uses its own eligibility information to market on our behalf. So, our question is, if we do not use eligibility information from an affiliate, but the affiliate uses its own eligibility information to market on our behalf, is the marketing that the affiliate does on our behalf covered by affiliate marketing provisions?

ANSWERS

I know this may seem somewhat complicated, but it is more straightforward than you think. If certain conditions are satisfied, the affiliate marketing provisions would not apply. But the details, like so much else, are important to consider.

So long as a financial institution does not use eligibility information in a manner that would constitute the making of a solicitation for marketing purposes, such solicitation is not covered by the affiliate marketing provisions where:

1.   The affiliate of an institution uses its own eligibility information that the affiliate obtained in connection with a pre-existing business relationship it has or had with the consumer to market the institution’s products or services to the consumer; or,

2.   The affiliate of the institution directs its service provider to use the affiliate’s own eligibility information that the affiliate obtained in connection with a pre-existing business relationship it has or had with the consumer to market the institution’s products or services to the consumer, and the institution does not communicate directly with the service provider regarding that use of the information. [12 CFR § 334.21(b)(4); 16 CFR § 680.21(b)(4); 12 CFR § 222.21(b)(4); 12 CFR § 41.21(b)(4); 12 CFR § 717.21(b)(4)]

One observation is worth considering: the ability of a financial institution to have an affiliate use the affiliate’s own eligibility information, as described above, to market the products or services of the financial institution provides a significant alternative to certain standard notice and opt out procedures.

Affiliate marketing rules of the federal financial institutions regulators and the FTC specify additional requirements regarding the involvement of service providers in a solicitation in order to avoid having the solicitation be subject to the affiliate marketing provisions. Refer to the FTC’s affiliate marketing rules for more details. [12 CFR § 334.21(b)(5); 16 CFR § 680.21(b)(5); 12 CFR § 222.21(b)(5); 12 CFR § 41.21(b)(5); 12 CFR § 717.21(b)(5)]

Jonathan Foxx

Managing Director 

Lenders Compliance Group

Eligibility Information in Affiliate Marketing

QUESTION

We are a bank that was recently cited for violations of affiliate marketing procedures. We did not have a pre-existing business relationship, but it seems that our violation also was caused by our use of “eligibility information.” What is “eligibility information?” Also, how is it a factor in affiliate marketing?

ANSWER

A consumer has the right to restrict affiliate marketing from a financial institution, where the former does not have a pre-existing business relationship with the latter. The restriction applies to using certain information obtained from an affiliate to make solicitations to that consumer. This provision is distinct from giving a consumer the right to restrict the sharing of certain consumer information among affiliates. [Section 603(d)(2)(A)(iii)]

A financial institution may not use information received from an affiliate to market its products or services to a consumer, unless the consumer is given notice and a reasonable opportunity and a reasonable and simple method to opt out of the making of such solicitations. The affiliate marketing opt-out applies to both “transaction” or “experience” and “other” information, such as information from credit reports and credit applications.

To be clear, exceptions to the notice and opt out requirements apply when an entity uses “eligibility information” in certain ways. Eligibility information includes not only transaction and experience information, but also the type of information found in consumer reports, such as information from third party sources and credit scores. Eligibility information does not include aggregate or blind data that does not contain personal identifiers such as account numbers, names, or addresses. [12 CFR 571.20(b)(3)]

Specifically, “eligibility information” is defined in the affiliate marketing regulation as any information the communication of which would be a consumer report if the exclusions from the definition of “consumer report” in Section 603(d)(2)(A) of the Fair Credit Reporting Act do not apply.

With respect to the pre-existing business relationship, a financial institution establishes this relationship based on:

• A financial contract between the person and the consumer which is in force on the date on which the consumer is sent a solicitation covered by the affiliate marketing regulation;
• The purchase, rental, or lease by the consumer of the person’s goods or services, or a financial transaction (including holding an active account or a policy in force, or having another continuing relationship) between the consumer and the person, during the 18- month period immediately preceding the date on which the consumer is sent a solicitation covered by the affiliate marketing regulation; or
• An inquiry or application by the consumer regarding a product or service offered by that person during the three-month period immediately preceding the date on which the consumer is sent a solicitation covered by the affiliate marketing regulation. 

One of the regulatory triggers for affiliate marketing violations is in the area of solicitations, which is the marketing of a product or service initiated by a person, such as a financial institution, to a particular consumer that is:

• Based on eligibility information communicated to that person by its affiliate; and
• Intended to encourage the consumer to purchase or obtain such product or service. [12 CFR 571.20(b)(5)]

Examples of a solicitation include a telemarketing call, direct mail, e-mail, or other form of marketing communication directed to a particular consumer that is based on eligibility information received from an affiliate. A solicitation does not include marketing communications that are directed at the general public (i.e., television, general circulation magazine, and billboard advertisements).

Jonathan Foxx

Managing Director

Lenders Compliance Group

Pre-existing Business Relationships in Affiliate Marketing

QUESTION

We have an affiliate marketing program. Recently, we had it evaluated by a risk management firm such as yours. In the findings, we learned that our policies and procedures did not account for how to establish and identify pre-existing business relationships. What is a pre-existing business relationship in an affiliate marketing program?

ANSWER

A “pre-existing business relationship” with a consumer is given an exemption in an affiliate marketing program, where the parties to the relationship are a person (i.e., entity) or a person’s licensed agent and a consumer, based on the following requirements:

1)    A financial contract between the person and the consumer that is in force on the date a solicitation covered by the affiliate marketing provisions is sent to the consumer;

2)   The consumer’s purchase, sale, or lease of the person’s goods or services, or a financial transaction (including holding an active account or a policy in force or having another continuing relationship) between the person and the consumer during the eighteen-month period immediately preceding the date a solicitation covered by the affiliate marketing provisions is sent to the consumer; or

3)   An inquiry or application by the consumer regarding a product or service offered by the person during the three-month period immediately preceding the date a solicitation covered by the affiliate marketing provisions is sent to the consumer. [16 CFR § 680.3(j)]

Take note, also, that affiliate marketing program rules of the federal financial regulators, as well as the FTC, contain examples of when there is and when there is not a pre-existing business relationship. [Idem]

Jonathan Foxx

President & Managing Director

Lenders Compliance Group

Pre-existing Business Relationships and Affiliate Marketing

QUESTION:

What is a “Pre-existing Business Relationship” and its effect on affiliate marketing? 

ANSWER:
At its core, the pre-existing business relationship is a relationship between a “person” or “persons” (i.e.,residential mortgage lender and originators) and consumers, based on these three rudimentary criteria:

1. A financial contract between the person and the consumer that is in force on the date a solicitation covered by the affiliate marketing provisions is sent to the consumer;

2. The consumer’s purchase, sale, or lease of the person’s goods or services, or a financial transaction (including holding an active account or a policy in force or having another continuing relationship) between the person and the consumer during the eighteen-month period immediately preceding the date a solicitation covered by the affiliate marketing provisions is sent to the consumer; or

3. An inquiry or application by the consumer regarding a product or service offered by the person during the three-month period immediately preceding the date a solicitation covered by the affiliate marketing provisions is sent to the consumer.

There are essentially two scenarios that come under scrutiny: (1) where there is a pre-existing business relationship, and (2) where there is no pre-existing business relationship. [16 CFR § 680.3(j)(i)-(iii); 16 CFR § 680.3(j)(2)-(3)]

A pre-existing business relationship is where a consumer:

• Has an existing loan account with a creditor - the creditor has a pre-existing business relationship with the consumer and can use eligibility information it receives from its affiliates to make solicitations to the consumer about its products or services. (A solicitation is the intent to encourage the consumer to purchase or obtain products or services.)

• Obtained a mortgage from a mortgage lender, but refinanced the mortgage loan with a different lender when the mortgage loan came due - the first mortgage lender has a pre-existing business relationship with the consumer and can use eligibility information it receives from its affiliates to make solicitations to the consumer about its products or services for 18 months after the date the outstanding balance of the loan is paid and the loan is closed.

• Obtains a mortgage, the mortgage lender has a pre-existing business relationship with the consumer.

• If the mortgage lender sells the consumer's entire loan to an investor, the mortgage lender has a pre-existing business relationship with the consumer and can use eligibility information it receives from its affiliates to make solicitations to the consumer about its products or services for 18 months after the date it sells the loan, and the investor has a pre-existing business relationship with the consumer upon purchasing the loan.

• If the mortgage lender sells a fractional interest in the consumer's loan to an investor but also retains an ownership interest in the loan, the mortgage lender continues to have a pre-existing business relationship with the consumer, but the investor does not have a pre-existing business relationship with the consumer.

• If the mortgage lender retains ownership of the loan, but sells ownership of the servicing rights to the consumer's loan, the mortgage lender continues to have a pre-existing business relationship with the consumer. (The purchaser of the servicing rights also has a pre-existing business relationship with the consumer as of the date it purchases ownership of the servicing rights, but only if it collects payments from or otherwise deals directly with the consumer on a continuing basis.)

• Applies to a creditor for a product or service that it offers, but does not obtain a product or service from or enter into a financial contract or transaction with the creditor - the creditor has a pre-existing business relationship with the consumer and can therefore use eligibility information it receives from an affiliate to make solicitations to the consumer about its products or services for three months after the date of the application.

• Makes a telephone inquiry to a creditor about its products or services and provides contact information to the creditor, but does not obtain a product or service from or enter into a financial contract or transaction with the creditor - the creditor has a pre-existing business relationship with the consumer and can therefore use eligibility information it receives from an affiliate to make solicitations to the consumer about its products or services for three months after the date of the inquiry.

• Makes an inquiry to a creditor by e-mail about its products or services, but does not obtain a product or service from or enter into a financial contract or transaction with the creditor - the creditor has a pre-existing business relationship with the consumer and can therefore use eligibility information it receives from an affiliate to make solicitations to the consumer about its products or services for three months after the date of the inquiry.

• Has an existing relationship with a creditor that is part of a group of affiliated companies, makes a telephone call to the centralized call center for the group of affiliated companies to inquire about products or services offered by the insurance affiliate, and provides contact information to the call center, the call constituting an inquiry to the insurance affiliate that offers those products or services - the insurance affiliate has a pre-existing business relationship with the consumer and can therefore use eligibility information it receives from its affiliated creditor to make solicitations to the consumer about its products or services for three months after the date of the inquiry.

A pre-existing business relationship does not occur where a consumer:

• Makes a telephone call to a centralized call center for a group of affiliated companies to inquire about the consumer's existing account with a creditor - the call does not constitute an inquiry to any affiliate other than the creditor that holds the consumer's account and does not establish a pre-existing business relationship between the consumer and any affiliate of the account-holding creditor.

• Has a loan account with a creditor, makes a telephone call to an affiliate of the creditor to ask about the affiliate's retail locations and hours, but does not make an inquiry about the affiliate's products or services - the call does not constitute an inquiry and does not establish a pre-existing business relationship between the consumer and the affiliate. (Also, the affiliate's capture of the consumer's telephone number does not constitute an inquiry and does not establish a pre-existing business relationship between the consumer and the affiliate.)

• Makes a telephone call to a creditor in response to an advertisement that offers a free promotional item to consumers who call a toll-free number, but the advertisement does not indicate that creditor's products or services will be marketed to consumers who call in response - the call does not create a pre-existing business relationship between the consumer and the creditor because the consumer has not made an inquiry about a product or service offered by the creditor, but has merely responded to an offer for a free promotional item.

Jonathan Foxx
President & Managing Director
Lenders Compliance Group