Restrictions on Gifts and Promotional Activities

QUESTION 

I am the Compliance Manager of a mortgage lender in the mid-West. Recently, we received a notice from the CFPB after their examination. One of their allegations is that we violated RESPA’s restrictions on referrals involving “gifts and promotional activities.” 

Our General Counsel has asked me not to go into the details. However, he approved my request to ask you a generic question about referrals. We need an “advanced warning” guideline to ensure this violation won’t happen. 

I want to know how to determine when a referral is a violation of RESPA. Maybe you can provide some guidance on whether an arrangement can be deemed an illegal referral. I want to be able to evaluate the arrangement based on a simple set of criteria to determine if it can lead to a referral violation. 

How can I determine if a referral is illegal under RESPA? 

COMPLIANCE SOLUTIONS 

Policies and Procedures 

Referrals Tune-up® 

Advertising & Marketing Compliance 

ANSWER 

It is possible to provide a generic guideline to act as an “advanced warning” of gifts and promotional activities that would likely trigger a violation of the Real Estate Settlement Procedures Act (RESPA). Under RESPA Section 8(a), gifts and promotions generally are “things of value” and, therefore, could, depending on the circumstances, violate RESPA Section 8(a).[i] 

If the gifts or promotions are given or accepted as part of an agreement or understanding for the referral of business incident to or part of a real estate settlement service involving a federally related mortgage loan, they are prohibited. 

Here’s an example. A settlement service provider[ii] gives professional sporting event tickets, trips, restaurant meals, or sponsorship of events (or the opportunity to win any of these items in a drawing or contest) to current or potential referral sources in exchange for referrals as part of an agreement or understanding, such conduct violates RESPA Section 8(a). By the way, the agreement or understanding need not be written or oral; a practice, pattern, or course of conduct can establish it. 

However, in certain circumstances, gifts or promotions directed to a referral source are not prohibited if they are a normal promotional or educational activity meeting the conditions in Regulation X, RESPA’s implementing regulation. 

Regulation X allows normal promotional and educational activities directed to a referral source if the activities meet two conditions: 

1.The activities are not conditioned on the referral of business.

2.The activities do not involve defraying expenses that otherwise would be incurred by the referral source. 

First Condition 

The first condition is that normal promotional and educational activities must not be conditioned on the referral of business. 

Factors that are relevant to whether the first condition is met may include the following: 

• Whether the item or activity is targeted to referral sources. If an item or activity is targeted narrowly towards prior, ongoing, or future referral sources, this could indicate that the item or activity is conditioned on referrals of business. 

Example A 

Suppose a promotional item is provided only to a limited set of settlement service providers who also happen to be current referral sources or an intentionally targeted group of future referral sources. In that case, this may suggest that the recipient is receiving the promotional item because of past or future referrals, and thus, the promotional item may be conditioned on referrals. 

Example B 

If, instead, a promotional item is provided to a broader set of recipients, such as the general public or all settlement service providers offering similar services in a given locality, then that may indicate that the promotional item is not conditioned on the referral of business. 

How often is the item or activity given to the referral source? If a referral source is routinely and frequently provided with an item or included in an activity, and particularly if that referral source is provided with the item or included in the activity more often than other persons, this could indicate that the item or activity is conditioned on referrals. 

Second Condition 

The second condition is that normal promotional and educational activities must not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or business incident to those settlement services. 

Factors that may be relevant to whether the second condition is met may include the following:

• Whether the item or activity involves a good or service that the referral source would otherwise have to pay for itself. 

Example A 

Suppose a promotional activity involves paying for mandatory continuing education expenses, certifications, licenses, or other items that the referral source would otherwise need to pay for on its own. In that case, the promotional item or activity is more likely to defray expenses. 

Example B 

Similarly, suppose the activity involves paying for the referral source’s office supplies branded with the referral source’s name, contact information, or logo. In that case, this is more likely to defray the expenses of the referral source. But suppose the activity involves providing the referral source with office supplies featuring the name, contact information, or logo of the entity providing the supplies. In that case, this is less likely to defray expenses, since it is unlikely that the referral source would otherwise use its own funds to purchase office supplies featuring the name and information of another entity. 

If the particular item or activity does not meet either of these conditions, it is not a normal promotional or educational activity meeting the conditions in Regulation X.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

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[i] 12 CFR § 1024.14

[ii] 12 CFR § 1024.2(b)(29)

Fee Splitting Violations

QUESTION 

We were cited for two RESPA violations. The first thing we supposedly had was an undisclosed referral arrangement. But in our view, there was no increase in our charges, so we do not believe we did something wrong. 

The other violation was about fee splitting. I became a mortgage broker a year ago. I am not a compliance person, and I don’t even know what that is, but based on the banking department’s letter, it means we had an arrangement with a company to split the fees on a mortgage loan. Now, I disagree about us even having such an arrangement, let alone splitting any fees. I now have to prove it to the banking department. 

I need to know more. I want to understand how these violations could cause such a big response from the banking department. I have other questions, but these are the two that matter most to me. I contacted your Brokers Compliance Group to discuss everything. 

Did we actually violate RESPA if there was no increase in our charges? 

Are there exemptions to the prohibitions on referral fees and fee splitting? 

COMPLIANCE SOLUTIONS 

Brokers Compliance Group 

Policies and Procedures 

ANSWER 

RESPA (Real Estate Settlement Procedures Act) refers to a “thing of value” as including, but not limited to, any payment, advance, funds, loan, service, or other consideration.[i] To broaden this concept, a “thing of value” includes, without limitation, monies, things, discounts, salaries, commissions, fees, duplicative payments of a charge, stock, dividends, distributions of partnership profits, franchise royalties, credits representing monies that may be paid at a future date, the opportunity to participate in a money-making program, retained or increased earnings, increased equity in a parent or subsidiary entity, special bank deposits or accounts, special or unusual banking terms, services of all types at special or fee rates, sales or rentals at special prices or rates, lease or rental payments based in whole or in part on the amount of business referred, trips and payment of another person’s expenses, or reduction in credit against an existing obligation. My firm has come across many types of “thing of value” arrangements at one time or another. You get the point! 

By the way, the term “payment” is effectively synonymous with the giving or receiving of any “thing of value” and does not require a transfer of money.[ii] 

If you have a particular arrangement for referrals, and you are not sure if the arrangement violates RESPA, contact a competent compliance professional to discuss your plans. 

With respect to your view that there was no increase in the charge, therefore, there should be no violation of RESPA, you are 100% wrong. The fact that the transfer of a thing of value does not result in an increase in any charge made by the entity giving the thing of value is irrelevant in determining whether the act is prohibited.[iii] 

The answer about exemptions[iv] to the referral and fee splitting prohibitions is both specifically outlined in RESPA with examples. I will provide a brief outline here; however, a compliance evaluation should be undertaken to ensure any plan based on an exemption is thoroughly vetted by a compliance professional. 

The RESPA specifically provides seven exemptions to referral and fee splitting prohibitions. 

The RESPA exemptions are: 

1.   A payment to an attorney at law for services actually rendered; 

2.   A payment by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance; 

3.   A payment by a lender to its duly appointed agent or contractor for services actually performed in the origination, processing, or funding of a loan; 

4.   A payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed; 

5.   A payment pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and real estate brokers;[v] 

6.   Normal promotional and educational activities that are not conditioned on the referral of business and that do not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or business incident thereto; or 

7.  An employer’s payment to its own employees for any referral activities. 

I would argue that each of these examples requires significant explication by a compliance professional who has core competency in interpreting and applying the requirements of RESPA and Regulation X. 

There has been some confusion about different versions of exemptions for payments to employees. The exemptions from the referral fee and fee splitting prohibitions are contained in Regulation X, the implementing regulation of RESPA.[vi] The Code of Federal Regulations includes an Effective Date Note[vii] that sets forth a second version of the same version with different provisions regarding payments to employees. Congress prohibited the Department of Housing and Urban Development (HUD) from implementing the revised version until July 31, 2007, and it required HUD to provide advance public notice if it ever intended to implement the different provisions. But, HUD has never acted to implement the revised version. 

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

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[i] 12 USC § 2602(2)
[ii] 12 CFR 3500.14(d)
[iii] 12 CFR § 3500.14(g)(2)
[iv] 12 CFR 3500.14(g)(1)
[v] The statutory exemption refers only to fee divisions within real estate brokerage arrangements when all parties are acting in a real estate brokerage capacity and has no applicability to any fee arrangements between real estate brokers and mortgage brokers or between mortgage brokers.
[vi] Regulation X § 3500.14(g)(3)
[vii] 12 CFR § 3500.14(g), Effective Date Note

Steering Practices in Comparison Platforms

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

Policies and Procedures

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 

Lenders Compliance Group

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[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.

Pitfalls of Mortgage Comparison Platforms

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 

Lenders Compliance Group

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[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)

RESPA Section 8 Triggers on Mortgage Comparison Platforms

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.