Will AI Replace Me?

YOUR COMPLIANCE QUESTION 

I have been a loan officer for fifteen years. I am a single mother of two wonderful teenagers. I have also been the breadwinner for 15 years since my husband passed away. I keep reading how AI is going to replace me. 

In the last few weeks, I've read a few articles about how AI is transforming the mortgage world. Part of that transformation looks like I am going to lose my job and be replaced by a computer program. This is so unfair. I have spent all these years building my professional life, and now I feel it is all going to be trashed. 

I heard you speak at a conference recently. You spoke about your new AI Policy Program and answered many audience questions. One of them was about how loan officers, processors, and underwriters are worried about being replaced by AI. I would like you to share your remarks in your newsletter. 

Will AI replace loan officers like me? 

Signed, 

A Human Being 

OUR COMPLIANCE SOLUTION 

AI POLICY PROGRAM FOR MORTGAGE BANKING™ 

Our AI Policy Program aligns with Freddie Mac's AI governance requirements for Freddie Mac Sellers/Servicers. Responsible AI practices can help align AI system design, development, and use with applicable legal and regulatory guidelines.

Our AI Policy Program consists of the following policies: 

1.      Artificial Intelligence Governance Policy

2.      Artificial Intelligence Use Policy

3.      Artificial Intelligence Workplace Policy

4.      Artificial Intelligence Credit Underwriting Policy

5.      Artificial Intelligence Do & Do Not Policy

6.      Artificial Intelligence Ethics Policy

7.      Artificial Intelligence Vendor Management Policy 

Contact us for the presentation and pricing.  

RESPONSE TO YOUR QUESTION 

REVOLUTION AND EVOLUTION 

There have been many technological revolutions in human history. We are now at the advent of another revolution: the onset of artificial intelligence (AI) technology, a massive, incremental, worldwide expansion of knowledge in computer science dedicated to creating systems capable of performing complex tasks that typically require human intelligence. Each revolution has brought about profound changes in civilizations. Surges in technological development have characterized each revolution. 

From stone-age tools to learning to control fire, from foraging for food to the first agricultural revolution, from replacing bronze with iron, each stage of technical knowledge enabled widespread human development at the cost of some trade-off in the human social experience that had evolved heretofore. The printing press brought about mass production of books, democratizing knowledge and literacy; the scientific revolution shifted knowledge from philosophy to evidence-based insights; new farming techniques led to increased food output, population growth, and urbanization. 

And, of course, we all know of the industrial revolution, where machine-based manufacturing shifted society away from manual labor; this was then followed by the technical revolution, where mass production became deeply entrenched in lived experience, such as the creation of assembly lines, steel-making methodologies, and the application of electricity, internal combustion, and telecommunications. Over the last 100 years, the green revolution has introduced high-yielding crops, industrial fertilizers, and new agricultural technologies, thereby increasing global food production. 

Which Revolution Are We In Now? 

So, where are we now in the scheme of things? 

In my view, we are currently living in the information and digital revolution, but rapidly transitioning to the artificial intelligence revolution. We are living at a time when computers and transistors, the Internet, personal computing, and smartphones are being rapidly replaced by the artificial intelligence revolution, characterized by discoveries such as gene editing, advanced robotics, and nanotechnology.

Endorsements and Testimonials

QUESTION 

Our banking department called us out for publishing testimonials that our loan officers use. We were contacted by an examiner who said they had checked out some of the testimonials and endorsements and found that some were either bogus or misleading. 

First of all, I didn’t know a banking department could go so far as to check out the veracity of testimonials. 

Secondly, our loan officers are honest and get their business from referrals, but the banking department makes them look like they were intentionally making up bogus testimonials. 

Thirdly, the loan officers have hundreds of endorsements and testimonials. I don’t see how we can verify every one of them. 

I think the department is way out of line! It feels like they are harassing us. I would like to know your opinion about this kind of advertising. Endorsements and testimonials are a big part of our marketing strategy. 

What are some guidelines for endorsements and testimonials?

COMPLIANCE SOLUTION 

Policies and Procedures: Advertising Compliance 

ANSWER 

Endorsements and testimonial advertising are an important and valuable part of overall marketing. Of course, scrutinizing advertisements is an inherent responsibility of banking departments. As consumer advocacy agencies, they must ensure that the public is properly informed of a loan product or service. 

Many interlocking regulations have a substantive impact on advertising compliance because contact with the public by means of advertising is one of the most prevalent ways a financial institution can encourage consumers to use its services. 

The banking department is not “way out of line.” It monitors your loan flow process from the earliest advertisement that leads to an application, thence to underwriting, loan closing, and beyond. If you believe verifying the testimonials is too big a task, don’t publish them! A banking department will want to see that you documented a validity review of a testimonial or endorsement. 

Most loan officers are certainly honest. They are the lifeblood of mortgage banking. Everyone works together to ensure the consumer has a good experience. However, loan officers are on the front lines, most working on commission; they bring in the loans and the ones who financially suffer the most when sales slow or loans don’t close for some reason. There is no reason for them to be defensive when a banking department finds errors in their testimonials. But you need to watch out for a “pattern or practice” of bogus endorsements and misleading testimonials. 

So, let’s focus on the nature of endorsements and testimonials and not get all huffed up in righteous indignation. I will offer some thoughts on this subject and suggest you share them with your loan officers. Contact me here if you need advertising compliance. We have a team devoted solely to advertising and marketing compliance. 

DEFINITION 

As you probably know, I like to get a definition in place for a cogent discussion. 

Here’s how I define endorsements and testimonials:[i] 

Endorsements and testimonials are any advertising message that consumers are likely to believe reflects the opinions, beliefs, findings, or experiences of a party other than the sponsoring advertiser, even if the views expressed by that party are identical to those of the sponsoring advertiser. 

RULES OF THE ROAD 

There are certain indisputable rules of the road that you must apply. For this article, I use the terms endorsement and testimonial interchangeably. These are the four most important rules to follow. 

1.     Honesty 

Endorsements must reflect the endorser's honest opinions, findings, beliefs, or experiences. Furthermore, an endorsement may not convey any express or implied representation[ii] that would be deceptive if made directly by the advertiser. 

2.  Context 

Although the endorsement does not need to be the exact words of the endorser – unless the endorser requests it - the endorsement may not be presented out of context or reworded to distort in any way the endorser’s opinion or experience with the product. 

3.  Bona Fide User 

When the advertisement represents that the endorser uses the endorsed loan product or service, the endorser must have been a bona fide user of it at the time[iii] the endorsement was given. 

4.  Full Disclosure 

Advertisers are subject to liability for false or unsubstantiated statements made through endorsements or for failing to disclose material connections between themselves and their endorsers.[iv] (Be careful here! Endorsers may be liable for statements made in the course of their endorsements.) 

GUIDELINES FOR ENDORSEMENT TYPES 

Generally, three types of endorsements are encountered in mortgage banking: consumer, expert, and organization. I will provide a brief overview of each. 

Consumer Endorsements 

For the most part, there are three types of consumer endorsements.[v] Here’s a brief outline. 

1.     A consumer endorsement about the performance of an advertised product or service will be interpreted as representing that the product or service is effective for the purpose depicted in the advertisement. 

2.     An advertisement containing an endorsement relating the consumer’s experience on a central or key attribute of the product or service will likely be interpreted as representing that the endorser’s experience is representative of what consumers will generally achieve with the advertised product or service in actual, albeit variable, conditions of use.

 

3.     Advertisements presenting endorsements by what are represented, directly or by implication, to be “actual consumers” should utilize actual consumers in audio and video, or clearly and conspicuously disclose that the persons in such advertisements are not actual consumers of the advertised product.

 

Expert Endorsements

 

There are two primary guidelines involving expert endorsements,[vi] as follows:

 

1.     If an advertisement represents, directly or indirectly (viz., by implication), that the endorser is an expert concerning the endorsement, the endorser’s qualifications must state factually the endorser has the requisite expertise with respect to the endorsement.

 

2.     Although the expert may, in endorsing a loan product, take into account factors not within their expertise, the endorsement must be supported by an actual exercise of that expertise in evaluating the product’s features or characteristics to the extent to which they have relevant knowledge and expertise,[vii] and which are relevant to an ordinary consumer’s use of or experience with the product and, importantly, are available to the ordinary consumer.

 

Organization Endorsements 

Endorsements from organizations can be tricky. There is one essential guideline. 

1.     Organization endorsements, especially expert ones, represent the judgment of a group whose collective experience exceeds that of any individual member, and whose judgments are generally free of subjective factors that vary from individual to individual.

 

This is the tricky part because an organization’s endorsement must be reached by a process sufficient to ensure that the endorsement fairly reflects the collective judgment of the organization. Moreover, if an organization is represented as being an expert, then, in conjunction with a proper exercise of its expertise in evaluating the product,[viii] it must utilize an expert or experts recognized as such by the organization or standards previously adopted by the organization and suitable for judging the relevant merits of such products. 

MATERIAL DISCLOSURE 

A few words about material disclosure. If there’s a connection between the endorser and the seller of the advertised loan product or service that might materially affect the weight or credibility of the endorsement – for instance, where the audience does not reasonably expect the connection – such connection must be fully disclosed. 

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

Lenders Compliance Group

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[i] 16 CFR Part 255, § 255.0(b): “…including verbal statements, demonstrations, or depictions of the name, signature, likeness, or other identifying personal characteristics of an individual or the name or seal of an organization.” For the purpose of this article, I refer the reader to Guides Concerning the Use of Endorsements and Testimonials in Advertising, Federal Trade Commission, 16 CFR Part 255.

[ii] §§ 255.2(a) and (b) regarding substantiation of representations conveyed by consumer endorsements.

[iii] § 255.1(b) regarding the “good reason to believe” requirement.

[iv] § 255.5

[v] § 255.2

[vi] § 255.3

[vii] See § 255.1(d) regarding the liability of endorsers.

[viii] Ibid

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.

Material Interference in UDAAP Lawsuit

QUESTION 

We are being sued for a violation of UDAAP. The lawsuit is based on the allegation that we materially interfered with the ability of a consumer to understand our terms and conditions. As far as I know, we have never intentionally misled a consumer. Our legal counsel is fighting back, but our reputation is already getting hit with negative press. 

I am the Chief Operating Officer, and with permission of our Board, I am writing you to ask for some history involving this kind of allegation. Your response could help us broaden our perspective and assist us in making sure this incident never happens again. 

We recently signed up for your UDAAP Tune-up, but it will not start for a few weeks. In the meantime, a word from you about some facets of this allegation would be appreciated. 

What is "material interference" involving terms and conditions in the context of UDAAP? 

ANSWER 

Thank you for your interest in our UDAAP Tune-up. Our UDAAP review is in demand. When it comes to Unfair, Deceptive, or Abusive Acts or Practices (UDAAP), it is essential to be proactive. Don’t wait for a regulatory investigation; certainly, don’t think you can wiggle your way out of a lawsuit, which often metastasizes into class action litigation. 

You can have your counsel contact me to discuss your case explicitly if they want expert witness support. 

There are many litigious access points to allege UDAAP violations, given that many regulatory frameworks are implicated.[i] You mentioned that you never intended to mislead the consumer; however, it is important to recognize that intent is not required to show material interference. 

Brief History

In 2010, Congress passed the Consumer Financial Protection Act of 2010 (CFPA) and banned abusive conduct.[ii] The CFPA's prohibition on abusive conduct was the most recent congressional tailoring of the Federal prohibitions to ensure fair dealing and protect consumers and market participants in the United States. 

The 2007-2008 financial crisis tested consumer protection laws, government watchdogs, and the ability of the existing authorities to address predatory lending, considered to be a primary cause of the collapse. The financial crisis was set in motion by avoidable interlocking forces. At its core were mortgage lenders profiting (by selling on the secondary market) on loans that set people up to fail because they could not repay. 

Consequently, Congress concluded that federal agencies' enforcement of the prohibitions on unfair and deceptive acts or practices was too limited to be effective at preventing the financial crisis. Therefore, it amended existing law. This is the point at which the FDIC, in 2007, said the term “unfairness” is a restrictive legal standard and the term “abusive” should be added because it is more legally flexible.[iii] In the CFPA, Congress granted authority over unfair or deceptive acts or practices to the states, the Federal banking agencies, and the newly created Consumer Financial Protection Bureau (CFPB). Congress also added a prohibition on abusive acts or practices. 

There have been numerous updates to the regulatory supervision and enforcement of UDAAP over the years. Indeed, since the enactment of the CFPA, government enforcement and supervisory agencies have taken dozens of actions to condemn prohibited abusive conduct. Earlier this year,  the CFPB issued a Policy Statement to summarize those actions and explain how the Bureau analyzes the elements of abusiveness through relevant examples. This Policy Statement is the CFPB’s first formal issuance that summarizes precedent on abusive acts or practices and provides an analytical framework for identifying abusive acts or practices.[iv] 

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For information about our UDAAP Tune-up, please contact us here.

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I will provide a cursory overview of the CFPA prohibitions. Thereafter, I’ll briefly explain the prohibition regarding “material interference” as it relates to terms and conditions.

Overview 

Under the CFPA, there are two abusiveness prohibitions.[v] An abusive act or practice: 

(1) Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service, or 

(2) Takes unreasonable advantage of: 

·       A lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; 

·       The inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or 

·       The reasonable reliance by the consumer on a covered person to act in the consumer's interests. 

The statutory text of these two prohibitions may be summarized at a high level as:

 

(1) obscuring important features of a product or service, or

 

(2) leveraging certain circumstances to take an unreasonable advantage. The circumstances, or three prongs, that Congress set forth generally concern gaps in understanding, unequal bargaining power, and consumer reliance.[vi] 

Unlike unfairness but similar to deception, abusiveness requires no showing of substantial injury to establish liability but is focused on conduct that Congress presumed to be harmful or distorts the proper functioning of the market. Put otherwise, an act or practice need only fall into just one of the categories above to be abusive, but an act or practice could fall into more than one category.[vii] 

Material Interference in Terms and Conditions 

The first abusive act or practice that takes unreasonable advantage of consumers, gaps in understanding, concerns situations where an entity “materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service.”[viii] Material interference may be shown when an act or omission is intended to impede consumers’ ability to understand terms or conditions, has the natural consequence of impeding consumers’ ability to understand, or actually impedes understanding. 

Acts or omissions may be material interference. Material interference may include actions or omissions that obscure, withhold, de-emphasize, render confusing, or hide information relevant to the ability of a consumer to understand terms and conditions. Interference can take numerous forms, such as “buried disclosures,” physical or digital interference, “overshadowing,” and various other means of manipulating consumers’ understanding. 

What is a buried disclosure? It is a disclosure that limits people’s comprehension of a term or condition, including, but not limited to, fine print, complex language, jargon, or the timing of the disclosure. There could be an oral component, too.[ix] Entities can also interfere with understanding by omitting material terms or conditions. 

There may be physical interference, where physical conduct impedes a person’s ability to see, hear, or understand the terms and conditions, including, but not limited to, physically hiding or withholding notices.[x] 

Digital interference may occur where there are impediments to a person’s ability to see, hear, or understand the terms and conditions when presented to someone in an electronic or virtual format. This form of interference includes, but is not limited to, user interface and user experience manipulations, such as the use of pop-ups or drop-down boxes, multiple click-throughs, or other actions or “dark patterns” that have the effect of making the terms and conditions materially less accessible or salient.[xi] 

Material interference includes a process of overshadowing, which is the prominent placement of certain content that interferes with the comprehension of other content, including terms and conditions.[xii] 

Facing Litigation 

There are several methods to prove material interference with a consumer’s ability to understand terms or conditions. My response focuses on the prong of leveraging certain circumstances to take unreasonable advantage of consumers, to wit, gaps in understanding, but the other two prongs, unequal bargaining power, and consumer reliance, may also be implicated in material interference litigation.     

First, while intent is not required to show material interference, it is reasonable to infer that an act or omission materially interferes with consumers’ ability to understand a term or condition when the entity intends it to interfere.[xiii] 

Second, material interference can be established with evidence that the act or omission's natural consequence would impede consumers’ ability to understand. 

And third, material interference can also be shown with evidence that the act or omission did, in fact, impede consumers’ actual understanding. 

While evidence of intent would provide a basis for inferring material interference under the first method, it is not a required element to show material interference. 

Certain transaction terms are so consequential that when not conveyed to people prominently or clearly, it may be reasonable to presume that the entity engaged in acts or omissions that materially interfere with consumers’ ability to understand. That information includes, but is not limited to, pricing or costs, limitations on the person’s ability to use or benefit from the product or service, and contractually specified consequences of default. 

An entity’s provision of a product or service may interfere with consumers’ ability to understand if the product or service is so complicated that material information about it cannot be sufficiently explained or if the entity’s business model functions in a manner that is inconsistent with the apparent terms of its products or services. 

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

Lenders Compliance Group

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)