Financial Penalties for Advertising Violations

YOUR QUESTION 

We have been using a marketing company for our advertising. We relied on their compliance to make sure the advertisements met the guidelines. Unfortunately, a banking department just cited us for violations in our advertising. So, we fired the marketing company. Meanwhile, we're stuck. The banking department has asked for all our advertising going back three years!   

My partner hired a lawyer to handle our case. The lawyer reviewed the advertisements from the last three years and informed us that there are many violations in them. It is scary how much money we will need to pay in financial penalties. The lawyer says there could also be remuneration to the borrowers. We don't have the money for all of these violations. We just don't. We may have to close down the company. We're going to meet with the department next week to discuss the situation. 

I need some more guidance. I want to be more prepared for the meeting. I need to know what we're facing in penalties. We have been told that your firm conducts advertising reviews before their publication, so I hope you can enlighten me about what to expect. 

What are the financial and other penalties for violations of mortgage advertisements? 

COMPLIANCE SOLUTIONS 

Advertising & Marketing Compliance Reviews 

Advertising Tune-up 

Advertising Manual 

Please contact us to discuss these solutions!

ANSWER TO YOUR QUESTION 

I am sorry to learn of this happening. This situation is avoidable, yet many companies get caught up in the dragnet of defective advertisements. You can't farm out your liability to marketing companies. Many of them claim to have compliance staff, but in reality, their compliance is sparse, if it exists at all. And forget about the testimonials of their awesome success; for goodness sake, they are marketing companies – what kind of testimonials do you expect them to provide? 

Yes, we provide relatively inexpensive advertising and marketing campaign reviews. We've offered advertising compliance for twenty years. The advertising review is expeditious. We hold the final masters in our extranet, so that clients can access them at any time. Our staff works with the client to ensure the advertisements both meet their marketing goals and comply with regulatory mandates. Some clients have even retained us to review the compliance procedures of their marketing companies.

If you want assistance with advertising compliance, please contact me. Get your company into a reliable advertising compliance program. Forget the bells and whistles. Forget the marketing company route! 

If you are not an expert in advertising compliance, you need compliance support. 

A hefty violation could cost you the company! 

Here's what happens when your advertising compliance is not reliable.

 

Recently, a company was shuttered for alleged deceptive advertising. Its home office was located in California. It was licensed in 30 states and Puerto Rico. In that case, specifically, the mortgage lender allegedly used the names and logos of the VA and FHA in its advertisements, described loan products as part of a "distinctive program offered by the U.S. government," and instructed consumers to call the "VA Interest Rate Reduction Department" at a phone number belonging to the mortgage lender, thus implying that government agencies sent the mailings. The result of this matter was a consent order permanently banning the company from engaging in any mortgage lending activities, or from "otherwise participating in or receiving remuneration from mortgage lending, or assisting others in doing so." In addition, the company, while neither admitting nor denying the allegations, was required to pay a $1 million civil money penalty. 

Fortunately, many compliance departments have a very good understanding of the restrictions on advertising, which are meant to protect consumers from misleading practices and ensure fair access to credit. 

Here is a list of a few basic Acts and regulations. 

Some Acts and Regulations 

Truth in Lending Act (TILA) (Regulation Z) 

TILA requires clear and accurate disclosure of loan terms, including the annual percentage rate (APR), loan amount, loan term, and repayment terms, presented clearly and conspicuously. Certain "trigger terms" (for instance, specific interest rates or monthly payment amounts) require additional disclosures.

CFPB’s Massive Withdrawal of Guidance

QUESTION 

The CFPB recently withdrew guidance for many policies and legal interpretations. As my company’s  Chief Risk Officer and General Counsel, I was asked by our Board to provide an outline of the CFPB's withdrawn guidance and the effect such withdrawal will have on lending and servicing. I have reviewed all the withdrawn documents and written an analysis of their impact. However, I still can’t figure out the difference that the withdrawn guidance makes in our legal and regulatory risks. 

So, I am writing you for some feedback. I don’t need an outline of every withdrawn document. What I’m looking for is some insight into the overall impact of withdrawing the guidance. Our external law firm provided an excellent overview. But I would like something more conclusory with respect to the practical effect caused by the withdrawal. 

Long time subscriber! Thank you for your outstanding articles. We appreciate your clarity and straightforward responses. 

What impact does the withdrawal of the massive withdrawal of CFPB guidance documents have on mortgage originators and servicers? 

SOLUTION 

CMS Tune-up

RESPONSE 

Thank you for your kind words! My articles are a labor of love. I enjoy writing them, and I am grateful that you read them. Before I dig into the implications of the CFPB’s withdrawal of numerous guidance issuances, let me offer a few historical facts. 

Recent History 

The withdrawals of guidance stems from an Executive Order (EO) 13891 that goes back to 2019, which directed agencies to avoid using guidance documents to create regulatory burdens on the private sector.[i] President Trump issued the EO in his first term, and the Biden administration later rescinded it. 

The CFPB is maintaining that the principles the EO outlined are consistent with the requirements of the Administrative Procedure Act (APA), which are noted in the CFPB’s April 11, 2025 internal memo. The memo imposed a moratorium on the issuance of new guidance documents and initiated a full review of all existing guidance. The CFPB is supposed to complete the review by April 25^th. Any guidance not explicitly flagged to be retained, with a clear justification, would be subject to rescission.[ii] 

Three Reasons for the Withdrawal 

There are three ostensible reasons for the withdrawal of these guidance issuances: 

1.   The CFPB will now only issue guidance when it is truly necessary and when such guidance will lower, rather than raise, compliance burdens for regulated entities. 

2.   In response to President Trump’s deregulatory initiatives aimed at reducing bureaucracy, the CFPB is scaling back its enforcement activities and, as a result, does not require interpretive guidance to remain in effect at this time. 

3.   The CFPB has determined that there are no significant reliance interests justifying the retention of the withdrawn guidance. This is because parties generally recognize that guidance is nonbinding and does not create substantive rights. 

The Bureau says that while some guidance, or parts thereof, may be reinstated, it does not intend to prioritize enforcement against parties that do not conform to them during the period of withdrawal. 

What a Difference a Difference Makes 

In your inquiry you state that you “can’t make sense of the difference it makes in our legal and regulatory risks.” Frankly, I think your confusion is justified. I will explain shortly. Suffice it to say, for now, that withdrawal of the guidance documents will have little legal effect. Before getting to my view, let me mention a few areas that seem to be headlining as regulatory issues.

Guilty Until Proven Innocent?

QUESTION 

I am the Chief Executive Officer of a lender and servicer. Last week, the CFPB hit us with a Civil Investigative Demand. Our in-house lawyer has put a team together from various departments to respond to it. And you kindly referred us to an attorney who specializes in this process. We are retaining the attorney you recommended. 

At this point, many people in the company are aware that we received the Civil Investigative Demand, and I am very concerned about reputation risk. We have built a fantastic company, yet rumors have already started that we did something to violate laws and regulations. I need a way to calm everyone down and not worry. 

Because of the rumors, some employees now think we are guilty of wrongdoing. We intend to fight any such charges! I need to issue a statement that explains the process in plain and simple language. I need your help in providing information that helps them to understand the process. 

What is the CFPB’s Civil Investigative Demand? 

Are we guilty until proven innocent? 

COMPLIANCE SOLUTION 

CMS Tune-up®  

RESPONSE 

Rumour doth double, like the voice and echo,

The numbers of the feared.

Henry IV, Part 2, Shakespeare 

Allow me to put the above lines into our modern idiom: An unconfirmed report expands like an echo growing louder and louder, magnifying the perceived size and threat. 

DO NOT IGNORE THE RUMORS! 

Perhaps you think that the truth will reduce the rumors. Sometimes, it does; sometimes, it does not. One of my favorite literary figures, Jonathan Swift, once said that “falsehood flies, and the truth comes limping after it.” He cautioned that by the time people become “undeceived,” the “jest” is over, and the “tale” has already had its effect.  

Reputation risk is real, and adverse issues can hobble a company financially, even when there’s nothing to the allegations of wrongdoing. Some rumors don’t have a scintilla of truth, but they thrive nonetheless. Like a garden of weeds, pull out one, and another takes its place. Your aim should be to control the message. However, do not ignore rumors! 

PEEKING BENEATH THE CFPB HOOD 

I am going to give you a peek into the CFPB’s Civil Investigative Demand process. The acronym is “CID,” and for brevity, I will use this acronym. If you’re wondering if the CFPB has coopted the authority to conduct CIDs, you might be interested in knowing that it certainly does have the authority pursuant to the Dodd-Frank Act.[i] A primary access point to the authority is Unfair, Deceptive, or Abusive Acts or Practices (UDAAP),[ii] which

 “…take any action . . . to prevent a covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service…”[iii] 

Most CIDs are triggered by CFPB examination. However, the examination is not the only source of the CID. I’ll get back to examinations momentarily. 

NON-EXAMINATION SOURCES OF CIDs 

Other sources can trigger a CID, many of them being external to the company itself. For instance, the Office of Enforcement monitors the CFPB’s Consumer Complaint Database for potential violations.[iv]

Social Media Influencers

QUESTION 

A social media influencer approached our marketing department to provide an endorsement. The influencer wants to be paid an endorsement fee. The marketing department says this would be a good lead source for us. We asked our regulator about it, and they cautioned that this comes under the advertising regulations. 

I am concerned that we do not know much about the regulations or what we are getting ourselves into. We've been a mortgage lender in business for over twenty years. We are familiar with getting testimonials from customers but have no experience getting endorsements from influencers. 

And, to say the least, we want no trouble with our regulator about our marketing involved with an influencer. So, we need some guidance. We are hoping you can shed some light on this situation. 

What are some of the concerns and challenges regarding endorsements from social media influencers? 

ANSWER 

I must admit that I can't figure out all the buzz behind the popularity of social media influencers; indeed, there are celebrity influencers who promote products and services to millions of social media followers, even though they fail to mention they were paid for their promotions. I won't get into the obvious concern that getting paid undermines the authenticity of the endorsement. 

You don't mention the name of your regulator, but no matter. I will provide an answer based on the Federal Trade Commission (FTC) advertising requirements, since the FTC serves a critical role in regulating advertising to protect consumers from false, misleading, or deceptive claims. 

The FTC is essentially a consumer advocacy agency that, among other things, combats untruthful advertising through enforcement actions, regulatory guidance, and consumer education. I think a cursory overview of the FTC's approach to ensuring truth in advertising can offer some helpful advice with respect to social media endorsements and testimonials. 

FTC Oversight 

The FTC's oversight of advertising is derived primarily from its authority under the FTC Act to prevent "unfair or deceptive acts or practices."[i] The FTC's deception enforcement policy specifies several factors in analyzing whether an act or practice is deceptive: 

·       There must be a representation, omission, or practice that is likely to mislead consumers. The FTC examines the overall net impression made by the ad, not just isolated words or phrases.[ii] 

·       The act or practice must be evaluated from the perspective of a reasonable consumer. The test is whether it is likely to mislead reasonable consumers. If the representation or practice impacts or is directed primarily to a particular group, the FTC examines reasonableness from the perspective of that group.[iii] 

·       The representation, omission, or practice must be material. That is, it must be important to consumers' decisions or conduct regarding the product.[iv] 

·       The representation, omission, or practice is likely to mislead consumers acting reasonably under the circumstances.[v] The facts and circumstances dictate the evaluation. 

It is critical to note that the FTC does not need to show actual deceit or even that any consumers were actually misled. Rather, it must simply show that the conduct in question has a tendency or capacity to deceive consumers who act reasonably.[vi] 

Tangentially relevant to your question is the action taken by the FTC against operators of websites that purport to provide independent reviews of products and services. The FTC has alleged the defendants posted fake positive reviews to increase sales and false negative reviews to harm competitors.[vii] Consider this an example of how the FTC combats deception relating to online reviews and endorsements. 

In addition to its authority to prevent deception, the FTC can challenge unfair practices.[viii] Unfair practices involve conduct that substantially injures consumers, violates established public policy, or may be unethical or unscrupulous.[ix] 

Advertising Issues 

One of the FTC's best known advertising guides is entitled Guides Concerning the Use of Endorsements and Testimonials in Advertising ("Endorsement Guides").[x] In this guidance, the FTC proposed extensive updates to the Endorsement Guides to address changes in the marketplace, especially the rise of social media influencers.[xi] The guidance defines an endorsement as 

an advertising message consumers likely believe reflects someone's independent opinions or experiences with a product.[xii] 

I will expand on this definition shortly. 

The Endorsement Guides outline FTC's views on topics like when endorsements must disclose material connections and how advertisers should substantiate claims made through endorsements. They also offer numerous examples to illustrate practical implementation. For instance, one example explains that tagging a brand in a social media post can constitute an endorsement as part of a paid relationship.[xiii] 

Here's where you must be very cautious, for you are now at the point where competent handling of the relationship with the social media influencer is imperative to avoid considerable regulatory risk. In updating the Endorsement Guides, the FTC clarified principles like the need to substantiate both express and implied claims made through endorsements.[xiv] If you are unfamiliar with such claims, pause your efforts and get professional compliance assistance. 

As a matter of fact, new examples include posting fake reviews and threats against negative reviewers.[xv] So, you must be sure to be current with the task at hand. These and other revisions, proposed and actual, reflect the FTC's close monitoring of deceptive practices in connection with consumer reviews, influencer marketing, and, in particular, social media influencer endorsements. 

The combination of general guides and specific guidance articles should be constantly monitored because the FTC updates and expands its guidance as technology and marketing practices continue evolving. 

Educating the Social Media Influencer 

For what it's worth, the FTC has also tried educating social media influencers on following endorsement guidelines in recent years. For instance, in 2019, the FTC sent educational letters to prominent social media figures reminding them about disclosing brand relationships. While not enforcement actions, these letters served as warnings to comply with the advertising guidelines. But none of what the influencer does or does not do about compliance will protect you, notwithstanding the FTC's consumer and business education efforts continuing to evolve as platforms, technologies, and advertising techniques change. 

Minefields 

Let's consider some salient minefields involving endorsements. Although the Endorsement Guides do not themselves have the force of regulations, they certainly reflect the FTC's views regarding endorsements. 

Definition of Endorsement 

The following is the FTC's broad definition of an endorsement. It is 

"Any advertising message that consumers are likely to believe reflects the opinions, beliefs, findings, or experiences of a party other than the sponsoring advertiser."[xvi] 

This definition covers endorsements in both traditional and social media. It encompasses statements, images, tags, likes, reviews, and much more. But, really, any message in advertising which consumers likely perceive as representing someone's independent opinions or experiences with a product or service can be an endorsement. 

And what is a nuanced example of a fake endorsement? An example would be where paid negative reviews of a competitor are obviously not endorsements, but fake positive reviews used to promote one's own products and services clearly are fake endorsements.[xvii]

Liability for Deceptive Endorsements 

Both advertisers and endorsers can be liable for false or unsubstantiated claims made through endorsements.[xviii] The advertiser is responsible for claims made through their ads, whether by directly making statements or using paid endorsers. 

Even though endorsers may be liable for deceptive endorsements they make, advertisers may also be liable for failing to adequately monitor endorsers for compliance issues.[xix] I suggest you draft and ratify a policy that sets forth how you, as an advertiser, will guide, monitor, and take action to remedy endorser non-compliance, whether the social media influencer, the endorser, is paid or not paid.[xx] 

This principle applies even when advertisers merely disseminate existing endorsements, like sharing (which is retweeting or reposting) positive social media endorsements. As an advertiser, you should always confirm that endorsements reflect a social media influencer's honest views before rebroadcasting them.[xxi]

Substantiating Endorsement Claims 

The advertiser must substantiate claims made through endorsements.[xxii] As with any advertising claims, you must substantiate consumer endorsements, because such endorsements are not necessarily competent or reliable evidence or proof.[xxiii] 

In reviewing such endorsements, my firm has evaluated endorsements that are skewed. When that happens, we advise our clients they are obligated to ensure that representations of outcomes made by consumers should generally achieve the outcomes associated with using the advertised product or service.[xxiv] Our rule of thumb is, when endorsements reference exceptional results well beyond the norm, the ads should clearly and conspicuously disclose what consumers can expect to experience.

Disclosures 

As an advertiser, you must disclose any connections between social media influencers, and other endorsers, and your company that could affect how people evaluate the endorsements.[xxv] This includes monetary payments and the receipt of free products or services. Put otherwise, any connections likely to affect the weight consumers give endorsements should be disclosed when they are not reasonably expected.[xxvi] 

Social media influencers, for example, should disclose brand sponsorships and gifts. Consumers may give greater credence to reviews and opinions from people they perceive as unbiased. Thus, clear disclosure of connections allows consumers to consider endorsements in full context. 

Jonathan Foxx
Chairman & Managing Director 

Lenders Compliance Group

---

[i] Section 5, FTC Act, 15 USC § 45. False or misleading advertising falls under the umbrella of deceptive practices the FTC can prohibit.

[ii] See Federal Trade Commission, FTC Policy Statement on Deception (1983), as appended to In re Cliffdale Assocs., Inc., 103 FTC 110, 174 (1984).

[iii] Idem

[iv] Op. cit. ii, at 182

[v] Op. cit. ii, at 175-76

[vi] FTC v. Algoma Lumber Co., 291 U.S. 67, 81 (1934)

[vii] Complaint, FTC v. 427K, Inc., No. 4:22-cv-01069-JSW (N.D. Cal. February 28, 2022)

[viii] Op, cit. i

[ix] Federal Trade Commission, FTC Policy Statement on Unfairness (1980), as appended to In re Int'l Harvester Co., 104 FTC 949, 1070 (1984).

[x] 16 CFR § 255, Originally issued in 1980, 45 Fed. Reg. 3870 (January 18, 1980)

[xi] 87 FR, 44288 (July 26, 2022)

[xii] 16 CFR § 255.0(b)

[xiii] 16 CFR § 255.0(g)(5)(ii)

[xiv] 87 FR 44311 (July 26, 2022)

[xv] Idem

[xvi] Op. cit. xii

[xvii] 16 CFR § 255.0(g)(12)

[xviii] Idem

[xix] Op. cit. xvii

[xx] 16 CFR § 255.1(d)(3)

[xxi] 16 CFR § 255.2(a) & (b)

[xxii] 16 CCFR § 255.2(a)

[xxiii] Idem, Example 5

[xxiv] 16 CFR § 255.2(b)

[xxv] 16 CFR § 255.5

[xxvi] 16 CFR § 255.5(a)

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] 

_______________________________________________________

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

_______________________________________________________

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)