CFPB to Section 8 of RESPA: Will You Be My Valentine?

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The love affair continues between the Consumer Financial Protection Bureau (“CFPB”) and enforcement under Section 8 of the Real Estate Settlement Procedures Act (“RESPA”). On February 10, 2015, the CFPB announced a consent order with NewDay Financial, LLC (“NewDay” or the “Company”) involving alleged violations of the referral fee prohibitions under Section 8 of RESPA and deceptive marketing practices. Specifically, the CFPB alleges that NewDay paid “lead generation” fees to an unnamed veterans’ organization and a third-party company for the endorsement of the Company and referral of the organization’s veteran members to NewDay for mortgage financing. While the Company neither admitted nor denied the CFPB’s findings, the CFPB assessed a $2 million civil money penalty under the consent order. The facts as described in the consent order do not involve a typical marketing services agreement or lead generation agreement, but the consent order makes clear that endorsements of a company expressed through direct mail and email advertisements are considered to be referrals by the CFPB.

Beginning in 2010, NewDay entered into an agreement with a third-party company, which was acting on behalf of the veterans’ organization, to be designated as the exclusive lender of the veterans’ organization. The Company then sent direct mail and email advertisements to the organization’s members under the veterans’ organization’s name. As stated in the consent order, “these advertising communications promoted the relationship between [the Company] and [the veterans’ organization], and encouraged and recommended the use of [the Company’s] mortgage products to veterans’ organization members.” As an example, the consent order quotes one email advertisement as stating: “[Veterans’ Organization] chose NewDay to be our exclusive Reverse Mortgage provider after spending significant time with the company’s management team and watching its loan professionals in action.” Another advertisement stated: “NewDay USA is [veterans’ organization’s] exclusive provider of home loan programs based on their high standards for service and the excellent value of their programs.... we recommend you give them a call....” The veterans’ organization also promoted its exclusive relationship with NewDay to its members during telephone conversations, and the third-party company maintained a website for the organization’s members that “recommended” NewDay as a source for home loans. As part of this agreement, the Company paid “lead generation” fees to the veterans’ organization and the third-party company for each person that contacted NewDay to inquire about a mortgage and completed mandatory counseling or had a credit report pulled by the Company. The consent order states that members of the organization were never made aware of the payments by NewDay to the veterans’ organization and the third-party company.

Based on these facts, the CFPB found that the veterans’ organization’s advertisements (created by NewDay) and statements to its members were misleading and constituted deceptive acts or practices because the members were unaware of the paid relationship among the parties. The CFPB also determined that such communications referred recipients to NewDay by encouraging and recommending that members use the Company for mortgage-lending services. The consent order states that payments made by NewDay to the veterans’ organization and the third-party company “in connection with this marketing of home loans” constituted payments in violation of Section 8 of RESPA.

One takeaway from this action is that referrals can exist in many forms and, regardless of the form, fees or other things of value cannot be paid or received for those referrals. RESPA broadly defines “referral” to include “any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service... when such person will... pay a charge attributable in whole or part to such settlement service....” In this case, in addition to verbally referring potential customers directly to the Company, the veterans’ organization allegedly allowed direct mail, email, and website advertisements to be disseminated that referred to NewDay as an “exclusive lender,” made statements about the Company’s service standards and home loan value, and explicitly “recommended” that NewDay be contacted for mortgage loans. The content of these advertisements contained explicit written referrals or other written statements intended to affirmatively influence a person’s selection of a particular mortgage lender. Section 8 of RESPA does not permit payments to be made or received for advertisement communications that constitute referrals. That is the case even if the party making the referrals is not in the settlement service business. In addition, to the extent payments are made each time a person engages with an endorsed entity after he/she has been referred, such payments will be deemed impermissible referral fees, even if couched as payments for lead generation. 

While this case is not a verdict from the CFPB on the permissibility of marketing services agreements or lead generation agreements, the takeaway regarding conduct that constitutes an endorsement or referral has direct application to those agreements. To the extent the content of advertisements displayed as part of an agreement includes explicit written recommendations or endorsements of a particular settlement service provider, that conduct could be deemed to constitute referrals, which could put payments under the agreement at risk under Section 8 of RESPA. This case also highlights the importance of ensuring that consumers are informed about the presence of marketing arrangements.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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