What We Learned about UDAAP & RESPA from Recent Settlements
Settlements provide valuable guidance and insights into regulatory perspectives. We encourage financial institutions to review settlements for important regulatory compliance guidance, and to see the signals that regulators are broadcasting. Recent settlements should shape your perspective on compliance, including marketing endorsements and disclosure materials.
In February, the CFPB issued a Consent Order where they found certain marketing and advertising arrangements to violate RESPA’s prohibition on kickbacks and failure to disclose the relationship was deceptive (a violation under UDAAP).
According to the Consent Order, NewDay Financial (“Mortgage Lender” or Respondent”) entered into an agreement with a Veterans Organization through a third-party marketing and lead generation company referenced as a “Broker” in the consent order.
NewDay was designated as the “exclusive lender” and as the “lender of choice” of the Veterans’ Organization. Marketing and advertising materials promoted the relationship where mortgage inquiries were referred to NewDay as the preferred source for home loans. In exchange for the endorsement and referrals, NewDay was paying a monthly licensing fee of $15,000 and also made lead generation payments for each Referred Member.
NewDay’s primary business has been VA refinancings and government insured reverse mortgage products. The CFPB said that firm advertised its mortgage products to consumers primarily through direct mail campaigns. NewDay sent over 50 million solicitations by postal and electronic mail to consumers, generally veterans and older Americans.
The CFPB found that the mortgage firm’s failure to disclose the financial arrangements while making statements in regards to “exclusive” endorsements “based on high standards of service and the excellent value” to likely be misleading.
Two Insights about UDAAP Compliance
1. UDAAP Violations Can Occur Because of What's Not Said.
- UDAAP Violations By Omission: A practice is “deceptive” when there is a representation or omission of information that is likely to mislead consumers acting reasonably under the circumstances, and that information is material to consumers.
- Consent Order Example: According to the consent order, NewDay (the "Respondent") mailed advertising communications to Veterans’ Organization members with Veterans’ Organization’s approval. They were identified as being from Veterans’ Organization, endorsing Respondent’s products, and articulated why Veterans’ Organization selected Respondent as its lender-of-choice. Respondent also made similar statements to Veterans’ Organization members during phone conversations. The affirmative reasons offered to members created the impression that there were no other connections between Respondent and Veteran’s Organization, when, in fact, Respondent was making regular undisclosed payments, both directly and indirectly, for these endorsements.
2. Business Relationships, Including but Not Limited to Lead Generation Fees Paid, Must Be Disclosed.
- Disclosure of Business Relationships: Business relationships between financial organizations that would be material to consumers need to be clearly disclosed.
- Consent Order Example: The connections between the Respondent and the Veterans' Organization would likely have been material to consumers evaluating the weight or credibility of the Veterans' Organizations' endorsement of the Respondent and deciding whether to get a mortgage loan from the Respondent. The failure to disclose those material connections to consumers was considered a UDAAP violation.
Insight about RESPA (Real Estate Settlement Procedures Act)
Fees and Kickbacks aren't allowed according to RESPA, and can be enforced through UDAAP.
- No Fees or Kickbacks: Section 8(a) of the Real Estate Settlement Procedures Act (RESPA) provides that “[n]o person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” (12 U.S.C. § 2607(a))
- Consent Order Example: The CFPB noted that advertising communications were sent to pre-screened members of the Veterans’ Organization, and the advertisements referred recipients to NewDay. The CFPB concluded that the payments from Respondent to Veterans’ Organization and Third-Party Broker Company in connection with the marketing of home loans constitute payments made pursuant to agreements and understandings to refer real estate settlement service business in violation of RESPA, 12 U.S.C. § 2607(a).
- Develop a comprehensive compliance plan (marketing plans comply with applicable consumer financial laws) and address each item in the consent order;
- Pay a $2M fine;
- Submit progress reports of the compliance plan; and
- Distribute the consent order to board members, management and employees (current and future).
Ncontracts Viewpoint: Consent Orders can provide all of us clues that can help shape our Compliance Programs.
This particular consent order tells us that lenders must be careful that the motivations behind any recommendation or referral is clearly disclosed (or risk a claim). With this particular consent order, we hear two things:
- An annual review of your third-party marketing relationships is a critical component to your consumer compliance program. Financial institutions will be held accountable for understanding and managing the marketing practices (e.g., referral processes, websites, marketing messaging, licensing, marketing campaign execution). This consent order should be encouragement to review all third-party marketing arrangements on a regular basis.
- Lenders must be careful that their marketing and advertising does not omit key details and that any materially significant business relationships are clearly disclosed. Joint advertising and joint marketing arrangements should be disclosed or you risk a UDAAP violation (especially if marketed as a “preferred” or “exclusive” provider).