CFPB Issues Advisory Opinion on RESPA Section 8 and Mortgage Market Online Platforms: Everything Old is New Again
The CFPB, today, February 7, 2023, issued an advisory opinion (“Opinion”) regarding the application of section 8 of the Real Estate Settlement Procedures Act (“RESPA”) to online mortgage market platforms that enable consumers to comparison shop for mortgage loans and/or other settlement services. The Opinion refers to these platforms throughout as “Digital Mortgage Comparison-Shopping Platforms.” Couldn’t the CFPB have come up with a shorter defined term? I’ll use the acronym “DMCSP” instead, which is still way too long, but better.
The Opinion generally warns that it violates RESPA section 8 for such a platform to non-neutrally use or present information about the settlement service providers and/or to receive compensation to provide “enhanced placement” or steer consumers towards certain providers. I will briefly summarize the Opinion and provide my thoughts below.
1. What Does the Opinion Apply to?
The Opinion states that it is focused on DMCSPs, which it defines generally as “digital platforms that…enable consumers to comparison shop options for mortgages and other settlement services, including those platforms that generate potential leads for the platform participants through consumers’ interaction with the platform.” The Opinion also refers to persons who run DMCSPs[1] as “operators” of the platforms. The CFPB notes that platforms will continue to evolve as technology and the business evolves, and that it intends the DMCSP definition to be “flexible and non-exhaustive.”
The Opinion states that it specifically applies to “persons” subject to RESPA section 8’s prohibition against payments or kickbacks for referrals of settlement service business, and notes that RESPA defines this to “include individuals, corporations, associations, partnerships, and trusts.”
2. What About that Old HUD CLO Policy Statement from 1996?
The Opinion notes the policy statement issued by the Department of Housing and Urban Development (“HUD”) that covered “computer loan origination systems” (which HUD generally referred to using the acronym “CLOs”), which was the only previous guidance on this topic and is from 1996. You may recall that HUD had generally defined CLOs as “computer system that is used by or on behalf of a consumer to facilitate a consumer’s choice among alternative products or settlement service providers in connection with a particular RESPA-covered real estate transaction.”
The CFPB states that the CFPB has “applied” HUD’s CLO policy statement, “as relevant, since 2011” when RESPA was transferred to the CFPB. This provides helpful, additional confirmation that the CFPB considers the almost 30-year old HUD policy statement still in play. The CFPB also confirms that DMCSPs are a “type of CLO.” The Opinion does not state that it is rescinding or replacing the CLO policy statement, so it appears the CFPB still considers it to be operative guidance.
The CFPB summarized the CLO policy statement and states that “HUD’s concern over 26 years ago about steering was both compelling and prescient,” and then states that the CFPB understands that in some cases, DMCSPs may be violating RESPA section 8. Everything old is new again.
3. What Does the Opinion Say Generally?
The Opinion states that an operator of a DMCSP receives a prohibited referral fee in violation of RESPA section 8 when:
1. “the [DMCSP] non-neutrally uses or presents information about one or more settlement service providers participating on the platform;
2. that non-neutral use or presentation of information has the effect of steering the consumer to use, or otherwise affirmatively influences the selection of, those settlement service providers, thus constituting referral activity; and
3. the Operator receives a payment or other thing of value that is, at least in part, for that referral activity.”
The Opinion states that the operator’s payment in this case would not be for compensable services, but for referral activity. The Opinion also specifically calls out as potential evidence of a violation the operator’s charging some providers higher fees than others, absent other evidence “that the payment is not for enhanced placement or other form of steering.”
4. The Opinion’s Examples of Violations
As noted above, the CFPB is concerned about both the non-neutral “use” and “presentation” of information on DMCSPs, stating that either could become problematic under RESPA section 8.
Non-Neutral Use. The Opinion provides the following hypothetical examples of non-neutral use of information:
· An operator that “set the formula to boost the rankings of lenders who pay more to participate on the platform, by behind the scenes, excluding or placing low weight on the purportedly objective comparison criteria that would otherwise favor the lower-paying provider.”
· A platform that “purports to incorporate into the formula used to generate comparison results…the consumer’s preferences” but “manipulate[s] the formula to favor certain participating providers by declining to honor the consumer’s preferences or unwarrantedly placing weight on inaccurate information about the provider (e.g., giving credit in the formula to a lender for more favorable interest rates that the Operator knows are outdated, which ensures that lender will have a higher ranking under the formula).”
Non-Neutral Presentation. The Opinion provides many hypothetical examples of non-neutral presentation of information, which include:
· An Operator that lists names and telephone numbers for all providers, but only lists the website links for certain higher-paying providers.
· An Operator that lists the higher-paying lenders on the first page and rank them by interest rate—to give the appearance of a neutral factor, but putting lower-paying lenders with the same or lower interest rates on the second page.
· An Operator that labels a lender as a “sponsored lender,” “featured lender,” or similar phrase because the lender has paid for enhanced placement, but implies the lender earned its placement within the platform’s rankings based on neutral criteria.
· An Operator could list the same participant who has paid for enhanced placement multiple times in the rankings, using either the same name or an affiliated name.
Payments from Providers. The Opinion also provides a specific warning regarding the receipt of different payments from “similarly situated settlement service providers” for participation in a DMCSP, stating that it can be evidence of an illegal referral. The CFPB states that if a provider is paying more than others and receives enhanced placement, it is “reasonable to infer that the settlement service provider is paying for the enhanced placement,” rather than merely being listed on the platform. But the Opinion also notes that, if there is non-neutral use or presentation of information, there can still be a violation even if the fees paid by the providers were the same. The Opinion also pointed to the old HUD CLO policy statement in stating that “no compensable services would be present if a CLO were to list only one settlement service provider and only present basic information to the consumer on the provider’s products.”
But the CFPB does, significantly, give a blessing to DMCSPs that neutrally use and present information, stating that they are, “receiving payment for compensable services, and thus would be compliant with RESPA section 8….”
RESPA Section 8(c)(2). The Opinion also specifically addresses RESPA section 8(c)(2), which as you may know, generally provides that RESPA section 8 does not prohibit a bona fide payment for goods or services actually furnished, and provides the basis for CLOs (and DMCSPs to be compliant under RESPA section 8). The CFPB states that, “RESPA section 8(c)(2) does not provide a defense to payment of referral fees because referrals are not compensable services under RESPA,” and notes Regulation X’s regulatory provision that warns that payments that have “no reasonable relationship to the market value of the goods or services provided” are referral fees. Interestingly, the Opinion also cites to a specific sentence of a 5th Circuit case from 2003, which states that the aforementioned regulatory provision “was promulgated for the purpose of assisting courts in ferreting out kickbacks disguised as legitimate payments for goods and services in complex real estate settlement transactions.” The CFPB stated that when an operator is non-neutrally using or presenting information, the operator is “being paid, at least in part, for conduct that has the effect of steering or otherwise affirmatively influencing the consumer to select a provider on the platform,” and that the referral fee is not a compensable service.
The CFPB also mentions its recent FAQs on marketing services agreements, and takes some time to differentiate between general marketing and referrals, which I wrote about here.
Other Examples in the Opinion and Laws that May Be Implicated. The Opinion provides a lengthy list of examples of violations, which I do not summarize in this blog post (but I would be happy to discuss with you). These examples could be very helpful to compliance professionals and attorneys in analyzing compliance. But note that the CFPB states that the list is illustrative and non-exhaustive. In addition, the list also includes a discussion of warm hand-offs and live transfers, an area of much concern under RESPA. Also, the CFPB provides a warning regarding other laws that may be implicated by such platforms, such as the Dodd-Frank Act’s prohibition on unfair, deceptive, or abusive acts or practices (“UDAAP”), state licensing laws, and other state law versions of RESPA.
5. My Thoughts
There may not be much new in the legal underpinnings here, because many of the top-line conclusions could be gleaned from the old HUD CLO policy statement. But it is good to have confirmation that the CFPB applies the HUD CLO policy statement. And there are definitely many helpful examples of potential violations in the Opinion, and a confirmation that a DMCSP that neutrally uses and presents information is most likely compliant (absent other problematic facts). It is worth digging into the examples when analyzing a platform or other arrangement. The discussion in the Option also may have implications for other types of arrangements under RESPA, such as general marketing.
What is big news is that the CFPB is again interested in RESPA section 8. The CFPB has not had a public enforcement on RESPA section 8 since its legal position on RESPA section 8 in the PHH case was rejected by the D.C. Circuit in 2018, which I wrote about here and here (and which the Opinion does not mention). The CFPB’s issuance of the Opinion could mean the agency is turning its supervisory and enforcement activities back to RESPA section 8. To that point, Director Chopra issued a statement on the Opinion, noting that this is part of the CFPB’s efforts to ensure the mortgage market is transparent and competitive (competition and transparency are known to be important to Director Chopra) and that, “the CFPB often receives complaints about RESPA violations from mortgage professionals.” Many CFPB investigations may be initiated on the basis of complaints.
We have seen many different iterations of such online platforms or marketplaces, as well as other business arrangements that may implicate RESPA section 8 concerns. Many of these arrangements do involve technology and data sharing, which could implicate privacy, FCRA, and other issues as well, and the CFPB would not hesitate to bring up multiple violations. Also, from the CFPB’s discussion of RESPA section 8(c)(2), and how payments can be disguised referral fees, it appears that the CFPB plans to dig into the fine details of such platforms and arrangements.
Considering the CFPB’s potential renewed focus on RESPA section 8 compliance and these types of platforms, it is important for companies to review their platforms (and other business arrangements) for compliance with RESPA and other consumer financial services laws.
You can find the CFPB’s advisory opinion here.
Please email me at rich@garrishorn.com if you would like to discuss.
[1] I really wanted to write RUN-DMC.
