The Relationship between Marketing and UDAAP
Lenders must carefully ensure that all potential motivations for advice, recommendations, and referrals are provided to borrowers, as the Consumer Financial Protection Bureau has positioned itself to utilize Unfair Deceptive or Abusive Acts Practices claims as an enforcement tool.
The CFPB entered into a consent decree last week levying a $2 million civil penalty against NewDay Financial for its marketing activities.
According to the CFPB, NewDay entered into marketing relationships that involved a marketing broker facilitating a relationship with a veterans organization. The broker was paid a $15,000 monthly licensing fee, and both the veterans organization and the broker received a lead generation fee for each borrower that contacted the lender. The amount of the lead generation fee varied upon the nature of that contact. In exchange, the lender was deemed the exclusive lender for the veterans organization and letters were sent to members strongly encouraging members to use the lender for borrowing needs. Notably, members were not told of the financial arrangement between the parties.
From a RESPA perspective, it is not shocking that they found the above conduct violated RESPA. The exclusive relationship, direct borrower communications, and the fee per borrower compensation plan in combination are problematic under RESPA Section 8. What is more noteworthy about this case is that the CFPB found that the lender had committed an unfair and deceptive act by failing to disclose the financial relationship between the parties in connection with the communications to borrowers.
What this means is that lenders in any type of marketing or referral relationship — even when services are legitimately provided and paid for via a lawful MSA relationship — must disclose the compensation or risk a claim that the failure to disclose the financial relationship was unfair or deceptive. Moreover, it potentially opens the door to UDAAP claims in connection with other areas — such as loan originator compensation — where potential permissible distinctions in compensation (such as for a HELOC vs. second mortgage) are not disclosed to borrowers who are being advised of their options. When in doubt, until the CFPB finds satisfaction with lenders' marketing practices, disclose early and disclose often.
Ari Karen is an attorney specializing in regulatory compliance at Offit Kurman.