The CFPB recently issued an advisory opinion entitled Real Estate Settlement Procedures Act (Regulation X); Digital Mortgage Comparison-Shopping Platforms and Related Payments to Operators.  The CFPB states that it issued the advisory opinion “to address the applicability of the Real Estate Settlement Procedures Act (RESPA) section 8 to operators of certain digital technology platforms that enable consumers to comparison shop for mortgages and other real estate settlement services, including platforms that generate potential leads for the platform participants through consumers’ interaction with the platform (Digital Mortgage Comparison-Shopping Platforms).”  The advisory opinion is effective upon publication in the Federal Register, which is scheduled for February 13, 2023.  This blog post is a brief summary of the advisory opinion.  For a fuller discussion of the advisory opinion, please click here.

In the advisory opinion the CFPB provides general guidance on how Digital Mortgage Comparison-Shopping Platforms (Platforms) may be operated in a manner that violates RESPA and other laws, and addresses five specific examples of arrangements that it believes to be non-compliant.  While CFPB mainly addresses RESPA, it appears that UDAAP concerns are a significant motivating force behind the issuance of the advisory opinion.  Ominously, the CFPB states that “[b]ased on the evolution of business arrangements and technology platforms, the CFPB’s market monitoring, and regulator activity, the CFPB understands that operators of . . . Platforms and participating settlement service providers in some cases may be engaging in activities that violate RESPA section 8.”

CFPB General Guidance

The CFPB sets forth this general interpretation of when the operator of a Platform violates RESPA section 8:

An operator of a Platform receives a prohibited referral fee in violation of RESPA section 8 when:

•  The Platform non-neutrally uses or presents information about one or more settlement service providers participating on the Platform;
•  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
•  The operator receives a payment or other thing of value that is, at least in part, for that referral activity.

The CFPB reflects what appears to be an underlying UDAAP concern when it states that an operator’s non-neutral use or presentation of information “impedes the consumer’s ability to engage in meaningful comparison of options and, instead, preferences certain options over others or presents options for reasons other than presenting them based on neutral criteria such as APR, objective consumer satisfaction information, or factors the consumer selects for themselves to rank or sort the settlement service providers on the platform.”  The CFPB then states in these situations, the payment received by the operator for the preferences or presentations of options “is not merely for compensable services; instead, it is, at least in part, for referral activity.”  The CFPB also observes that when an operator receives a higher fee for including one settlement service provider than it receives for including other settlement service providers participating on the same Platform, “that can be evidence of an illegal referral fee arrangement, absent other facts indicating that the payment is not for enhanced placement or other form of steering.” 

The concept of a referral under RESPA section 8 is very broad.  The CFPB states an operator of a Platform makes a referral when it “non-neutrally uses or presents information and that has the effect of steering the consumer to use, or otherwise affirmatively influences the selection of, a settlement service provider.”  Based on its view that the non-neutral use or presentation of information on Platform by an operator constitutes a referral to a favored lender, the CFPB advises that a RESPA section 8 violation would exist if there is an agreement or understanding between the operator and lender regarding the presentation and the lender provides the operator a thing of value.  The CFPB notes that the RESPA regulation, Regulation X, provides that an agreement or understanding can be established through a pattern, practice, or course of conduct.

After explaining how a RESPA section 8 violation can be established in connection with a Platform, the CFPB then addresses the RESPA section 8(c)(2) exemption.  Under that exemption, RESPA section 8 does not prohibit “the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.”  The CFPB advises that the exemption “does not provide a defense to payment of referral fees because referrals are not compensable services under RESPA.”  The CFPB appears to indicate that the RESPA section 8(c)(2) exemption would not avoid a RESPA section 8 violation in a situation in which (1) a Platform 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, because the operator would be receiving a payment that is not merely for compensable services.

Significantly, the CFPB states that even if the operator of a Platform receives the same fees from lenders, the non-neutral use or presentation of information still can constitutes a RESPA section 8 violation.  The CFPB explains that “[b]y steering the consumer to particular settlement service providers, even where the fees paid by those providers are the same as one another, the Operator is providing a different—and non-compensable—service from those identified as compensable under the [CLO Statement of Policy].”

CFPB Examples of Platforms That Violate RESPA Section 8

The CFPB sets forth five examples of Platform arrangements that the CFPB would deem to violate RESPA section 8, and the examples are illustrative and non-exhaustive.

Pay-to-Play and Steering to Highest Bidder.  A consumer is able to input relevant information on a Platform to aid in the consumer’s search for mortgage options, such as location, anticipated loan amount, and credit score, and the Operator represents that the Platform will use the information to identify the “best match.”  The Platform presents a purported “best match” lender to the consumer, or ranks the lenders, but skews the results of the comparison function to ensure that the “best match” is the highest bidding lender participating on the Platform.

The CFPB notes that this situation may also involve a UDAAP violation.

Payments Only From and Promotion of Lenders Who Rotate in Top Spot.  In a variation of the prior example, a Platform allows consumers to input information about their needs and then generate lender rankings.  All lenders participating on the Platform take turns appearing in the top spot randomly or based on a predetermined schedule.  That is, the rankings do not reflect a tailoring to the consumer’s needs based on their inputted information.  Additionally, the operator is paid by only the lender appearing in the top spot, or lenders pay in advance for the opportunity to appear in the top spot randomly or based on the predetermined schedule.

The CFPB notes that this situation may also involve a UDAAP violation.

Preferencing Platform Participants That Are Affiliates.  A Platform is designed and operated in a manner that steers consumers to use settlement service providers that are affiliates of the operator.  For example, a mortgage lender develops a Platform permitting consumers to search information about and view rankings of comparable mortgage brokers, and the Platform includes both affiliated and non-affiliated mortgage brokers.  However, the mortgage lender/operator manipulates the application of the ranking criteria so that its affiliated mortgage brokers appear higher than the non-affiliated mortgage brokers. The operator receives payments for the higher ranking of affiliated mortgage brokers.

The CFPB notes that this situation may also implicate the RESPA section 8(c)(4) provisions regarding affiliated business arrangements.

Additional Services That Promote Platform Participant.  A Platform gathers the consumer’s contact information and permits the consumer to generate a ranking of lender options based on criteria selected by the consumer.  The ranking reflects neutral use and display of information.  The operator contracts with one of the participating lenders (which is not necessarily the top-ranked lender) to promote that lender by sending a text message or email to any consumer who uses the Platform to generate a ranking of lender options.  The text message or email encourages the consumer to submit an application to that lender because it would be a good fit for the consumer’s needs.  

Warm Hand-Off.  The operator of a Platform presents comparison information on multiple lenders and uses an online long form to gather detailed information from a consumer who is browsing the Platform.  The consumer’s information relates to the consumer’s particular borrowing needs, such as credit score and target loan amount.  Soon thereafter, the operator calls the consumer to offer an immediate phone or live chat transfer to, or callback from, a lender participating on the Platform and tells the consumer that they will be “in good hands” with that lender.  However, the lender that receives the lead is merely the first lender to respond to the operator’s push notification alerting a network of lenders that a consumer is available for an immediate transfer, rather than a lender the operator identified as meeting the consumer’s needs based on the consumer’s inputted information.

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