This article was originally published by Law360 on February 23, 2023 and is republished here with permission.
The Consumer Financial Protection Bureau ended a more than decadelong hiatus since the last formal guidance regarding Section 8 of the Real Estate Settlement Procedures Act on Feb. 7 by issuing its advisory opinion aimed at referral activity relating to mortgage comparison websites.
The last formal RESPA Section 8 guidance was issued by the U.S. Department of Housing and Urban Development, and the latest advisory opinion is the first that the CFPB has issued since it assumed authority for RESPA in 2011.
The CFPB uses its advisory opinion to remind the real estate settlement services industry that RESPA's anti-kickback principles apply to the modern digital marketplace.
RESPA Section 8
Section 8(a) of RESPA prohibits giving or receiving any fee, kickback or a so-called thing of value in exchange for the referral of settlement services with the closing of a federally related mortgage loan. Services that occur at or prior to the purchase of a home, such as mortgage financing, are typically considered settlement services.
In general, paying or receiving referral fees for a settlement service, unless a specific exemption applies, is illegal under RESPA. While RESPA Section 8(c) lists various kinds of payments that are not prohibited by RESPA, including an exemption for services rendered, the referral of a settlement service is not compensable under that exemption.
RESPA broadly defines a referral to include any oral or written action directed to a person that has the effect of affirmatively influencing the selection by any person of a settlement service provider or a related incidental business.
Digital Comparison-Shopping Platforms
The CFPB advises that operators of digital mortgage comparison-shopping platforms may not be compensated for engaging in activity that qualifies as referral activity under RESPA, even under the guise of providing online advertising or lead generation services.
The CFPB defines digital mortgage comparison-shopping platforms as those "that include information or features that enable consumers to comparison shop options for mortgages and other settlement services, including platforms that generate potential leads." The advisory opinion sets forth a three-part test for when activity on such platforms violates RESPA:
1. Nonneutral use or presentation of information about a settlement service provider on the platform;
2. Such nonneutral 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; and
3. The operator receives a payment or other thing of value that is, at least in part, for such referral activity.
The CFPB criticizes such practices as impeding consumers' "ability to engage in meaningful comparison of options." Its 27-page advisory opinion goes on to provide nearly six pages of examples of conduct that may violate RESPA.
In a footnote, the CFPB states that disclosure addressing how participating settlement providers' information is used and presented would generally be insufficient to overcome a conclusion that an operator was engaged in referral activity.
While the advisory opinion focuses on mortgage comparison sites, its RESPA principles also apply to digital comparison shopping platforms that feature other real estate settlement services, such as, for example, homeowners insurance provided in connection with a RESPA-covered loan — including, in certain cases, other real estate settlement services offered by affiliates.
The advisory opinion also cautions operators of digital mortgage comparison-shopping platforms that a litany of other laws and regulations potentially apply to their conduct, including Dodd-Frank Act prohibitions on unfair, deceptive or abusive acts and practices; the Truth in Lending Act; the Fair Credit Reporting Act; the Telemarketing Sales Rule; the Telephone Consumer Protection Act; federal privacy laws; and a variety of state laws.
The CFPB's new guidance is a reminder that RESPA referrals potentially can occur in the digital marketplace, from endorsement language to the use of programmatic, e.g., algorithmic, functions. As always, a Section 8 analysis will be heavily dependent on the actual facts and circumstances.
In light of the advisory opinion, anyone who, in a compensated arrangement, operates or participates in a digital comparison-shopping platform for real estate settlement services should revisit RESPA and related regulatory risk.
This fresh look should consider the information used to generate comparison options, procedures for selecting participating providers, and the manner in which the platform generates and sells leads.
Moreover, according to the advisory opinion, merely making information about a settlement service provider's products available to consumers for comparison with the products of other providers is not itself a violation and, indeed, may be a compensable service.
However, the nonneutral use or presentation of information that steers a consumer or affirmatively influences a consumer to use a particular settlement service provider is likely to be viewed as a referral that is not compensable. In that instance, the CFPB indicates that disclosure, i.e., regarding how the information is being used or presented, generally would not be a defense.
The CFPB expects operators to know whether their platform uses or presents information in a nonneutral manner, even if it is the product of a complex algorithm or formula. Similarly, the CFPB believes that settlement service providers that have contracted to participate in a digital comparison-shopping platform "likely would know" whether the platform is structured in such a manner.
The agency may examine fees paid by similarly situated settlement service providers that participate on the same platform, with the perspective that a fee differential can be evidence of a Section 8(a) violation. The advisory opinion cautions, however, that any payment for nonneutral placement on the platform — rather than merely making information available to consumers for comparison purposes — is problematic, even without any fee differential.
The CFPB's view is that even if a digital mortgage comparison-shopping platform uses and presents information in a neutral fashion, subsequent promotional activity by the operator that steers a consumer to use a particular settlement services provider soon after the consumer performed the comparison search can be problematic. Similarly, the CFPB warns that a "warm handoff" can be problematic behavior in a payment-for-services context.
The agency warns that affiliated business arrangements are not immune from the advisory opinion, such as if an operator uses the application to preference its own affiliate.
The new guidance does not, however, address how the CFPB would analyze a multifaceted online environment that encompasses a range of activity in addition to a digital comparison-shopping function, such as other separate webpages or apps that may advertise some of the providers on the comparison platform and/or an affiliated provider.
Legal experts are debating whether or to what extent the CFPB's analysis of a nonneutral presentation on a digital comparison-shopping platform might have relevance to other contexts that are covered by the RESPA Section 8 prohibition.
For those who engage in online activity without the use of a comparison-shopping platform, the advisory opinion in and of itself should not compel a fresh look. As always, however, online activity such as advertising, lead generation and the promotion of affiliated businesses may still be subject to Section 8 principles and should be vetted carefully for RESPA compliance.
The issuance of this RESPA advisory opinion suggests that RESPA enforcement is not as far down on the list of CFPB enforcement priorities as many may have thought.