The CFPB has issued another Consent Order finding certain marketing and advertising services arrangements to violate RESPA's prohibition on kickbacks. The CFPB required the lender, NewDay Financial, LLC ("NewDay"), to pay a civil money penalty of $2,000,000. Additionally, the CFPB fired a "shot across the bow" regarding endorsements, finding that the arrangement here failed to disclose material information and accordingly was deceptive under UDAAP.
NewDay entered into an agreement for marketing services with an unnamed nonprofit organization ("Veterans' Organization") serving veterans, with the agreement made and coordinated through a third-party broker ("Broker") that managed the relationship between NewDay and Veterans' Organization. Under the arrangements, NewDay was designated as the "exclusive lender" and as the "lender-of-choice" of the Veterans' Organization. NewDay drafted and sent out advertising materials to members of the Veterans' Organization. The communications were identified as being from the Veterans' Organization, and they promoted the relationship between NewDay and the Veterans' Organization and recommended the use of NewDay's mortgage products.
Members of the Veterans' Organization who contacted its call center for information on mortgage products were referred to NewDay. Additionally, the Veterans' Organization web site was linked to the Broker's web site, which in turn linked to the NewDay web site. According to the Consent Order, the Broker's web site identified itself to visitors as a part of the Veterans' Organization web site, and recommended and referred visitors to NewDay as a source for home loans, through links and phone contact information.
For approximately four (4) years, NewDay paid a monthly "licensing fee" of $15,000 to the Broker. Additionally during the same period, NewDay made payments to both the Broker and the Veterans' Organization for members who contacted NewDay to inquire about loan products, with such fees referred to in the arrangement as "lead generation fees". The Broker also paid the Veterans' Organization a portion of the fees Broker received from NewDay.
The advertising materials sent to the members endorsing the NewDay loan products specified certain reasons why NewDay had been selected as the Veterans' Organization lender-of-choice. Similar statements were also provided to callers during phone conversations with prospective applicants, implying that NewDay had been carefully selected by the Veterans' Organization based on performance. There was no mention, however, of the payments that were being made by NewDay to the Veterans' Organization for its endorsements.
One advertisement indicated that the Veterans' Organization had chosen NewDay to be its exclusive provider "after spending significant time with the company's management team and watching its loan professionals in action", whereas another advertisement indicated that NewDay had become the "exclusive provider of home loan programs based on their high standards for service and the excellent value of their programs." The CFPB found NewDay's failure to disclose its arrangements with the Veterans' Organization, while making affirmative statements setting out other purported bases for the endorsements, to likely be material and misleading. Accordingly, the CFPB concluded that NewDay engaged in deceptive acts or practices in violation of UDAAP.
With regard to the RESPA analysis, the CFPB noted that advertising communications were sent to pre-screened members of the Veterans' Organization, and the advertisements "referred" recipients to NewDay by encouraging and recommending that members use NewDay for its mortgage lending services. The CFPB concluded that NewDay's payments to the Veterans' Organization and the Broker in connection with the marketing of home loans under such circumstances were payments made pursuant to agreements and understandings to refer settlement service business in violation of RESPA.
In addition to the civil money penalty of $2 Million, the Consent Order contains provisions governing future conduct on the part of NewDay and its officers and employees. Significantly, it references the FTC Guides on Endorsements ("Guides"), and prohibits NewDay from entering into any business relationship utilizing third-party endorsements in a manner inconsistent with the Guides. As a result, the failure to disclose the compensated endorsement was not only a deceptive act or practice which violated UDAAP, but was also inconsistent with the Guides. Persons using endorsements in their marketing arrangements should review this decision and the Guides carefully.
Finally, recall that HUD indicated in its home warranty interpretation in 2010 that a recommendation directed to a particular person (as compared to a more general endorsement directed to the public at large) constitutes a referral that may not be compensated. Though not expressly mentioned in this case, the letters to individual members of the Veterans' Organization recommending the use of NewDay, and the referrals of Veterans' Organization members calling the Veterans' Organization call center, would certainly raise questions regarding whether those were referrals directed to a particular person and accordingly not compensable on that basis as well.
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