Learning from NewDay: Referral Fees and Deceptive Practices
Written by Eliott C. Ponte, Regulatory Compliance Counsel
On February 10, 2015, the CFPB announced a consent order with NewDay Financial, LLC (NewDay) regarding two violations resulting from its marketing practices. First, the order states that NewDayÃ¢ÂÂs marketing constituted unfair and deceptive acts and practices (UDAAP) in violation of Dodd-Frank. Second, NewDay engaged in referral arrangements with a veteranÃ¢ÂÂs group that violate the Real Estate Settlement Procedures ActÃ¢ÂÂs (RESPA) prohibition against kickbacks for referrals of federally related mortgage loans.Â The CFPB assessed a $2 million civil money penalty under the consent order.Â The facts as described in the consent order do not involve typical marketing service agreements; however, the consent order makes clear that endorsements of a company in advertisements are considered referrals by the CFPB, and failing to disclose material information to consumers regarding a marketing relationship is deceptive under UDAAP.Â
UDAAP Violation. The marketing agreement listed NewDay as the exclusive lender and Ã¢ÂÂlender-of-choiceÃ¢ÂÂ of a not-for-profit VeteransÃ¢ÂÂ Organization (the organization was not named in the consent order).Â Under the marketing agreement, NewDay sent direct advertisements under the VeteransÃ¢ÂÂ OrganizationÃ¢ÂÂs name, which promoted the relationship between the two companies and recommended the use of NewDayÃ¢ÂÂs mortgage products.Â One advertisement also stated the VeteransÃ¢ÂÂ Organization endorsed NewDay after spending significant time with NewDayÃ¢ÂÂs management and loan professionals.Â Another advertisement indicated that NewDay had become the Ã¢ÂÂexclusive providerÃ¢ÂÂ of mortgages based on NewDayÃ¢ÂÂs Ã¢ÂÂhigh standards for service and the excellent value of their programs.Ã¢ÂÂÂ VeteransÃ¢ÂÂ Organization members were not made aware of the agreement between NewDay and the Veteran Organization and this information was not made public.Â Â Based on these facts, the CFPB found that NewDayÃ¢ÂÂs failure to disclose its arrangements with the VeteransÃ¢ÂÂ Organization would likely be material to consumers choosing a lender and likely be misleading to Ã¢ÂÂreasonableÃ¢ÂÂ consumers.Â Accordingly, the CFPB concluded that NewDay engaged in deceptive acts or practices in violation of UDAAP.Â
RESPA Violation. Recall that under RESPA, Ã¢ÂÂ[n]o person shall give and no person shall accept any fee, kickback or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a settlement service involving a federally related mortgage loan shall be referred to any person.Ã¢ÂÂ RESPA also broadly defines the terms Ã¢ÂÂreferralÃ¢ÂÂ and Ã¢ÂÂthing of value.Ã¢ÂÂÂ SeeÂ 12 C.F.R. ÃÂ§ 1024.14.Â
NewDay's marketing agreement with a not-for-profit VeteransÃ¢ÂÂ Organization was arranged and coordinated by a Broker Company (unnamed in the Order), which contracted directly with NewDay on behalf of the VeteransÃ¢ÂÂ Organization.Â Under the agreement, NewDay paid a monthly Ã¢ÂÂlicensing feeÃ¢ÂÂ of $15,000 to the Broker Company.Â In addition, NewDay paid Ã¢ÂÂlead generation feesÃ¢ÂÂ to both the Broker Company and the VeteransÃ¢ÂÂ Organization for members who contacted NewDay to inquire about loan products.Â The Broker Company also paid the VeteransÃ¢ÂÂ Organization a portion of the fees the Broker received from NewDay. The CFPB found that the payments made by NewDay to the VeteransÃ¢ÂÂ Organization and the Broker constituted payments for referrals in violation of Section 8 of RESPA.Â
The key takeaway form this consent order is that marketing agreements involving third-parties can carry risks relating to both UDAAP and RESPA.Â Referrals exist in many forms and fees cannot be paid for those referrals.Â Meanwhile, to the extent that the content of an advertisement contains a particular endorsement, credit unions should note that in the CFPBÃ¢ÂÂs eyes, that conduct may be deemed as a misleading representation in violation of UDAAP.Â This enforcement action highlights the importance of ensuring that members are informed about marketing agreements and lenders avoid referrals for federally-related mortgage loans.Â Credit unions considering omitting material information should proceed with caution, and when appropriate, seek advice from local counsel familiar with UDAAP. For more information on RESPA kickbacks, NAFCU members can check out this monthÃ¢ÂÂs Compliance MonitorÂ (log in required).