There are a number of challenges mortgage lenders need to be aware of in their marketing and communication efforts, including advertising. The agencies and the regulations covering deceptive advertising and fair lending are more than just an alphabet soup of government acronyms. And they’re not something only your compliance officer needs to be aware of.
Advertising in all forms is most certainly on regulators’ radars. They’re looking for violations associated with a number of laws, including fair lending and the prohibition on unfair, deceptive, or abusive acts or practices (UDAAP). The things covered by these regulations and the penalties for violating them might surprise you.
Prior to passage of Dodd-Frank, legal enforcement for Unfair, Deceptive Acts and Practices (UDAP) in lending and commerce fell to the Federal Trade Commission (FTC). Under Dodd-Frank, the rules were expanded to include “abusive” acts, adding enforcement powers to the Consumer Financial Protection Bureau (CFPB).
As a result, there is now an overlap in the enforcement powers of the different federal agencies for UDAP and UDAAP violations. If you’re not careful, failure to understand this change could put your company in double jeopardy. There’s more here than just an extra letter “A.”
The CFPB has adopted the same definitions as the FTC for what is considered to be “unfair” and “deceptive.” So when a lender is found to be in violation by the FTC, odds are the same entity will be audited and found to be in violation by the CFPB, and vice versa—the double whammy.
Further, the FTC and CFPB entered into an agreement, via a Memo of Understanding, to work together to coordinate their enforcement of UDAP and UDAAP. Under this agreement they:
Meet regularly to discuss their activities;
Notify each other before beginning an investigation or bringing an enforcement action, or prior to filing any consent order, decree, or settlement agreement; and
Consult on final UDAAP rulemaking.
The CFPB has made clear its focus will be on fair lending in 2017. This will include redlining as well as unfair, deceptive, and/or abusive advertising.
Lenders, both banks and non-banks, need to be very careful in their lending and advertising practices to stay well within the confines of the law. Otherwise, they’ll face the two-pronged approach to UDAAP enforcement from both agencies, not to mention the potential for further action from state regulators. The CFPB might also add a claim of redlining for good measure—you just never know.
Understand “Unfair” and “Deceptive”
So, what exactly constitutes “unfair” and “deceptive”?
In general:
Unfair is an act or practice that causes, or is likely to cause, substantial injury or harm to consumers which they cannot reasonably avoid, and is not outweighed by a countervailing benefit to the consumer or competition.
Deceptive is an act or practice that is a material misrepresentation, omission, or practice that is likely to mislead a consumer when the consumer is acting reasonably.
What about “abusive”?
Dodd-Frank added the element of an act being “abusive.” This is one that materially interferes with a consumer’s ability to fully understand a term or condition of a financial product or service, or one that takes unreasonable advantage of the consumer’s lack of knowledge and understanding of the risks, costs, or conditions of the product or service; their inability to protect their interest; or their reasonable reliance on the lender to act in their best interests.
The following are some examples of what regulators consider to be violations of UDAAP and fair lending laws:
Possible inaccurate information about interest rates, such as indicating a “fixed” rate for a variable rate loan
Misrepresentations of government affiliation
Misrepresentations that the consumer is pre-approved for or guaranteed specific rates or terms
Not offering the same products at the same rates in all areas serviced
Failure to indicate a rate is a low introductory rate that will increase after a predetermined period
In general, according to both the FTC and the CFPB, an entity is in violation when its acts or practices—which covers communication and advertising in any form of media, including social media—mislead a consumer in making a decision that causes, or is likely to cause, any harm in any way. That’s a pretty broad spectrum for the potential of violations, especially when dealing with some of the complicated financing options currently offered to help consumers.
To make matters worse, a violating product, activity, action, or advertisement can have a waterfall effect for enforcement. A single violation may bring about multiple enforcement actions under UDAP and UDAAP rules, leading to extensive fines and penalties. For example, a violation found to be deceptive may also be found to be unfair and/or abusive.
Other laws with UDAAP implications include:
TILA, Reg. Z (Advertising)
Mortgage Acts and Practices Act
Fair Debt Collection Practices Act
Various State UDAP laws
All of these laws, in some way, shape or form, spell out the rules and requirements for advertising and disclosing product information and/or services to consumers. Any violation may end up being a UDAP and UDAAP infraction and bring about a related enforcement action, with fines and penalties from both the FTC and the CFPB that can reach into the millions, or more, depending on the violation and the number of consumer loans involved. Every lender would be wise to become fully familiar and compliant with the requirements of these laws, particularly as they relate to communications, marketing, and advertising done by the company and its individual originators on social media.
Be Vigilant with Communications
These laws were enacted to protect consumers from unscrupulous lenders’ advertising and activities meant to mislead, take advantage of, and harm the consumer. Sad but true, such lenders and their activities do exist in our industry. Unfortunately, some good lenders also unwittingly get caught up in the net of UDAP and UDAAP enforcement. This is due to a lack of understanding or full knowledge of the rules or from activities taken by employees thinking they are acting in the best interest of the company.
The CFPB recently fined three well-established reverse mortgage lenders—American Advisors, Reverse Mortgage Solutions, and Aegean Financial—for deceptive advertising tactics that misled consumers about the reverse loan products they offer. According to statements made by Richard Cordray, the CFPB’s director, these companies tricked consumers by advertising that they couldn’t lose their homes, would have no monthly payments, and could stay in their homes for the rest of their lives. Those statements are not true, according to the CFPB.
In the age of social media it is extremely important that lenders carefully and constantly monitor all communication with consumers. Lenders are probably already familiar with the Reg. Z requirements to clearly and conspicuously display payment and loan information in any product advertisement. However, they also need to be able to answer these questions in the affirmative:
Do all communications and product offerings or advertisements done by your originators via social media also carry such information?
Are these postings carefully monitored for legal compliance?
Do they accurately reflect the product or service offered so as to be reasonably understandable by the average consumer, without technical jargon or abbreviations, hidden fees, and/or other implications?
Are they a fair and understandable representation of what is being offered?
Simply put, any information provided to consumers must clearly represent exactly what product or service they should expect, the cost of the product or service, and under what specific conditions it is available. Any product or payment comparison must be of like products and services under the same conditions.
If, for example, a specific rate for a product offered is only available to applicants with a credit score above 720, then any advertisement or communication for that product at that rate must clearly indicate that condition. A consumer with a lower credit score should not be misled into believing he will receive the same product, at the rate advertised, for the same costs. The lender must ensure it delivers what it advertises. Otherwise, it may end up with a “bait and switch” violation.
The Double-Edged Sword
With the CFPB requiring additional data to be collected under HMDA in 2018 and then reported in 2019, it becomes even more important—if that’s possible—for lenders to ensure they have accurate origination information. Most lenders rely on their LOS to capture and store consumer and loan information, using that information to monitor loan quality and compliance. But this can be a double-edged sword. The LOS, and related technology, will definitely help streamline processes and reduce costs, but it also increases risk. The data entered or captured is only as good as the individual making the entry. Unless all HMDA, and other loan information, is electronically captured and entered directly into the LOS, there is way too much room for errors—errors that can result in a UDAAP claim, or worse.
In addition to monitoring consumer data, product information, and lending trends, the information entered into the lender’s LOS will help determine the loan’s quality and compliance. Such information will determine what is disclosed to the consumer under the new TRID rules, and when those disclosures are issued. It will also be used to determine the loan approval and the value of the underlying collateral. Finally, such information will be the basis to populate the final property, product, and consumer information in the final legal and closing documents.
As you can clearly see, it is imperative that the LOS data be absolutely accurate in every detail. Otherwise the loan is built on a very shaky foundation.
Be Careful, Clear, and Honest.
To help avoid UDAAP violations, lenders need to understand the rules, train their employees, monitor all advertising and consumer communications, and ensure the integrity of the information used for the loan in their LOS. Web advertising and advertising done via social media carry the same legal requirements as those done in print media, on the radio, or on TV. There are no exceptions. They all must be crystal clear regarding what is being presented, under what specific terms, for what period of time, including any special conditions or considerations, and spell out what the consumer may expect in return.
This isn’t rocket science; it’s just good old-fashioned, honest advertising; customer service; and data integrity. Know what you originate; advertise what you sell; and deliver what you advertise. That will go a long way in helping to avoid any UDAP and/or UDAAP enforcement actions, as well as other loan defects that will get you into trouble.
Stay compliant, my friends.