Historically, there has been a popular view among those in the industry that one does not sell a reverse mortgage—one provides information about a reverse mortgage and over time a senior decides whether the loan is right for them. However, given recent regulatory developments, the practical ability to inform seniors about reverse mortgages on a nationwide basis bears further consideration and re-examination.
How does one sell or market a reverse mortgage in the current regulatory environment? Based on recent enforcement actions and pronouncements, the answer to this question has become more complicated and dependent on a company’s advertising and marketing strategies.
Sales are the lifeblood of any business, and generating and sourcing sales is a fundamental part of a company’s success. Until someone makes a sale, no one gets paid. But over the past year, some of the most important lead channels have come under attack. What follows is an outline of recent CFPB actions in relation to mortgage advertising, marketing and lead sales arrangements, several matters of which focus specifically on reverse mortgages.
Advertising: Not Too Small to Fly Under the Radar
Challenges arising from criticism of reverse mortgage advertising are not new. However, two recent developments bring these challenges back into focus. In February 2015, the CFPB filed suit against a Maryland-based mortgage broker, All Financial, for promoting faulty reverse mortgage advertising. The suit alleges that All Financial’s actions violated both UDAAP provisions and the Mortgage Acts and Practices – Advertising (Regulation N) or the MAP Rule. The substance of the allegations are not new: impersonating the government, misrepresenting that reverse mortgages have no required repayment, an aggressive and misleading call to action (“act fast, supplies are limited”). However, the process of policing them is new.
Three points can be gleaned from the All Financial matter thus far. First, it is litigation. The CFPB has many avenues of enforcement. It can bring administrative enforcement actions, make investigative demands (similar to a subpoena process), engage in administrative litigation or sue companies in court.
In the All Financial matter, the CFPB sued a mortgage broker in federal court. If that sounds serious, it is. With administrative enforcement actions (as opposed to litigation), such as consent orders, public settlement agreements are filed and some facts are discernable, but with the All Financial litigation, there are detailed allegations in public court filings, with exhibits of alleged faulty advertising and even copies of emails between the broker and its third-party marketing company vendor—all very transparent.
Second, as stated, All Financial is a mortgage broker, not Bank of America or Wells Fargo—it is not “too big to fail.” Some were concerned that when Dodd-Frank was enacted, some companies would be “too small to comply.” However, with the All Financial case and other CFPB enforcement actions, one thing has become abundantly clear: No company is too small to fly under the CFPB’s radar, and that goes for company officers as well. One point bears repeating: In many enforcement actions, the CFPB is also going after company executives.
In 2011, the FTC instituted the MAP Rule, which, among other things, prohibits misdealing and deceptive mortgage advertising. Authority to implement the MAP Rule transferred to the CFPB as part of the Dodd-Frank Act. The Dodd-Frank Act also mandates that the CFPB police and prohibit so-called Unfair, Deceptive or Abusive Acts or Practices (UDAAP). In the All Financial matter, the complaint was based on allegations of non-compliance with the MAP Rule, as well as allegations of violations of UDAAP provisions.
This leads to the third point: In the review of reverse mortgage advertising, the CFPB will know deceptive or misleading advertising when it sees it. On one hand, in cases like All Financial, if the allegations are true, one could surmise how the CFPB might disapprove of such advertising strategies. However, in other cases, it is more difficult to understand the source of the CFPB’s displeasure.
In June 2015, the CFPB issued a report entitled “A closer look at reverse mortgage advertisements and consumer risks.” This is a curious document. Unlike prior CFPB pronouncements (such as guides, bulletins or even rulemaking), this 15-page document is based on the bureau’s review of reverse mortgage marketing materials, conversations with focus groups and one-on-one interviews with seniors who reviewed reverse mortgage advertising. Before showing the ads to seniors, the CFPB stated that, on their face, the ad materials it collected were confusing, incomplete and inaccurate regarding borrower requirements, government insurance and borrower risks. With that as a precursor, could one be surprised about the bureau’s final conclusions?
After viewing ads with focus groups, the CFPB reported that many consumers were confused or had misconceptions about important features and terms of reverse mortgage loans. Some consumers struggled to understand that reverse mortgages are loans that must be repaid with interest. Consumers also often misinterpreted the role of the federal government in the reverse mortgage market as providing consumer protections that are not actually offered.
The CFPB went on to state that advertisements frequently do not describe all the details of the particular product or service being advertised. Interestingly, however, some consumers participating in the survey noted that television ads they saw presented “neutral” information. One consumer described television ads as “more informative than trying to sell you something… it seems like he’s just trying to give you information.” If reverse mortgages are complex, as the CFPB posits, how can a lender explain all of the features of a reverse mortgage in a 15- or 30-second advertisement? Further, advertising air time can be expensive. So, many reverse mortgage advertisements encourage seniors to call in and request additional information in the form of handbooks, DVDs and other materials. It would be interesting to determine seniors’ views of the reverse mortgage after reviewing this additional information.
Paying for mortgage marketing services, if done properly, is permissible under RESPA. However, since 2010, marketing services agreements have been under attack, first by HUD and now by the CFPB. At the core of both agencies’ concerns is the possibility that the marketer might steer or refer a consumer to the company being marketed. In 2010, HUD issued an interpretive bulletin specifically regarding Realtors’ sales of home warranties, but which had broader implications for marketing services agreements in the mortgage market in general. In the bulletin, HUD expressed concerns that the company (in that case, a Realtor) marketing a settlement service provider might be in a position to influence a consumer to use the settlement service provider (in that case, a home warranty company).
In September 2014, the CFPB announced an enforcement action against Lighthouse Title for an allegedly faulty marketing services agreement. If mental gymnastics were an Olympic sport, the CFPB would have won a gold medal for the reasoning it utilized in its actions against Lighthouse Title. Without even mentioning or making reference to the prior HUD bulletin on home warranty sales, the CFPB concluded that the mere existence of a marketing services agreement is in itself a “thing of value” as defined under RESPA. Thus, notwithstanding the fact that actual and reasonably valued marketing services may be performed under a marketing services agreement, if the marketing company is also making direct referrals of consumers to the mortgage company, that is in itself a RESPA violation and the legitimate services being performed under the marketing services agreement cannot be used to defend such referrals.
This action by the CFPB has had a chilling effect on the use of the marketing services agreements in the mortgage market, and two large mortgage companies recently announced that they would no longer use such agreements.
In February 2015, the CFPB entered into a Consent Order with NewDay Financial. In the order, the bureau alleged that NewDay engaged in deceptive acts by failing to disclose payments to a veterans’ organization that endorsed NewDay, and that payments under a marketing services agreements constituted illegal payments for mortgage referrals.
In the mid-1990s, HUD staff had issued a since-withdrawn informal RESPA opinion indicating that lead sales arrangements where payments are made for a list of names would not be in violation of RESPA, as long as the payment per name was nominal and did not take into account the value of any endorsement by the lead seller of the company purchasing the leads.
Leads sales arrangements in the mortgage market today are vastly different from HUD’s informal opinion on lead sales in the mid-1990s. Nonetheless, in the NewDay matter, the CFPB won another medal in mental gymnastics when it reasoned that not disclosing an endorsement in a lead sales arrangement constitutes a UDAAP violation. If under RESPA payments for a lead cannot include the value of the endorsement, but under UDAAP a lead buyer must disclose that it paid for an endorsement, well… Checkmate!
In 2012, in response to questions submitted by FHA mortgagees regarding a mortgagee letter, FHA issued a response to the following frequently asked question: Does a sponsoring mortgagee have to include the review of its sponsored TPO’s advertising materials in its Quality Control Plan?
HUD replied: All FHA-approved lenders must include a process for reviewing all advertisements generated by or on behalf of their company for compliance with HUD/FHA advertising requirements as part of their Quality Control Plan.
Lenders must ensure that they take prompt corrective action upon discovering any violation of advertising requirements. This includes advertising abuses by employees of the lender, and any violations committed by employees of non-FHA-approved lenders, sponsored TPOs, marketing firms, or companies that advertise or generate borrower leads or other business on behalf of the lender.
Relators and Home Builders:
Traditionally, many mortgage companies preferred to enter into various agreements with realtors and/or home builders in order to source HECM for Purchase business. Such agreements might include marketing services agreements, desk rentals or the sharing of joint advertising expenses. The challenges with marketing agreements are outlined above. Properly structured desk rentals can be viable, but they raise state mortgage branch licensing issues, and the payments should be based on the fair market value of the rental space and not on the volume of mortgage business generated from the arrangement. In joint marketing arrangements, the sharing of third-party advertising expenses (for example, newspaper ads) should be done equitably based on the cost and exposure of each party. For instance, if a Realtor and mortgage company take a full-page ad and each are displayed equally, the companies should spilt the cost evenly.
In the reverse mortgage business, there are potential sources of business from other professionals, such as elder care attorneys, long-term care agents and financial planners. Where financial planners and long-term care agents are concerned, in addition to the above challenges with marketing agreements and other structures (if utilized), lenders must be cognizant of the so-called McCaskill provisions under the HECM statute, which place limitations on activities around the so-called “cross-selling” of other financial services products with reverse mortgages. About a dozen states have similar laws with limitations on cross-selling other financial services products with reverse mortgages. California imposes such limitations both on mortgage companies involved in the offering of other financial services products and insurance agents involved in the promotion of reverse mortgages.
Conclusion and Some Practice Tips
The CFPB has stated more than once that reverse mortgages are complex financial transactions. However, the bureau has criticized some reverse mortgage advertising as incomplete. Some rule of reasonableness is in order here, and the CFPB should recognize and understand that not all of the features of a reverse mortgage can be explained in a 15-second advertisement. The CFPB should also understand that a senior does not see a celebrity on TV and immediately pick up the phone and apply for a reverse mortgage. It just does not happen that way. This points to the fundamental flaw in the CFPB’s latest report on reverse mortgage advertising, which the bureau even seems to recognize in its own report: “Focus groups are not intended to give us statistically significant data that can be generalized to all consumers.”
Nonetheless, what is a mortgage company to do to source reverse mortgage business in such a regulated environment? This may depend on your company’s marketing and advertising strategy. However, in today’s environment, there is no excuse for not knowing the “black letter of the law” (including the UDAAP provisions of Dodd-Frank and the MAP Rule). Although this law and rule can be amorphous, one can glean how the CFPB will proceed with enforcement by reviewing settlements and actions taken specifically in the reverse mortgage arena, and the mortgage market in general.
You also must know your counterparties and vendors and their reputation in the market, including whether they had consumer complaints or regulatory actions, and if so, what corrective actions have been taken. Now, every company is required to have compliance systems and policies and procedures in place, even small companies. As the CFPB’s actions have demonstrated, it does not discriminate in its investigations and enforcement actions based on a company size. Must a mortgage company review every vendor with which it conducts business? When it comes to mortgage broker advertising, HUD seems to think so. The CFPB has also issued guidance on vendor management and mortgage companies’ responsibility to review and monitor their vendors. You are “your brother’s keeper.” If you do not embrace this, at least accept it. At a minimum, a risk-based approach should be undertaken with the review of your most active counterparties and largest vendors first.
Regarding marketing services agreements, a fundamental question now is whether to do them at all. If one decides to engage in marketing services agreements, they must be well documented, the marketing services should be valued by a third party, and the implementation of the agreements must be closely monitored to ensure that only marketing services are being performed and there is no direct referral activity.
Recordkeeping is mandatory and robust recordkeeping is imperative. This includes documenting all agreements with third parties—including mortgage brokers, advertising agencies or marketing companies and Web masters—as well as keeping copies of all advertisements and the dates they were disseminated. Have a process in place for reviewing and approving advertisements in light of regulatory requirements.
Do not pay “based on success.” When it comes to marketing agreements, lead sales and desk rentals, pay for marketing services, on a per name basis, or for the value of the space rented, respectively, and not the volume of mortgage business (such as submitted applications or loans closed) due to or derived from such a channel or relationship. And do not “mix and match.” If you have a marketing services agreement, do not combine it or place elements of a lead sale arrangement in or with it. If you have a desk rental or marketing services agreement, do not also engage in joint advertising under the same agreement with the same party.
And remember, in today’s environment, neither you nor your brother is too small to fly under the radar.