Why it matters

Alleged deceptive marketing by a mortgage lender to veterans was at the heart of the Consumer Financial Protection Bureau’s (CFPB) latest enforcement action. NewDay Financial, LLC, “profited from the trust that veterans place in their veteran service organization,” Bureau director Richard Cordray said in a statement. “Veterans, and any consumers getting a mortgage, deserve honest information about lender endorsements.” NewDay failed to disclose that it paid a veterans’ organization to be named its “exclusive lender” in its marketing materials, an error the CFPB said constituted a deceptive act or practice in violation of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Further, because NewDay paid monthly licensing fees and lead generation fees to the organization—which encouraged members to work with the lender in direct mailings, call center referrals, and via its website—the fees were illegal kickbacks in violation of the Real Estate Settlement Procedures Act (RESPA), the Bureau said. The consent order requires the lender to pay a $2 million civil penalty and submit a compliance plan to the agency, along with other recordkeeping tasks. The CFPB includes an Office of Service Member Affairs, and products involving service members and veterans will get special scrutiny from the CFPB. The action is also a reminder that the CFPB is actively and aggressively enforcing the antikickback provisions of RESPA previously administered by HUD.

Detailed discussion

NewDay Financial’s primary business originates refinance mortgage loans guaranteed by the Veterans Benefits Administration, which are limited to service members, veterans, and their surviving spouses. To generate new customers, NewDay advertises via direct mail campaigns.

In 2010, NewDay reached a deal with a veterans’ organization to receive the right to call itself the group’s “exclusive lender.” In return, NewDay paid a $15,000 monthly licensing fee and provided “lead generation fees” to the veterans’ organization as well as the broker company that facilitated the agreement ranging from $15 to $100 per customer.

Over a three-year period between July 2011 and July 2014, NewDay sent more than 50 million mortgage solicitations by both postal mail and e-mail. In mailings targeted to members of the veterans’ organization, NewDay claimed that its “exclusive” status was based on its high standards for service and excellent value, the CFPB said.

For example, one mailer read: “[Veterans’ Organization] chose NewDay to be our exclusive Reverse Mortgage provider after spending significant time with the company’s management team and watching its loan professionals in action.”

In none of the marketing materials did NewDay disclose its financial relationship with the organization, a failure that violated Dodd-Frank’s prohibition of deceptive acts and practices, the Bureau explained.

The mailers also featured a recommendation from the organization to its members, urging them to use NewDay’s products. Coupled with the organization’s additional efforts on NewDay’s behalf, including telephone and web-based referrals, the recommendations amounted to a referral of settlement service business. Because NewDay paid the veterans’ organization for the referrals, the CFPB said the payments were illegal kickbacks under RESPA.

Pursuant to the consent order with the CFPB, NewDay terminated its relationship with the veterans’ organization and the broker company. Going forward, the lender may not enter into any business relationship involving third-party endorsements unless the deal is consistent with the Federal Trade Commission’s Guides on Testimonials and Endorsements.

Deceptive marketing related to mortgage credit products or assisting others in making misrepresentations is also prohibited and NewDay must no longer make payments for referrals. Within 60 days, the lender is required to submit a compliance plan to the Bureau to ensure that its marketing complies with all applicable federal consumer financial laws as well as the consent order.

The $2 million penalty will be paid to the CFPB’s Civil Penalty Fund.

To read the consent order in In the Matter of NewDay Financial, click here.