December 15, 2015

WEBINAR Social Media and Mortgage Regulation: What’s Next?

WEBINAR Social Media and Mortgage Regulation: What’s Next?

Dan CarrollLending Compliance Specialistat Smarsh

Andrea Lee Negroni, JD

December 15, 2015

Social Media• Social media has been called a "sweeping cultural, social and

economic phenomenon." • It could transform the home mortgage industry. • There are 1.5 billion social media users, including 70% of

companies and 80% of those online. • Adoption and use has outpaced compliance guidelines. • Limited legal and regulatory guidance means lenders must

respond to consumer digital demands while avoiding regulatory risks.

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McKinsey Global Institute, "The social economy: Unlocking value and productivity through social technologies," November 2012.

Regulatory RisksRegulatory risks in a digital lending environment include: • Privacy breaches• Recordkeeping failures• IP infringement• Deceptive advertising• Claims of unfair or abusive lending process

Lenders are also concerned with infringing on their employees’ rights of expression.

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How is social media used in the residential

mortgage business? The FFIEC Guidance explains why financial institutions use social media – generating new business, interacting with customers, distributing information to users of financial services, and matching products and services to user needs.

Presently, social media is viewed as a tool for advertising and for customer solicitation. Some social messages do both. A lender might say on its Facebook page, "there's no better time to get a home mortgage," and promote loans alongside that message.

Under most state mortgage advertising rules, advertising includes materials intended to promote mortgage transactions, including those delivered by computer network or the web. Mortgage regulators are involved in oversight of social messages because mortgage companies are subject to advertising restrictions.

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AdvertisingLaws restrict advertising particular loan features (or advertising them without qualifiers or disclosures), or bar certain words.

Twenty-six (26) states prohibit specific words in advertising. • Washington disapproves advertising unqualified superlatives using the word "lowest." • A California lender may not advertise “low doc/no doc” or “no income/no asset” loans without

indicating these may have higher interest rates. • New York does not allow statements of “immediate approval” or “immediate closing” of mortgage

loans. • Terms like “bank” or “trust” are not allowed if a lender is not a depository institution.

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Advertising & RecordkeepingAdvertising is a recordkeeping issue because lenders must maintain advertising records. Recordkeeping rules are non-uniform.

• 27 states have advertising record retention rules• 17 have recordkeeping rules that apply to ads soliciting borrowers• 45 require lenders to maintain loan file records• 38 states have financial recordkeeping rules

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Regulatory ViewThe accepted regulatory view is that any message promoting a home mortgage loan is advertising. A few states have identified specific social platforms as falling within the sphere of regulated advertising:

• Nebraska considers Craigslist a platform for advertising (the lender must include its unique NMLS identifier in Craigslist ads)

• Nevada’s Mortgage Lending Division has identified Facebook, Twitter and Craigslist

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Advertising & ComplianceCompliance with advertising rules—may depend on where the advertising will be seen!

If it’s on a social app, it might be seen anywhere (check privacy settings!)

An Ohio Division of Commerce rule requires the registration number of a loan originator on every page of the company’s website, or on the homepage, with a link to the homepage on every other page. This information must be visible without scrolling beyond the screen borders. Missing information can be an Ohio advertising/recordkeeping violation.

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How might social media be used in the future? Social data may help predict financial needs. Information on social

platforms includes children in a household, hobbies, marriages, divorces and anniversaries, retirement, etc. A lender with access to a borrower’s social posts “knows his customer” better.

• A 20-something first time borrower with a 1 BR condo loan may be ready to buy a house after 6 or 7 years, requiring a larger loan or a refinance.

• A lender that considered the amount and amortization of a borrower’s student loans when her original mortgage was underwritten can approximate when her disposable income increases as a result of paying off the loans -- an opportune window for marketing additional credit.

• A person announcing a job promotion on social apps may be a good prospect for an expanded credit line.

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Mortgage loan underwritingFuture studies of social media may have implications for mortgage loan underwriting. A University of Pennsylvania study says certain types of social media use may reveal income levels.

• How will this information be used?• What is the appropriate regulatory role in supervising the users?

[“Penn study finds tweets reveal income level, social status of users,” citing research of Daniel Preotuic-Pietro (http://www.upenn.edu/pennnews/current/2015-10-01/latest-news/penn-study-finds-tweets-reveal-income-level-social-status-users), October 1, 2015.]

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Mortgage Regulators & GuidelinesMortgage regulators don’t yet have robust social media policies and enforcement guidelines, but they are aware of the rise in social media use by lenders. Their principal regulatory weapon is their authority to review records. Unhappy consumers complain to government officials through web portals or by public social messages. Knowing this, regulators will begin to ask lenders for social message records. They may also get access to messages from other parties (prospective borrowers, or real estate agents, title agents, and insurance agents).

Lenders should archive social messages, and review them periodically for complaints, resolutions, unapproved or noncompliant content, and advertising violations (even if technical).

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How should a lender keep its records to demonstrate compliance?

Regulators may find noncompliance if records aren't kept in a meaningful way. A Kansas rule requires retention of a phone or correspondence log, with notes detailing each contact with the borrower.

Social messages can be frequent, short, and abbreviated. They might use emojis instead of words. Adding notes to every contact between borrower and lender could be burdensome if each message in a communication thread is separate contact.

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Millennials as borrowers, and as regulatorsThe baby boomers are retiring. The regulatory agencies are hiring.

Agency staffs will include younger, more connected examiners, with lifelong social media habits. The next generation of regulators will use social platforms to monitor lender advertising, messages and conduct.

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“Complaint” Apps“Complaint” apps can be a landmine for lenders. Some allow complaints across multiple social platforms (e.g., :(omplainApp). Regulators look for complaints to identify for problems with specific lenders and brokers.

• Regulators are also establishing official complaint portals, making it easier for consumers to air grievances.

• HUD’s app permits housing discrimination complaints to be made via mobile devices (https://itunes.apple.com/us/app/housing-discrimination-complaint/id570755695?mt=8).

• After launching its complaint portal in 2012, mortgage complaints have doubled at the CFPB.

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Other regulatory uses for social media• Communicating enforcement actions to the public

• Notifying the public about unlawful conduct in the mortgage business, or publicizing fraud

• Notifying potential beneficiaries of refunds or remediation ordered against noncompliant lenders (e.g., if a lender is ordered to refund fees, the agency may announce the refund and solicit claimants via social apps)

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Where might regulation and social media intersect in the future?

• Mortgage agencies may require lenders to establish and document their social media policies.

• Regulators may insist on reviewing lenders’ social media policies.• They may require certain elements in those policies.• They may require that the policies apply to certain employees (retail loan officers, for

example).• They may require reporting of factors considered in credit decisions, including

consideration of social data.• They may require lenders to self-report instances of noncompliance with social media

policies.• They may expand exams to include social media policy compliance modules.• They may require lenders to have cyberbreach insurance or bonds.

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Risk of social messaging to advertise to affinity groups

Connections on social media may be based on demographic similarities or common interests.

Examples:• Mothers groups• Young professionals• Marathoners and triathletes • Marital status (parents without partners, Jewish singles, etc.)

Is marketing to these groups discrimination in favor of a protected class (or against another)?

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Does social media use increase a lender’s workload?

Can a lender ignore what is on social platforms?

Example: A customer writes "married" on his mortgage application and requests both spousal incomes be used in underwriting. But the man’s Facebook posts says he’s single (and not “in a relationship”).

What is the lender’s duty to investigate?

Does it change if the loan was solicited through a Facebook ad in the first place?

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Other Complicating Factors: Big Data / Privacy / Inaccurate Data

• Data can help lenders target customers based on factors like high-income zip codes, low LTV loan holders, or personal characteristics (including interests and social media posts) suggesting creditworthiness. Computer algorithms for identifying good borrowers could lead to fewer physical loan offices or mortgage counselors, limiting credit access in less connected communities.

• Social platforms aren’t always secure; breaches have occurred. The more social data a lender has, the greater the consequences of breaches and unauthorized disclosures.

• Personal information on social platforms isn’t always true -- it may have been posted with the intent to deceive. Social platforms have been used to perpetrate fraud.

“Flaws in [Snapchat’s] ‘Find Friends’ feature left the phone numbers and usernames of 4.6 million users exposed during the 2013 holiday season.” Andrea Peterson, “Calm Down, Internet. Snapchat’s new policy isn’t ‘scary,’” Washington Post, November 3, 2015.

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But social media use has upsides!• Lenders can use it to learn more about how employees communicate

with customers• Lenders can monitor customer reactions (i.e., perform sentiment analysis

to identify and categorize opinions as positive, negative, or neutral)• Lenders can predict regulatory scrutiny (based on complaints or negative

sentiment analysis) – possibly mitigating problems before they get out of hand

• Lenders can spot issues to be escalated (e.g., Jared Fogle, Subway ex-spokesman, or whistleblowing)

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ConclusionThe mortgage industry presently operates under vague social media “guidelines.” Implementing the guidelines is challenging, unfinished work.

Tailored messages that incorporate consumer data and interests in financial promotions via mobile apps may appeal to increasingly digital consumers, but they increase lenders’ legal, monitoring, analysis and recordkeeping workload.

Mortgage companies using social media must adopt robust programs for developing, vetting, storing, reviewing, and managing social messages and for identifying noncompliance, by subject matter and by source. Message records are a key tool in lender risk management.

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Questions?

Thank you!