To apply a classic adage to an emerging issue, it’s time we evaluate whether marketing services agreements (MSAs) are a wolf in sheep’s clothing within the real estate industry. While many real estate businesses such as title companies, mortgage companies and real estate brokerage companies have created MSAs in recent years, do you really know whether yours is “safe”?
MSAs are often utilized in the real estate industry as a tool to define cross-marketing or co-marketing relationships among settlement service providers (such as real estate brokerage companies, title companies, mortgage companies and the like). It’s easy to get lured into thinking an MSA is a simple and harmless agreement without understanding what makes them lawful or illegal. MSAs can be beguiling, particularly when a party entering such an agreement believes it reflects a mutually beneficial relationship among business service providers but is unaware of the dangers that lurk below the surface.
When an MSA is properly structured and the relationship is appropriately managed, parties to an MSA can market together in harmony, without violating the law. Such an agreement might be structured to address a cooperative marketing arrangement within which an appropriate market value is paid to a real estate agent or broker for including a lender, title company or other settlement service provider in a direct mail campaign, an ad taken out in a local paper or magazine, or for the right to have a banner or sidebar advertisement on the agent’s website.
The wolf inside an MSA: RESPA, the CFPB and the real estate regulatory environment
Unfortunately, companies who enter MSAs often fail to understand or appreciate the risks such agreements and relationships carry. They see the sheep costume and don’t realize there is a wolf inside.
An additional dynamic that makes MSAs a risk-prone arena for the uninitiated is that they are easy fodder for regulators (in other words, “target practice”). Among other things, RESPA (the Real Estate Settlement Procedures Act) prohibits referral fees. The Consumer Financial Protection Bureau has regulatory authority to pursue violations of RESPA, and it has had an active presence in exploring companies in the real estate industry that it believes might be violating RESPA. MSAs are too regularly the result of a casual and hasty agreement between parties, with insufficient thought and consideration for whether the agreement reflects an appropriate relationship that is structured to be compliant with applicable laws.
As recently as September of this year, the CFPB issued a consent order in which it levied a $200,000 fine against a title company (Lighthouse Title) for alleged RESPA violations in connection with MSAs. The full consent order can be found here: CFPB consent order against Lighthouse Title. In short, the MSAs entered into between Lighthouse Title and certain real estate brokers are alleged to have been disguised referral fees; this is due in part to the parties’ lack of sufficient proof that the marketing fees paid pursuant to the MSAs were a reasonable and fair determination of market value. The fees were instead linked in part to referrals generated in connection with the agreement.
Risk is not limited to the text of the agreement but is also tied to the structure of the relationship between the parties
This order (and others that are likely to come) does not suggest that MSAs are inherently unlawful. Cars, guns and MSAs are not inherently legal or illegal without considering how they are utilized. If an MSA is thoughtfully considered, thoughtfully structured, negotiated with a full understanding of the rules of the road and maintained appropriately by the parties with careful regard to what issues may violate RESPA, the outcome may be fine.
Ideally, parties who enter into MSAs are mindful of RESPA and are cautious to ensure that the MSA is not simply window-dressing on what would otherwise be an impermissible financial exchange for the referral of business (since RESPA prohibits referral fees among settlement service providers). Unfortunately, many parties who enter into such MSAs presume that they are lawful, without understanding the dynamics and the considerations that make such an agreement lawful or illegal. Many of these dynamics go beyond the text of the agreement and must be analyzed and considered in the context of the relationship that is established.
Like many compliance and risk management matters in the real estate industry, simply having an attorney draft, review or negotiate an agreement isn’t enough. As I’ve referenced in a prior article, contracts define and create expectations and responsibilities among the parties. As a result, simply having a contract that reflects what the parties intend to do doesn’t mean that they actually accomplish that goal without problems or mistakes.
Review the MSA before agreeing to such a relationship
Before entering into an MSA, a real estate agent should check with his or her broker to determine whether the brokerage company permits or prohibits entering into an MSA with a settlement service provider. Brokerage companies might restrict agents from entering into such agreements altogether, or they might create a policy that prohibits an agent from entering into such an agreement without having it first reviewed by the broker, the agent’s own attorney and an attorney representing the interests of the brokerage company. Those brokerage companies that have not already evaluated such policies would be wise to consider such an idea.
Next, a title company, real estate agent/brokerage or mortgage company contemplating an MSA should involve their legal counsel in every step of the process. For some, the costs and risks associated will be a deterrent from entering into such an agreement. For others, the value of an MSA is sufficiently strong to merit the investment of time, financial resources and effort in ensuring it is done right.
You are responsible (for yourself as an agent or for your brokerage company if you are a broker or manager) to see beyond the beguiling pitch (sheep’s clothing) of an MSA, to explore whether there are any inherent or fundamental problems with entering into such an agreement, based not only on the terms of the agreement itself but also considering the surrounding context of how the parties anticipate the marketing relationship might work.
In the final analysis, it won’t take too many more $200,000 consent orders from the CFPB for the real estate industry to recognize that it may not want to be target practice for the regulators, and that MSAs carry an inherent risk beyond that which might be perceived on the surface. Wolves in sheep’s clothing can still be handled appropriately so long as we all know there’s a wolf inside.
Be sure to contact your own attorney to discuss whether your MSA should be reviewed and audited internally, before a regulator decides to do it for you. Feel free to share this article with your real estate colleagues and friends to help spread the word.
Brad Boyd has over 13 years of experience advising clients in business, real estate and contract matters. Follow him on Twitter.
Reposted with permission from LinkedIn.