Confused about the term “marketing service agreements” (MSAs) that regulators keep tossing out? The National Association of Realtors has published a list of “do’s” and “don’ts” for Realtors who may be contemplating entering into MSAs with lender partners.
A recent Inman survey shows that real estate agents and brokers are keen to establish MSAs with mortgage brokers and other lender partners, but they aren’t quite certain about the legalities of such arrangements, particularly as federal regulators are closely examining these relationships to make sure they are compliant with the Real Estate Settlement Procedures Act (RESPA). (Inman will release the full results of this survey in an upcoming special report.)
MSAs are formal relationships between settlement service providers in which the partners cross-market or co-market each other’s services. Under an MSA agreement, a real estate agent or broker may make mention of a lender, title company or other settlement service provider in a direct mail campaign, a newspaper advertisement or a website banner, to name just a few examples of marketing services.
An MSA can have tremendous benefits for its partners, but they must be carefully structured to make sure the partners are RESPA-compliant. RESPA permits agents and brokers to provide such goods and services, but only if they are offered at fair market value. Violators of RESPA are subject to harsh penalties, including triple damages, fines and even imprisonment.
MSAs have been a source of intense industry debate since Sept. 30, 2014, when the Consumer Financial Protection Bureau (CFPB) announced a consent order and $200,000 penalty against Michigan title insurance company Lighthouse Title Inc. for entering into what the bureau called “illegal quid pro quo referral agreements” with real estate brokers and others. According to the CFPB, Lighthouse Title provided marketing and advertising services to their partners “with the agreement or understanding that in return, the counterparties would refer closings and title insurance business” to the title company. The CFPB was particularly concerned that Lighthouse Title’s MSAs were tied to a specific number of referrals or revenues generated by those referrals, which is not permitted under RESPA.
The bureau’s enforcement action was considered to have an immediate chilling effect on MSAs nationwide, and in the months since, attorneys who have issued compliance advice via webinars, newsletters and other educational efforts have publicly said that many of their clients are either revamping their MSA contracts or exiting such agreements altogether. Our recent survey shows widespread confusion and misunderstanding about MSAs.
In the meantime, NAR is advising its members who may be contemplating an MSA to consider the following:
- Be aware that RESPA permits payments for services performed by a broker or agent only if actual services are performed and the fee is fair market value for the services performed.
- Memorialize an MSA in a written agreement that states in detail the marketing and advertising services to be performed and the fee to be paid in return for such services.
- Ensure that marketing and advertising services identified in a written MSA are, in fact, performed.
- Consider including a reporting and/or audit obligation in a written MSA that requires the service provider to document or otherwise provide evidence that services were performed.
- Provide a disclosure to consumers notifying them of the MSA relationship.
- Document how the parties arrived at the amount of the marketing fee and the determination of fair market value.
- Consider engaging an independent third party to establish the fair market value of the marketing and advertising services.
- Modify the amount of the marketing fee under an MSA only when objective changes are made to the services performed and/or other terms of the agreement. Verify the basis for the increase or decrease in fee amount and document the objective reason(s) for the change.
- Do not include “services” in the MSA that require a broker or agent to market a lender or title company directly to a consumer, like a sales pitch to a consumer, or distributing lender or title company brochures or other materials directly to a consumer.
- Do not designate a settlement service provider as the broker’s or agent’s “preferred” company as part of the MSA.
- Do not enter into exclusive MSAs such that the broker agrees to perform marketing and advertising services for only one lender or title company.
- Do not accept fees that are in excess of the fair market value of the marketing services actually performed.
- Do not base the amount of marketing fees on the volume of referrals or success of the referrals.
- Do not accept fees under an MSA for allowing access to sales meetings, conducting customer surveys or creating monthly reports.
- Do not make frequent changes to the fees paid under an MSA based on the volume or success of referrals or any other nonobjective criteria.
- Do not enter into an MSA with a company that is an affiliate of the broker or agent.
- Do not enter into an MSA with a month-to-month term.
NAR noted that this list is not all-inclusive, and small variations in the facts can lead to different outcomes. They also do not take into consideration any additional regulations that may have been imposed in different states, which may prohibit activities that are permissible under RESPA. The association advises all real estate agents to speak with a RESPA attorney to make sure they comply with all applicable laws.