On July 30, two of the nation’s largest mortgage lenders, Wells Fargo and Prospect Mortgage, announced to the world that they are “discontinuing” their participation in MSAs (marketing service agreements) with real estate agents and brokers. And in September 2014, Lighthouse Title in Michigan was slapped with a $200,000 fine for its MSAs with agents and brokers.
There’s been confusion in the industry about what’s permissible with MSAs and what’s forbidden. And until last week, the Consumer Financial Protection Bureau (CFPB) had been largely silent on the issue.
But last week, real estate industry professionals who have been clamoring for regulator clarification on the topic of MSAs got their wish. The CFPB issued a compliance bulletin (read below) stating its position on whether co-marketing pacts between industry partners are legal under the Real Estate Settlement Procedures Act (RESPA).
Many feel, however, that the guidance does not appear to resolve ongoing industry confusion and concerns about how their MSAs may be viewed under the CFPB’s RESPA smell test — even as companies large and small are ending their partnerships to avoid raising regulator eyebrows.
Reaction to the bulletin reads a bit like the story of “Goldilocks and the Three Bears.” For some, the guidance is too vague, offering little instruction beyond what the CFPB has already stated in some of its recent enforcement actions involving MSAs.
“The CFPB is not really putting out guidance at all; it is basically rehashing all the past orders, with the admonition to be careful with agreements,” said Ken Trepeta, president and executive director of the Real Estate Services Providers Council Inc. (RESPRO), a trade group that helps affiliated members ensure their strategic partnerships, joint ventures and subsidiaries are compliant with regulations.
“It is really missing guidance on how to do a good agreement. What are some things that would make an agreement compliant — besides not having a referral arrangement?”
For others, the bulletin goes too far, as they feel the CFPB seems to view all MSAs as illegal under RESPA — even those that are properly set up by legal counsel and followed to the letter.
“The bureau has received numerous inquiries and whistleblower tips from industry participants describing the harm that can stem from the use of MSAs, but has not received similar input suggesting the use of those agreements benefits either consumers or industry,” the CFPB stated in the bulletin.
“Based on the bureau’s investigative efforts, it appears that many MSAs are designed to evade RESPA’s prohibition on the payment and acceptance of kickbacks and referral fees. MSAs are usually framed as payments for advertising or promotional services, but in some cases, the payments are actually disguised compensation for referrals.”
Marx Sterbcow, managing partner of the New Orleans law firm Sterbcow Law Group LLC and a nationally recognized RESPA attorney, questioned why the CFPB would make such bold statements only a week after Diane Thompson, managing counsel in the bureau’s Office of Regulations, spoke at RESPRO’s Regulatory Seminar and told attendees that MSAs are, in fact, legal — if they are set up properly.
“Part of the problem is that the CFPB has been inconsistent with its message. If all MSAs are illegal, why have there been some investigations in which the CFPB found no fault and let the company go?” Sterbcow pointed out.
“The old saying about being careful about what you wish for is right. The way the CFPB wrote this, the guidance could be used to interpret other regulations on things like lead generation and advertising on billboards. This doesn’t just apply to MSAs; the bureau could apply this to any sort of co-advertising.”
And to a small minority, the CFPB’s communication where MSAs are concerned is just right. For Jobe Danganan, who once worked for the CFPB as an enforcement attorney and advisor and now sets up MSAs for online mortgage lender Sindeo as its chief legal officer, the guidance — and what RESPA has to say concerning MSAs — are a no-brainer.
“You can’t pay for, or accept payments for, referrals. If you mix in payments for referrals — even if services have been performed — you’re still liable under RESPA. The law is clear: You can only pay for services, not referrals,” Danganan said.
“My personal opinion is that most MSAs today violate RESPA; the contract is being used to pad payments for a referral. Either clean it up and be compliant, or get out of it. It’s only a matter of time before the CFPB comes knocking on your door.”
Are MSAs a ‘thing of value’ under RESPA?
Regulators have been taking a closer look at MSAs for about the last decade. In the mid-2000s, the Department of Housing and Urban Development (HUD), the CFPB’s RESPA enforcement predecessor, began probing title companies, mortgage lenders and real estate brokers for using “sham” affiliated business arrangements, joint ventures and co-marketing agreements” to exchange kickbacks, gifts, funds and business referrals.
That’s a violation of RESPA Section 8(a), which prohibits any person from giving or receiving “a thing of value” for the referral of settlement services in connection with federally related mortgage loans.
HUD settled cases against a slew of companies it accused of violating RESPA for millions of dollars, but the department also periodically issued guidance to the industry about the sort of conduct it deemed illegal. Recognizing that illegal conduct would likely persist as long as some rogue companies continued to pressure their partners to engage in these activities, HUD also made a point to go after both the givers and receivers of kickbacks — which RESPA Section 8(a) permits it do — to cut illegal conduct off at the source.
So, for example, if the department nailed a title company for RESPA violations, it also took action against the real estate broker who expected favors or referrals in the first place.
But the CFPB’s action in this area differs from HUD’s in important ways. In most cases, the bureau has elected to take action against only one entity involved in an affiliated business agreement — usually the “givers” of kickbacks — preferring to focus its investigation and enforcement resources on the entity it deems to be causing the most harm to consumers.
‘Regulating by enforcement’
And the bureau has issued little formal guidance on RESPA matters, usually tucking its stance on certain market conduct into consent orders and enforcement actions. Many in the industry have thus criticized the CFPB for “regulating by enforcement” and have pushed the bureau to issue formal written policy statements to make sure everyone is on the same page about what conduct may be deemed illegal.
In a RESPRO article titled “Affiliate Business and Marketing is Not Illegal under RESPA,” Trepeta stated, “the CFPB has more power than HUD ever had to enforce RESPA, and they are using it. The cases themselves have generally involved fairly clear violations.
“The problem is that the CFPB has gone beyond the actual fact patterns in opining about RESPA. It is the dicta or extraneous language (versus authoritative guidance) in the consent orders and press statements, coupled with the unchecked power of the CFPB to punish violations, that has caused much anxiety for real estate and other settlement services professionals and firms.”
Lighthouse Title’s consent order
That anxiety came to a head last year, when on Sept. 30, 2014, the CFPB announced a consent order against Michigan title company Lighthouse Title for allegedly funneling kickbacks to real estate brokers and other companies with whom it had MSAs.
The CFPB actually inherited the Lighthouse Title investigation from HUD, which began probing the company around 2010. Soon afterward, as Lighthouse Title worked to respond to the civil investigation demand, the company voluntarily ended its MSAs — but that did not stop the CFPB from fining the company $200,000 four years later.
But it was a statement the CFPB made about MSAs in the consent order that really raised eyebrows. In what many compliance experts agree is a rather broad interpretation of RESPA Section 8, the CFPB stated, “Entering a contract is a ‘thing of value’ within the meaning of Section 8, even if the fees paid under that contract are fair market value for the goods or services provided,” the bureau said.
“Entering a contract with the agreement or understanding that in exchange the counterparty will refer settlement services related to federally related mortgage loans violates Section 8(a).”
That’s far outside the traditional definition of “thing of value” under RESPA, which defines it as “any payment, advance, funds, loan, service or other consideration, including, without limitation, monies, things, discounts, salaries, commissions, fees, duplicate payments of a charge, stock, dividends, distribution of partnership profits, franchise royalties, credits representing monies that may be paid at a future date, the opportunity to participate in a money-making program, retained or increased earnings, increased equity in a parent or subsidiary entity, special bank deposits or accounts, special or unusual banking terms, services of all types at special or free rates, sales or rentals at special prices or rates, lease or rental payments based in whole or in part on the amount of business referred, trips and payments of another person’s expenses or reduction in credit against an existing obligation.”
And for that reason, the Lighthouse Title consent order immediately put MSAs on ice.
Many companies began examining whether their MSAs would be considered illegal under the CFPB’s interpretation, and some ended their agreements altogether to avoid scrutiny. On July 30, two of the nation’s largest mortgage lenders, Wells Fargo and Prospect Mortgage, announced to the world that they are “discontinuing” their participation in MSAs with real estate agents and brokers and others.
What the bulletin says
In the compliance bulletin, the CFPB noted that determining whether an MSA violates RESPA requires a review of the facts and circumstances in each individual case. This makes issuing guidance difficult, the bureau suggested, as the facts of one case may be completely different from another case.
“Nevertheless, any agreement that entails exchanging a thing of value for referrals of settlement service business involving a federally related mortgage loan likely violates RESPA, whether or not an MSA or some related arrangement is part of the transaction,” the CFPB stated.
Restating its position on the Lighthouse Title case, the CFPB said the fees paid under the title company’s MSAs were based in part on how many referrals it received, as well as the revenue generated by those referrals.
“Any agreement that entails exchanging a thing of value for referrals of settlement service business involving a federally related mortgage loan likely violates RESPA, whether or not an MSA or some related arrangement is part of the transaction.” – Consumer Financial Protection Bureau’s Compliance Bulletin
“From its investigation of the underlying facts, the bureau found that the number of referrals increased significantly when MSAs existed, and the differences in referrals were statistically significant and not explained by seasonal or year-to-year fluctuations,” the CFPB stated.
The CFPB also hearkened back to its May 2014 enforcement action against RealtySouth, Alabama’s largest real estate firm, in which the bureau accused the company of failing to provide adequate disclosures to consumers that they could choose their own settlement service providers and illegally steering them toward its affiliate, TitleSouth LLC.
The bulletin also mentions the action the CFPB took in August 2014 against Atlanta-based Amerisave Mortgage Corp. and its affiliate appraisal management company, Nova Appraisal Management Co., for failing to explain their affiliate relationship to homebuyers.
In the CFPB’s mind, these three cases had one thing in common: The defendants all attempted to disguise the steering of business through an MSA, resulting in “consumers paying higher prices for mortgages than would likely be the case without disguised kickback or referral fees.”
“The steering incentives that are inherent in many MSAs are clear enough to create tangible legal and regulatory risks for the monitoring and administration of such agreements,” the CFPB stated.
What the bulletin doesn’t say
Aside from rehashing those enforcement actions, the CFPB also noted that in the course of its investigations, it has documented instances in which companies failed to provide all or some of the services described in their MSA contracts, as well as failed to charge their partners actual market value prices for providing advertising and promotional services.
According to the compliance bulletin, all of this conduct creates serious legal and compliance risks for mortgage and real estate industry participants, but the bureau stopped short of putting the kibosh on MSAs or advising companies engaged in them how to peacefully co-exist with RESPA.
“In sum, the bureau’s experience in this area gives rise to grave concerns about the use of MSAs in ways that evade the requirements of RESPA. In consequence, the bureau reiterates that a more careful consideration of legal and compliance risk arising from MSAs would be in order for mortgage industry participants generally.
“This review is especially warranted insofar as whistleblower complaints about MSAs that violate RESPA have been increasing. The bureau intends to continue actively scrutinizing the use of such agreements and related arrangements in the course of its enforcement and supervision work,” the CFPB concluded.
Trepeta said RESPRO will continue to work with its members to help them ensure their MSAs are RESPA-compliant, as well as with the CFPB “to set the record straight that while they have been conducting enforcement actions on fairly clear payment for referral arrangements, there are clearly arrangements and activities that do not violate RESPA.”
“It is my hope that they will eventually issue guidance in accord with the case law, statute and best practices,” Trepeta said.