Following up on a series of enforcement actions against industry participants engaged in “marketing services agreements” (“MSAs”), the CFPB issued a Compliance Bulletin (No. 2015-15) entitled “RESPA Compliance and Marketing Services Agreements [“MSAs”].” (The Bulletin can be accessed by clicking here.) The thrust of the Bulletin is again warning companies that “many MSAs necessarily involve substantial legal and regulatory risk for the parties to the agreement, risks that are greater and less capable of being controlled by careful monitoring than mortgage industry participants may have recognized in the past.”
Background. MSAs have been around for some time now. Basically, they are contracts in which a person who is in a position to refer settlement service business (e.g., real estate brokers, title insurance agents, residential mortgage lenders) agrees to perform certain advertising and marketing services on behalf of a settlement service provider in return for compensation.
RESPA § 8(a) prohibits the payment of fees or other “things of value” for the referral of settlement service business. Notwithstanding RESPA § 8(a), many industry participants have long believed that MSAs could be justified so long as the advertising and marketing services were bona fide, non-duplicative and actually performed, and the compensation paid for the services did not exceed their reasonable market value – even if referrals were involved. This belief was based on § 8(c)(2) of RESPA (“Nothing in [RESPA § 8] shall be construed as prohibiting … the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed”), and § 14(g)(iv) of Regulation X (“Section 8 of RESPA permits … [a] payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed”).
What Does The Bulletin Say? In the Bulletin, the CFPB takes a more critical view of MSAs. It begins by describing them as agreements that are “usually framed as payments for advertising or promotional services, but in some cases the payments are actually disguised compensation for referrals.” It also advises that, in determining whether an MSA violates RESPA, it will review all of “the facts and circumstances surrounding the creation of each agreement and its implementation.”
The CFPB then highlights some of the problems it has encountered when investigating MSAs that have led it to pursue enforcement actions against the participants. These problems include, for example, the payment of fees under an MSA that were based in part on how many referrals the payor received and the revenue generated by those referrals, the failure of a party to an MSA to perform the agreed-upon advertising and marketing services, and the fact that the number of referrals increased by a statistically significant number following execution of an MSA between the parties.
Finally, the Bulletin indicates that the CFPB has “grave concerns about the use of MSAs in ways that evade the requirements of RESPA,” and that mortgage industry participants should undertake “a more careful consideration of legal and compliance risk arising from MSAs, especially in light of the fact that “whistleblower complaints about MSAs that violate RESPA have been increasing.”
What Does The Bulletin Not Say? The Bulletin does not say that MSAs are per se illegal. However, it also does not offer any guidance as to what companies can or should do to ensure that their MSAs are compliant (except to say that the use of independent third-party valuation experts to determine fair market value of the advertising and marketing services will not, by itself, insulate them from liability).
Indeed, the CFPB’s intended message to settlement service providers appears to be that the legal and regulatory risks of being involved in MSAs (to both the companies and individuals within the companies) are simply too great and too difficult to control to justify entering into or continuing them. Reinforcing this message, Director Cordray stated in his press release that “[w]e are deeply concerned about how marketing services agreements are undermining important consumer protections against kickbacks,” and that “[c]ompanies do not seem to be recognizing the extent of the risks posed by implementing and monitoring these agreements within the bounds of the law.” In closing, the Bulletin indicates that the CFPB “intends to continue actively scrutinizing the use of such agreements and related arrangements in the course of its enforcement and supervision work” and encourages industry participants who suspect unlawful activity by others or who wish to self-report their own possibly unlawful conduct to contact the CFPB, noting that such “[s]elf-reporting and cooperation … will be taken into account in resolving such matters.”
Companies and individuals thinking of entering into an MSA or that are currently involved in an MSA should be guided accordingly.