Lenders utilizing “marketing services agreements” (“MSAs”) beware: On October 8, the Consumer Financial Protection Bureau (“CFPB”) issued a new bulletin strongly cautioning that MSAs often violate Real Estate Settlement Procedures Act’s (“RESPA”) “primary purpose” of preventing kickbacks. Lenders that use MSAs bear a high risk of eventually facing a CFPB enforcement action, which could carry stiff monetary and nonmonetary penalties.

According to the CFPB, “MSAs are usually framed as payments for advertising or promotional services, but in some cases the payments are actually disguised compensation for referrals.” In other words, they could be considered kickbacks under RESPA. While the CFPB’s bulletin is quick to note that “determining whether an MSA violates RESPA” depends on the facts and circumstances of each case, its review of its own cases reveals that MSAs often violate RESPA. The CFPB finds violations where a company fails to provide “some or all” services provided under a particular MSA. The CFPB also cautioned that a lender can be subjected to an enforcement action under RESPA even if it is not aware of the MSA’s existence. For example, in one case a title company entered into unwritten MSA with a lender’s loan officers for referrals to the title companies in exchange for reducing the officers’ marketing expenses. The lenders were ultimately found liable because, based on the circumstances of their case, they had “reason to know” that the scheme existed and likely violated RESPA.

The CFPB’s primary motivation in focusing on MSAs appears to be that MSAs often “result in consumers paying higher prices for mortgages than would likely be the case without disguised kickback or referral fees.” Higher costs undermine consumers’ attempts to “shop” for mortgages. Indeed, the CFPB bulletin notes that while it has received “numerous inquiries and whistleblower tips from industry participants describing the harm that can stem from the use of MSAs, [it] has not received similar input suggesting the use of those agreements benefits either consumers or industry.”

The bulletin further provides that “the payment of improper kickbacks and referral fees has been the basis of almost all of” the CFPB’s RESPA enforcement actions. The CFPB explains that resolving such actions “has entailed injunctive relief including bans on entering MSAs or working in the mortgage industry for periods of up to five years.” The CFPB has also recovered in excess of $75 million in penalties from these actions.

As a result of these enforcement actions and the CFPB’s broad application of RESPA to MSAs, the CFPB remarks that “various mortgage industry participants have publicly announced their determination that the risks and complexity of designing and monitoring MSAs for RESPA compliance outweigh the benefits of entering the agreements.” This has led some lenders to eliminate MSAs altogether. Hence, lenders should carefully weigh the costs and benefits, and potential for RESPA violations and ensuing enforcement actions, before entering into any MSA.

The full bulletin can be found here.