On October 8, 2015, the Consumer Financial Protection Bureau (CFPB) issued long overdue guidance (Bulletin 2015-05) regarding marketing services agreements (MSAs) and compliance with the Real Estate Settlement Procedures Act (RESPA), particularly section 8 of RESPA. However, the guidance provides a dim view of MSAs in the eyes of the CFPB, which should not be surprising given the enforcement actions taken by the CFPB in this area over the last 12 months.
As we wrote in a previous QuickStudy on August 11, 2015, “Debilitating Uncertainty Highlights CFPB RESPA Enforcement,” the recent enforcement activity of the CFPB has put the settlement services industry in a holding pattern until more clarity is provided. It appears that this Bulletin is the clarity the CFPB is willing to provide; but as reviewed below, it is a far cry from the clarity the industry has been seeking. The Bulletin provides less guidance and more of a warning to those who venture into this territory, or choose to retain current MSAs.
The Bulletin was issued by the CFPB to “remind participants in the mortgage industry of the prohibition on kickbacks and referral fees” and to “describe the substantial risks posed by entering into [MSAs].” It indicates that “while [MSAs] are usually framed as payments for advertising or promotional services, in some cases the payments are actually disguised compensation for referrals.” The CFPB also suggests that 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.”
Moreover, the CFPB reiterates that “[a]ny agreement that entails exchanging a thing of value for referrals of settlement service business likely violates federal law, regardless of whether [an MSA] is part of the transaction” and reviews some recent enforcement cases as examples supporting the claim that “many MSAs are designed to evade RESPA’s prohibition on the payment and acceptance of kickbacks and referral fees.”
While not stating that MSAs are per se illegal, a fact confirmed by public statements by senior CFPB staff, the Bulletin identifies “substantial legal and regulatory risk” for parties to an MSA and “grave concerns” about the use of MSAs that may evade RESPA requirements. Clearly, the CFPB is making its case against MSAs. They do not like them. And, they intend to “continue actively scrutinizing” MSAs through their examination and supervisory functions.
This Bulletin is helpful to the extent that it confirms that the CFPB views MSAs as very high-risk. Since RESPA is a civil as well as a criminal statute, the words used and the view expressed in this Bulletin, as well as the recent enforcement activity in this area, might cause more in the industry to follow in the footsteps of the few but sizeable financial institutions that have simply eliminated MSAs from their businesses. There is no certainty on MSAs. The final paragraph of the Bulletin makes this clear by stating that this Bulletin “is a non-binding general statement of policy articulating considerations relevant to the [CFPB’s] exercise of its supervisory and enforcement authority. Once again – “non-binding.” No certainty. Please tread very carefully.
- If you have MSAs in place, consider conducting a wholesale review of the terms and conditions, as well as all payments associated with each MSA, to determine whether the MSA involves any kind of referral – on paper or in practice – that might be viewed by the CFPB as problematic under RESPA If you find that an MSA does confer benefits that regulators may perceive as a referral, you should speak with inside or outside counsel immediately to determine whether further analysis, remediation and/or even self-reporting to the CFPB is appropriate.
- Whether or not MSAs are currently part of your business model, step back and review your business objectives in light of the substantial risks and consequences of non-compliance with the CFPB’s interpretation of RESPA, which is not always the same as HUD’s precedent.
- If after careful analysis you determine that the potential rewards of an MSA are worth the growing regulatory risk, at a minimum you should go forward with these agreements only after consulting counsel and independent third party valuators and satisfying yourself that your process for monitoring and documenting the performance of the MSA parties on an ongoing basis is adequate to withstand inevitable regulatory scrutiny.