In the new era of the Real Estate Settlement Procedures Act (“RESPA”), the Consumer Financial Protection Bureau (“CFPB”) is zeroing in on Marketing Services Agreements (“MSAs”) and publicly expressing its concerns surrounding these agreements. Generally, an MSA is a relationship between a real estate broker or developer and a title company or mortgage broker whereby the real estate office agrees to market the service of the title company or mortgage broker in exchange for a “marketing” fee. The fee is supposed to be based on the “fair market value of marketing and advertising services to be formed.”
In its compliance bulletin issued on October 8, 2015, CFPB warned that the routine industry practice of entering into MSAs could trigger RESPA’s prohibition on kickbacks or referral fees. RESPA prohibits, among other things, providing something of value to any person with an agreement or understanding that the person will refer back business related to a real-estate-settlement service. Though the bulletin does not downright outlaw MSAs as per se illegal, it does serve to warn title insurance, mortgage, real estate and settlement services professionals to proceed with caution in light of the imminent and severe consequences that will arise by entering into a noncompliant agreement.
Though such agreements have become a norm in the real estate servicing industry, CFPB is aggressively cracking down on alleged kickback schemes. On September 30, 2014, CFPB ordered a Michigan title insurance agency to pay a civil money penalty of $200,000 for illegal quid pro quo referral agreements in violation of RESPA. Four months later, on January 22, 2015, CFPB took action against two of the nation’s largest banks for “illegal mortgage kickbacks”, imposing fines of $35.7 million after loan officers traded referrals for cash and marketing services. In February, CFPB fined another lender $2 million over a marketing agreement the lender had with a veteran service organization. In June, CFPB fined yet another lender $109 million for mortgage kickbacks in the form of reinsurance payments from insurers to which the lender had referred customers.
In its Compliance Bulletin, CFPB provides several examples of RESPA violations it has encountered in investigating kickbacks and referral fees, including a settlement service provider’s failure to disclose its affiliate relationship with an appraisal management company and did not inform customers that they had the option of shopping for services before directing them to the affiliate. In another case, an MSA was structured such that fees were based, in part, on how many referrals the settlement service provider received and how much revenue was generated by those referrals. While the bulletin does not indicate a bright-line test for legality of MSAs, it does indicate that there is a very high threshold that must be met for an MSA to not violate RESPA. Nonetheless, CFPB explained, “In [its] experience, determining whether an MSA violates RESPA requires a review of the facts and circumstances surrounding the creation of each agreement and its implementation. The nature of this fact-intensive inquiry means that, while some guidance may be found in the Bureau’s previous public actions, the outcome of one matter is not necessarily dispositive to the outcome of another.” Many companies have already begun canceling their MSAs because of compliance concerns. Though it is less than clear how to perfectly construct an MSA that passes CFPB muster, industry members should conduct an in-depth assessment of their current and prospective MSAs with their counsel to avoid the costly consequence of noncompliance.