On September 25, 2014, the Bureau of Consumer Financial Protection (“CFPB”) entered into a Consent Order with Lighthouse Title, Inc., a title insurance company located in Holland, Michigan (“Lighthouse”), in which the CFPB alleged that Lighthouse violated RESPA section 8 by compensating referral sources (“Advertisers”) for performing certain marketing services. These marketing/advertising services were performed in accordance with the terms of a “marketing services agreement” (“MSA”) entered into between Lighthouse and the Advertisers.
The Consent Order raises several questions, which are identified and discussed below.
- What Does the Order Say? Interestingly, the Consent Order does not identify the specific marketing services the Advertisers contracted to perform or the amounts of compensation Lighthouse agreed to pay them in return for the marketing services. Rather, it simply lists the things Lighthouse allegedly did and did not do that convinced the CFPB that the MSAs were really disguised agreements to pay for referrals. This list includes the following:
- Lighthouse entered and renewed the MSAs with the agreement or understanding that in return, the Advertisers would refer closing and title insurance business related to federally related mortgage loans to Lighthouse.
- Lighthouse believed that if it did not enter into MSAs with the Advertisers, the Advertisers would refer their business to other companies.
- Lighthouse did not determine a fair market value for the services it allegedly received pursuant to the MSAs.
- Lighthouse did not document how it determined the fair market value for the specific services it allegedly received under the MSAs.
- Lighthouse set the fees to be paid pursuant to the MSAs, in part, by considering how many referrals it had received from the Advertisers and the revenue generated by those referrals. In some cases, Lighthouse also set the fees, in part, by considering how much competing title insurance companies were willing to pay those same Advertisers for marketing and advertising services.
- Lighthouse did not diligently monitor the Advertisers to ensure that it received the services for which it contracted.
- What Is the CFPB’s Intent in Issuing the Order? The most obvious purpose of this Consent Order is to put a stop to Lighthouse’s allegedly impermissible behavior and to punish Lighthouse for engaging in such behavior. But, this being the first enforcement action undertaken by the CFPB directed at MSAs, it also seems obvious that the CFPB intends for the Consent Order to serve as a warning to the entire settlement service industry. The message is that the CFPB will closely scrutinize MSAs and, more importantly, the facts surrounding their execution and implementation, for evidence that, regardless what the MSAs say, they are really agreements for the payment of referral fees.
- Does the Consent Order Mean that MSAs Are Prohibited? The good news is that the CFPB, which has never seemed shy about stating its view that a particular practice is prohibited, nowhere says in the Consent Order that MSAs as a general rule violate section 8. On the other hand, neither does the CFPB say that MSAs are permissible. Nevertheless, assuming the parties to an MSA avoid the mistakes outlined in the Consent Order, it seems possible for them to enter into and engage in an MSA that will survive CFPB scrutiny.
- How Can One Avoid These Mistakes? There are several things one can apparently do that would significantly reduce the chances of a CFPB enforcement action based on an MSA. First, the compensation paid by the settlement service provider (“SSP”) to the Advertiser under the terms of the MSA must not be connected, directly or indirectly, with the actual or expected volume or value of the settlement service business that is referred. This means that the amount of compensation paid for the marketing/advertising services cannot be a function of the amount of business that is referred. A fixed monthly fee is therefore preferable to a fee per unit of business coming from the Advertiser. Moreover, the fixed monthly fee may not be based upon the actual or expected amount of business being referred by the Advertiser.
Perhaps the best way to make sure that there is no such connection is to obtain an opinion as to the fair market value of the services to be performed under the MSA from an independent third-party valuation expert in the field of mass-marketing/advertising, and to set the compensation for the marketing/advertising services at or below the expert’s valuation. The expert should also be specifically instructed not to consider the value of any referrals, and probably also not to develop his/her valuation opinion using figures derived from other MSAs in which an SSP is involved.
Second, the valuation opinion should be retained by both parties to the MSA and periodically updated as appropriate (and certainly before any change in compensation is made).
Third, the SSP on whose behalf the marketing/advertising services are performed should “diligently monitor” its Advertiser to ensure that the Advertiser is in fact performing those services. In this regard, one must remember also that section 8 of RESPA prohibits not only the payment of money, but also the giving of any “thing of value,” in return for referrals. And, as the Consent Order points out, a “thing of value” is broadly defined to include virtually anything that might be of benefit to the recipient, including, for example, “[a]ny payment, advance, funds, loan, service, or other consideration, including, without limitation, …, things, … the opportunity to participate in a money-making program, … services of all types at special or free rates, …trips and payments of another person’s expenses…”
If one takes care to do all of the above, and the services to be performed under the MSA consist of legitimate marketing/advertising services as distinguished from “referrals” (“any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service…”), it appears that such an MSA should have a decent chance of surviving CFPB scrutiny.
- Is There Anything Else One Should Know About the Consent Order? Yes. Several other aspects of the Consent Order raise interesting issues, including whether Advertiser endorsements make MSAs problematic, whether the CFPB considers the success of an MSA as evidence of its illegality, and what it means to enter into a contract. These issues are discussed below:
Endorsements. In the Consent Order, the CFPB defines a MSA as excluding:
An Agreement for mass advertising for consumer consumption pursuant to which [a SSP] is to pay a person who does not provide real estate settlement services to place an advertisement to the public … unless the person endorses [the SSP] as part of the advertisement. (Emphasis added.)
This raises a question as to whether the CFPB will consider an MSA to be compliant if it calls for the Advertiser not only to provide mass advertising on behalf of the SSP, but also to endorse the SSP’s products or services. Logically, so long as the valuation expert’s opinion as to the market value of the advertising services does not take into account any value attributable to Advertiser endorsements, and the payment for the advertising services does not exceed the expert’s valuation, an otherwise compliant MSA should still be considered compliant. Nevertheless, it may be prudent to exclude from the MSA any requirement that the Advertiser endorse its SSP partner (and perhaps even to have the MSA prohibit the Advertiser from endorsing the SSP).
Success. In the Consent Order, the CFPB includes a finding that the Advertisers “referred significantly more transactions to [Lighthouse] when they had MSAs with [Lighthouse] than when they did not,” and that “[t]he differences are statistically significant and are not explained by seasonal or year-to-year fluctuations.” This raises a question as to whether, assuming the parties to an MSA take care to avoid the mistakes attributed by the CFPB to Lighthouse and its Advertisers, and the marketing/advertising services performed under the MSA succeed in increasing the SSP’s business (which is the goal of any advertising campaign), the CFPB would consider this success evidence of compensated referrals?
The answer to this question is not evident in the Consent Order. It is possible that the increase in Lighthouse’s business is attributable to actual person-to-person referrals from the Advertiser, in which case the differences pointed out by the CFPB may provide support for a finding of a non-compliant MSA. However, it is also possible that this increase in business resulted, not from person-to-person referrals, but from the mass advertising efforts of the Advertiser that are directed at all consumers who visit the Advertiser’s premises or website, or receive its publications. In such a case, the success of these efforts should not be considered evidence of an illegal MSA.
Execution of an MSA as a “thing of value,” The CFPB also states in its Consent Order that “[e]ntering 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.” One is left to wonder as to the significance of this statement.
There are three essential elements to every RESPA section 8 violation, i.e., that (1) a “thing of value” is given, (2) pursuant to an “agreement or understanding,” (3) that settlement service business will be “referred.” It is difficult to understand how entering into an MSA can be considered a “thing of value” when the MSA itself constitutes the “agreement or understanding.” If that were true, one could establish a violation of section 8 merely by proving that there was an agreement or understanding to refer settlement service business, which is not the law.
- What Penalties Did the CFPB Impose on Lighthouse? The Consent Order provides that Lighthouse must: (1) immediately terminate all of its existing MSAs and not enter into any new ones; (2) document all exchanges of things of value worth more than $5.00 with persons in a position to refer settlement service business to Lighthouse, including a description of all things of value exchanged and the reasons for the exchange, maintain such documentation for five years after the exchange, and produce such documentation to the CFPB promptly upon request; and (3) pay to the CFPB a civil money penalty of $200,000.
- Is There Any Other Advice for Someone Considering Entering Into an MSA? Yes. First, make sure that you also take into account any guidance that your regulator has put out concerning the use of third-party vendors. For example, if you are a nonbank mortgage lender, you should adhere to the guidelines set forth in CFPB Bulletin 2012-03 (April 12, 2012) regarding service providers, which is available here.
Second, proceed with caution!