On October 8, 2015, the CFPB issued compliance Bulletin 2015-05 cautioning against the use of marketing services agreements (MSAs), due to the “substantial legal and regulatory risk” of violating the Real Estate Settlement Procedures Act (RESPA) (12 U.S.C. 2601, et seq.). Although the Bulletin did not specify what a RESPA-compliant MSA would look like, below are some points to glean from the CFPB’s non-binding guidance.
A “primary purpose” of RESPA is to “eliminate[e] … kickbacks or referral fees that tend to increase unnecessarily the costs of settlement services,” the Bulletin noted. 12 U.S.C. 2601(b)(2); 12 U.S.C. 2607(a); 12 C.F.R. 1024.14(b). RESPA permits payment for goods or services actually furnished. 12 U.S.C. 2607(c)(2); 12 C.F.R. 1024.14(g).
MSAs, oral or written, “often involve providers of settlement services in a mortgage loan transaction, such as a lender, real estate agent or broker, or a title company … [and are] framed as payments for advertising or promotional services, but in some cases the payments are actually disguised compensation for referrals,” the Bulletin said.
The CFPB indicated that “determining whether an MSA violates RESPA requires a review of the facts and circumstances” in each case, but provided examples where MSAs were identified as disguising kickbacks and referral fees. These include:
- “[A] title insurance company entering MSAs as a quid pro quo for the referral of business” where the fees paid were based in part on “how many referrals the title insurance company received and the revenue generated by those referrals”;
- Directing consumers to an affiliate appraisal management company without disclosing the affiliate relationship or informing consumers of the option to shop for services;
- “[Burying in text] the disclosure that consumers can shop for settlement services”;
- Failure to “provide some or all of the services required under the [MSAs],” such as “underwriting, processing, and closing services; not executing title insurance work; not carrying out marketing services; and not delivering financing to fund the origination of loans”;
- Directing promotional and advertising efforts toward other settlement service providers in order to obtain more MSAs, “instead of directing their advertising and promotional servicers toward consumers….”
The Bulletin stated that “the risk of behaviors that may violate RESPA are likely to remain significant … even where the terms of the MSA have been carefully drafted to be technically compliant with [RESPA].” And using third-party consultants to “independently establish market-rate compensation for marketing services, alone, does not suffice to ensure the legality of an MSA.”
As we have covered previously, the CFPB has been pursuing public enforcement actions under RESPA for some time now. This has led to “injunctive relief including bans on entering MSAs or working in the mortgage industry for up to five years” and over $75 million in penalties for RESPA violations so far, the Bulletin noted.
Although the CFPB Bulletin did not say that MSAs are per se unlawful, it warned “mortgage industry participants” of its “inten[t] to continue actively scrutinizing the use of such agreements” and of its “grave concerns” about the “numerous [and increasing] inquiries and whistleblower tips.” The CFPB advised that “certain lenders have dissolved existing agreements and decided that they will no longer enter into MSAs. The bureau encourages all mortgage industry participants to consider carefully RESPA’s requirements and restrictions and the adverse consequences that can follow from non-compliance.” And the Bulletin noted that “[s]elf-reporting and cooperation … will be taken into account in resolving such matters,” per CFPB Bulletin 2013-06.
Already, at least one major lender is reported to be discontinuing its use of MSAs in the wake of Bulletin 2015-05. Others had previously done so over the summer. It will be for the rest to decide whether to do the same given the Bureau’s warnings and recent actions.