On January 31, 2017, the Consumer Financial Protection Bureau (CFPB) announced that it ordered a California-based mortgage lender to pay $3.5 million in civil penalties for an illegal mortgage kickback scheme. According to the CFPB, the lender entered into several different referral programs with multiple third parties, each of which the CFPB contends violated Section 8(a) of Real Estate Settlements Procedures Act (RESPA), 12 U.S.C. § 2607(a). Although the consent order targets alleged violations relating to marketing service agreements (MSAs), a prior CFPB target, its scope is much broader – also taking aim at a host of other third party relationships. Lenders should take notice that the range of conduct targeted by the CFPB included:
- Lead Agreements with more than 200 different counterparties;
- Exclusive MSAs with more than 120 counterparties;
- Desk licensing agreements;
- Co-marketing agreement with a loan servicer;
- Co-marketing agreements with brokers involving sharing advertising costs on third-party websites; and
- Broker counterparties requiring borrower preapproval with the lender;
- Encouraging broker counterparties to use loan fees and credits to influence lender selection.
Under the lead agreements, the lender allegedly required brokers to enter exclusivity arrangements to sell potential borrowers’ names and contact information only to the lender. The lender allegedly then compensated brokers directly based on the number of leads received. Under the MSA arrangements, the lender paid real estate brokers monthly fees for performing marketing services on the lender’s behalf. The CFPB alleges these fees were, in effect, impermissible referral kickbacks because the brokers were allegedly compensated based on the number of referrals they were able to make to the lender in a given month. Under the desk license agreements, the lender into arrangements with real estate brokers to locate its loan officers onsite with the brokers. However, the lender’s payments to brokers allegedly were not based on office space rental, but instead tied to the number of referrals the lenders received each month.
There were several types of challenged co-marketing agreements, which the lender entered into after it ended its MSAs in 2015. The first involved an origination agreement with a loan servicer where the servicer was compensated for customers who refinanced using the lender. Another involved a new enforcement focus, sharing costs with real estate agents for third party website advertising. The CFPB alleges the lender required agents’ advertisements on any third-party websites to exclusively promote the lender, and in exchange, the lender would subsidize the agents’ advertisements; the CFPB determined such an arrangement involved an illegal kickback.
Finally, the CFPB also alleges RESPA was violated where the lender’s agreements with brokers allegedly required brokers to have prospective buyers obtain preapproval from the lender before the buyer could make an offer on the home. In return the lender paid cash bonuses for each referral, and waived certain fees if the buyer obtained a loan through the lender. Relatedly, the CFPB alleges the lender also encouraged brokers to insert terms in real estate contracts that would steer consumers toward using the lender.
According to the consent order, many of the brokers or agents received a fixed monthly fee, which the lender adjusted depending on the number of referrals actually received. Under RESPA and its implementing regulation (Regulation X, 12 C.F.R. part 1024), illegal kickbacks are not allowed on federally related mortgages. Such tactics also violate Section 1036 of the Consumer Financial Protection Act (CFPA), 12 U.S.C. § 5536. Per the terms of the consent order, the lender agreed to cease its referral programs, pay $3.5 million in civil penalties, and satisfy various reporting requirements. The CFPB also entered into similar orders with two real estate brokers and a servicer that provided lender with referrals. The orders are available here, here, and here. The servicer and two real estate brokers agreed to pay $495,000 in consumer relief.
This is one of the most significant enforcement actions the CFPB has taken involving RESPA referral arrangements, and it is especially noteworthy for its focus on desk licensing agreements, and co-marketing arrangements. It is noteworthy that the legality of both of these types of arrangements have support in pre-CFPB RESPA guidance. It is unclear if this Consent Order signals an intent by the CFPB to expand its marketing-arrangement RESPA focus beyond traditional MSAs now that many lenders have exited such arrangements.
The CFPB has made no secret of its disapproval of MSAs, but this is the first MSA enforcement action taken since October 2015, when the CFPB issued compliance Bulletin 2015-05 cautioning against the use of MSAs due to the “substantial legal and regulatory risk of violating RESPA.” The Bulletin noted that MSAs “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 CFPB stated that “determining whether an MSA violates RESPA requires a review of the facts and circumstances of each case,” but provided a list of examples where it believed MSAs were in fact disguising kickbacks and referral fees. Despite the bulletin’s relatively hard line on MSAs and referrals, the CFPB had yet to publicly announce another MSA-re lated enforcement action until this past week, perhaps due in part to many lenders publicly and privately exiting MSAs after the Bulletin. For more on Bulletin 2015-05, please see the post from our sister blog, Lender Law Watch.
Prior to Bulletin 2015-05 , the CFPB had announced several enforcement actions that caused the mortgage industry to reexamine its third party relationships. For example, in September of 2014, the CFPB announced an order in a similar action against a title insurance agency, Lighthouse Title. According to the 2014 order, Lighthouse entered into MSAs with companies, such as real estate brokers, where the companies would refer business to the title insurance agency in exchange for payments. As in the above action, Lighthouse allegedly made payments based on the number of referrals it received or expected to receive. Pursuant to the consent order, the title insurance agency agreed to pay $200,000 in civil penalties and agreed to terminate its MSAs.
Further, as covered by Enforcement Watch in January and April of 2015, the CFPB and the Maryland Attorney General announced the issuance of related orders against two large lenders and their executives relating to an alleged kickback scheme with a title company. CFPB asserted that the banks’ loan officers referred loans for closing to the title company in exchange for cash, consumer data, and marketing materials. As part of the settlement, the lenders agreed to pay $24 million in civil penalties and $11.1 million in redress to affected consumers. Nearly three months later, the CFPB entered into consent orders with the title company’s executives and named loan officers, banning the individuals from the mortgage industry and requiring them to pay a total of $662,500 in redress and penalties.
Also in early 2015, as previously reported by the Enforcement Watch, the CFPB announced a consent order with a Maryland-based nonbank lender relating to an alleged deceptive advertising and a kickback scheme. The Maryland lender’s purported scheme involved the advertising of VA mortgage products to military veterans. The order resulted in the lender’s cessation of all deceptive marketing, endorsement and kickback practices, as well as the payment in $2 million in civil penalties.
It remains to be seen whether the CFPB’s most recent enforcement action signals a broader focus by the CFPB on different kinds of third-party relationships in the mortgage industry beyond MSAs. Any party involved in such relationships should carefully consider them in light of the Consent Order, as well as the CFPB’s prior guidance on the issue, such as Bulletin 2015-05.