On October 8, 2015, the CFPB announced new “Guidance About Marketing Services Agreements,” publishing a Compliance Bulletin on the subject of RESPA Compliance and Marketing Services Agreements. The Bulletin is lacking in clear “guidance,” at least in the sense of outlining regulatory standards, but it does provide an unequivocal warning that marketing services agreements (MSAs) in the mortgage industry are much less likely to pass regulatory scrutiny than in the past.
The CFPB expresses “grave concerns” about the use of MSAs to evade the requirements of RESPA, and they note that certain mortgage industry participants have already stopped entering into MSAs given the RESPA compliance burdens. To ensure that the industry is getting the message, they warn that careful consideration of the legal and compliance risks “would be in order” for all industry participants, especially in light of the increase in whistleblower complaints under RESPA.
Every MSA must comply with the RESPA Section 8 prohibition on the payment or receipt of any fee, kickback or other “thing of value” for the referral of mortgage loan or other “settlement services” business. However, compensation for goods or facilities actually furnished or services actually performed is permissible under Section 8, at least so long as the compensation reflects the fair market value of the goods, facilities or services. The industry has long attempted to rely on this exception for the payments for services actually performed as a means to avoid Section 8 violations. This has usually worked in the past, but it’s going to be much harder to make this work in the future.
There is no doubt that a mortgage lender or other settlement services provider can purchase mass media advertising time or space. It is crucial, however, that the advertising is paid for on a fixed-fee basis. The fee paid for broadcast media should reflect the duration of the advertisement, and the fee for print media should reflect the space used or placement of the advertisement in the publication. Above all, the fee cannot be based in any way on the success of the advertisement. Fees that are based on the number of resulting loan applications or closed loans, for example, will violate Section 8.
Most other marketing arrangements will be very risky. The Bulletin summarizes a number of the CFPB’s recent RESPA enforcement actions in an effort to illustrate arrangements that will not comply with Section 8. These summaries are unfortunately vague, and it is not easy to identify which specific enforcement action is being referred to with any confidence. However, based on our separate review of the CFPB’s RESPA enforcement actions, the following the activities and arrangements are likely to lead to Section 8 enforcement by the CFPB:
- Any marketing arrangement with another settlement services provider. The CFPB has said that entering into a contract is itself 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. If the recipient of those fees is in a position to then refer settlement service business to the payor of the fees, the CFPB could decide that the payment of the fees were in fact for referrals. That will almost surely be the case if the fees are set by considering the amount of business received, and could be the case if the evidence shows that referrals increased after the marketing agreement was entered into. The CFPB’s Lighthouse Title enforcement action illustrates these issues. The Genuine Title enforcement action provides another example of this problem. Genuine Title allegedly sent marketing materials to loan prospects on behalf of loan officers who then referred loan closing business to Genuine Title. It was alleged that, in at least some cases, the loan officers did not pay the full cost of producing and mailing the materials but did refer loan closing business to Genuine Title.
- Prescreening prospective borrowers and connecting them with a lender in return for a per-prospect fee from the lender. Prior HUD opinions, published before RESPA enforcement was transferred to the CFPB, allowed de minimus payments for delivery of a list prospective customers. Recent enforcement actions suggest that the active screening of these loan prospects by the list provider goes too far and causes the arrangement to violate Section 8.
- Payments of any lead generation fees, regardless of the dollar amount. Notwithstanding the HUD opinion noted above, the CFPB has shown a willingness to disregard HUD’s prior opinions, so it is possible that even a small per-name fee is not permissible today.
- Purchasing services or products of no or nominal value from a company that refers settlement service business to the purchaser. In the Republic Mortgage Insurance Corporation case, that company allegedly purchased “worthless” captive reinsurance from affiliates of lenders in exchange for referral by the lenders of private mortgage insurance business. The lenders had an incentive to make such referrals so as to be paid reinsurance premiums, but the CFPB concluded that the reinsurance had no meaningful value to RMIC and that the premium payments were therefore hidden referral fees. See also the PHH Corporation enforcement action.
- Providing for loan-related services in an agreement, in addition to marketing services, when the loan services are not in fact provided. The Bulletin states that this leads to a “reasonable inference” that the MSA is part of an agreement for the referral of business in exchange for illegal kickbacks.
There are many other ways to violate Section 8, including through blatant referral fee arrangements. The point here is that creative “work-arounds” are much less likely to succeed than in the past.
If your company believes it has discovered a fool-proof method to compensate third parties for referrals of business, we strongly encourage you to consult with experienced RESPA counsel. As one CFPB attorney has said to this author, all of the legal methods have already been implemented and everything else will violate RESPA… especially now that the CFPB is in charge.
For another (more cynical) perspective on this issue, see my Consumer Banking Blog post referencing the CFPB’s attempts to channel Monty Python.