The Consumer Financial Protection Bureau (CFPB) is scrutinizing Marketing Services Agreements (MSAs) in a way that appears to be contrary to decades of HUD guidance. In addition to a significant number of enforcement actions involving MSAs, the agency issued Compliance Bulletin 2015-05 on October 8 which casts doubt about whether the CFPB would ever approve an MSA.
CFPB Richard Cordray was quoted: “We are deeply concerned about how marketing services agreements are undermining important consumer protections against kickbacks. Companies do not seem to be recognizing the extent of the risks posed by implementing and monitoring these agreements within the bounds of the law.”
The bulletin began with a seminar message: “The Bureau has received numerous inquiries and whistleblower tips from industry participants describing the harm that can stem from the use of MSAs, but has not received similar input suggesting the use of those agreements benefit either consumers or industry.”
The Bureau’s position appears to be that MSAs serve no useful purpose.
Let’s look at the background. First, the prohibition against kickbacks: Section 8(a) of RESPA prohibits giving or accepting “any fee, kickback or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a party of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” Second, the carve out that MSA participants have relied upon: Section 8(c)(2) provides “(n)othing in this section shall be construed as prohibiting the payment of bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.”
Based on years of HUD guidance and legal advice from industry authorities, many lenders, real estate agencies, law firms, title agencies and other providers have routinely entered into agreements to pay each other marketing fees. The entities often share office space as well as sophisticated marketing efforts.
The advice of HUD and the experts was, generally:
- don’t tie the relationship or compensation to sales, referrals or productivity;
- limit the services to marketing;
- avoid exclusivity provisions;
- value marketing services objectively. This requirement was often the sticking point because shared marketing campaigns are difficult to value. Some experts suggested hiring auditing or actuarial companies; and
- track the services in the event proof is needed.
The bulletin suggested that the kickbacks and referral fees associated with MSAs may result in consumers paying higher prices for mortgages, and that the practice of steering business may indirectly undermine consumers’ ability to shop for mortgages.
Running afoul of the CFPB in this area has resulted in injunctive relief including bans on entering MSAs, bans on working in the mortgage industry for up to five years, and penalties totaling more than $75 million.
Wells Fargo, Bank of America and Prospect Mortgage have announced decisions to discontinue MSAs. The Mortgage Bankers Association, which had asked the CFPB for guidance on this topic, has now warned its members to take the bulletin very seriously because it appears to be a series of warnings rather than the requested guidance.
Because of the possibility of enormous potential liability, I urge South Carolina real estate lawyers to completely avoid MSAs in the current regulatory environment, at least until more guidance is provided either by the CFPB or court action.