- In an important new development, the Consumer Financial Protection Bureau (CFPB) on Oct. 7, 2020, announced that it has rescinded Compliance Bulletin No. 2015-15 (Bulletin) regarding the Real Estate Settlement Procedures Act (RESPA).
- The CFPB replaced the Bulletin - RESPA Compliance and Marketing Services Agreements (MSAs) - with RESPA Frequently Asked Questions (FAQs) designed to provide "clearer rules of the road for [MSAs]."
- This Holland & Knight alert provides a discussion concerning this development and its significance for the settlement services industry.
In an important new development, the Consumer Financial Protection Bureau (CFPB) on Oct. 7, 2020, announced that it has rescinded Compliance Bulletin No. 2015-15 (Bulletin) regarding the Real Estate Settlement Procedures Act (RESPA). The CFPB replaced the Bulletin - RESPA Compliance and Marketing Services Agreements (MSAs) - with RESPA Frequently Asked Questions (FAQs) designed to provide "clearer rules of the road for [MSAs]."
This Holland & Knight alert provides a discussion concerning this development and its significance for the settlement services industry.
CFPB Rescinds Bulletin No. 2015-15
In deciding to rescind the Bulletin, the CFPB stated that the Bulletin "does not provide the regulatory clarity needed on how to comply with RESPA and Regulation X." To better understand this, a little history may be helpful.
MSAs were used by settlement services providers (Providers) for many years before the Bulletin was issued. They are basically contracts in which a person in a position to refer settlement service business (e.g., real estate broker, title insurance agent, residential mortgage lender) (a Source) agrees to perform certain advertising and marketing services on behalf of a Provider in return for compensation. For example, a lender might enter into an MSA with a real estate broker pursuant to which the real estate broker would run lender advertisements in its weekly newsletter and banner ads on its website, allow lender representatives to attend open houses, display lender brochures in its offices and similar services, all in return for a fixed monthly fee.
By participating in MSAs, Providers seek to efficiently, and without violating the referral fee prohibition in RESPA § 8, get their marketing message before the Sources' customer base, which will typically be comprised of persons who are more likely than the general populace to have a need for the Providers' products or services.
The Bulletin was essentially a warning to Sources and Providers that "many MSAs necessarily involve substantial legal and regulatory risk for the parties to the agreement, risks that are greater and less capable of being controlled by careful monitoring than mortgage industry participants may have recognized in the past." The specific "legal and regulatory risk" referred to in this statement was the risk that the MSA would be found to violate Section 8.
What Does RESPA Say About MSAs? RESPA does not directly address the legality of MSAs. However, Section 8(a) of RESPA prohibits the payment of fees or other "thing of value" for the referral of settlement service business pursuant to an "agreement or understanding" and Section 8(b) of RESPA prohibits the splitting of a fee for a settlement service "other than for services actually performed." Violations of Section 8 can result in civil and criminal penalties.
Notwithstanding Section 8, many industry participants believed that MSAs could be justified so long as the advertising and marketing services required to be performed by a Source were bona fide, nonduplicative and actually performed, and the compensation paid for those services did not exceed their reasonable market value - even if referrals were involved. This belief was based on Section 8(c)(2) of RESPA ("Nothing in [Section 8] shall be construed as prohibiting ... the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed."), and Section 14(g)(iv) of Regulation X, RESPA's implementing regulation ("Section 8 of RESPA permits ... [a] payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.").
What Did the Bulletin Say? In the Bulletin, the CFPB took a critical view of MSAs. It stated that "any agreement that entails exchanging a thing of value for referrals of settlement service business involving a federally related mortgage loan likely violates RESPA, whether or not an MSA or some related arrangement is part of the transaction." It described MSAs as agreements that are "usually framed as payments for advertising or promotional services, but in some cases the payments are actually disguised compensation for referrals." It also advised that, in determining whether an MSA violates RESPA, the CFPB will review all of "the facts and circumstances surrounding the creation of each agreement and its implementation."
The Bulletin then went on to highlight some of the problems that the CFPB had found when investigating MSAs that led it to pursue enforcement actions against the participants. These problems included, for example, the payment of fees under an MSA that were based in part on how many referrals the payor received and/or the revenue generated by those referrals, the failure of a party to an MSA to actually perform the agreed-upon advertising and marketing services, and the fact that the number of referrals the Provider received increased by a statistically significant number following execution of an MSA with the Source.
The Bulletin further indicated that the CFPB had "grave concerns about the use of MSAs in ways that evade the requirements of RESPA," and that mortgage industry participants should undertake "a more careful consideration of legal and compliance risk arising from MSAs," especially in light of the fact that "whistleblower complaints about MSAs that violate RESPA have been increasing."
What Was Not Stated in the Bulletin? The Bulletin did not say that MSAs are per se illegal. However, it also did not offer any guidance as to what companies can or should do to ensure that their MSAs are compliant, except to say that the use of independent third-party valuation experts to determine fair market value of the advertising and marketing services will not, by itself, insulate them from liability.
Indeed, the Bulletin's message to Sources and Providers was that the legal and regulatory risks of being involved in MSAs (to both the companies and individuals within the companies) are simply too great and too difficult to control to justify entering into or continuing them. Reinforcing this message, then-CFPB Director Richard Cordray stated in his press release concerning the Bulletin that "[w]e are deeply concerned about how marketing services agreements are undermining important consumer protections against kickbacks," and that "[c]ompanies do not seem to be recognizing the extent of the risks posed by implementing and monitoring these agreements within the bounds of the law." In that same press release, he also announced that the CFPB "intends to continue actively scrutinizing the use of such agreements and related arrangements in the course of its enforcement and supervision work" and encouraged industry participants who suspect unlawful activity by others or who wish to self-report their own possibly unlawful conduct to contact the CFPB, noting that such "[s]elf-reporting and cooperation ... will be taken into account in resolving such matters."
Developments Following Issuance of the Bulletin
Immediate Impact. The impact of the Bulletin, following as it did an earlier Consent Order in which a title insurance agency agreed to terminate MSAs it had entered into with several referral sources and to pay the CFPB a $200,000 civil monetary penalty, was immediate and widespread. Numerous companies that were parties to MSAs decided to terminate them, determining that the risks of being involved in an MSA following issuance of the Bulletin (both regulatory and reputational) outweighed their benefits. And many other companies that were considering entering into a MSA chose to decline.
D.C. Circuit Court Decision in PHH Case. This was the state of affairs until Oct. 11, 2016. On that date, a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit unanimously overturned a novel interpretation of RESPA § 8(c)(2) by Director Cordray that provided the legal underpinning for the CFPB's Final Decision against PHH Mortgage Corporation (PHH Decision). (In the PHH Decision, the CFPB found that certain "captive reinsurance" arrangements between PHH and several private mortgage insurance companies violated RESPA § 8(a) and ordered PHH to pay a penalty of more than $9 million.) The PHH Decision came out only a few months before the Bulletin was issued.
As indicated above, Section 8(c)(2) states that "[n]othing in [RESPA § 8] shall be construed as prohibiting ... the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed." In Director Cordray's view, however, as stated in the PHH Decision, a payment is "bona fide" and thus permitted under Section 8(c)(2) only if it is "solely for the service actually being provided on its own merits," and not "tied in any way to a referral of business." It seems likely that this interpretation helped shape some of the more aggressive statements made by the CFPB in the Bulletin.
Rejecting Director Cordray's interpretation as "not a close call," the D.C. Circuit Court held "that Sections 8(a) and 8(c) of [RESPA] allow captive reinsurance arrangements so long as the mortgage insurance companies pay no more than reasonable market value to the reinsurers for services actually provided," notwithstanding that referrals may be involved. This decision was subsequently affirmed by the full panel of the D.C. Circuit.
Appointment of New CFPB Director. Another important development of note is that the CFPB is headed by Kathleen Kraninger, who was appointed by President Donald Trump following the resignation of former Director Cordray and the interim period during which Mick Mulvaney served as Acting Director. Director Kraninger has changed the focus of the CFPB from being the "cop on the beat" and "regulating by enforcement" to "preventing harm ... by building a culture of compliance throughout the financial system while supporting free and competitive markets that provide for informed consumer choice." The result is a more balanced approach to regulation and enforcement.
The New FAQs
The new FAQs specifically include FAQs that discuss RESPA § 8(a) as it applies to MSAs (MSA FAQs). They also include FAQs on RESPA § 8 in general, RESPA § 8(a), and RESPA § 8(a) as it applies to gifts and promotional activities, which are not addressed in this alert. This section will be confined to the MSA FAQs.
The MSA FAQs begin with the statement that "[a] lawful MSA is an agreement for the performance of marketing services [that are 'actual, necessary, and distinct from the primary services' performed by the Source] where the payments under the MSA are reasonably related to the value of services actually performed." The MSA FAQs distinguish lawful MSAs from unlawful "agreement[s] for referrals," and indicate that the determination as to whether an MSA is a lawful MSA or an unlawful "agreement for referrals" "depends on the facts and circumstances, including the details of the MSA and how it is both structured and implemented."
The MSA FAQs also explain that a "referral" is an oral or written action directed to a person which has the effect of affirmatively influencing the selection of a particular Provider, such as handing clients a Provider's contact information; whereas a "marketing service" is not directed to a person, but is generally targeted at a wider audience, such as placing an ad in a trade publication. The MSA FAQs further explain that arrangements that purport to be MSAs but where the compensation being paid to the Source is based on the number of referrals are prohibited, whereas those involving marketing services that are actually provided and for which only reasonable market-value compensation is paid are not prohibited.
And, importantly, the MSA FAQs make it clear that "RESPA Section 8 does not prohibit payments under MSAs if the purported marketing services are actually provided, and if the payments are reasonably related to the market value of the provided services only," although a cautionary note is added that "under Regulation X, the value of the referral, i.e., any additional business that might be provided by the referral, cannot be taken into consideration when determining whether the payment has a reasonable relationship to the value of the services provided."
The MSA FAQs also make it clear that -
an MSA is or can become unlawful if the facts and circumstances show that the MSA as structured, or the parties' implementation of the MSA - in form or substance, and including as a matter of course of conduct - involves, for example:
- An agreement to pay for referrals.
- An agreement to pay for marketing services, but the payment is in excess of the reasonable market value for the services performed.
- An agreement to pay for marketing services, but either as structured or when implemented, the services are not actually performed, the services are nominal, or the payments are duplicative.
- An agreement designed or implemented in a way to disguise the payment for kickbacks or split charges.
Conclusion and Takeaways
While further guidance regarding specific structuring and implementing issues that might cause an MSA to cross over the line from compliant to prohibited would be helpful, the CFPB's decision to rescind the Bulletin and issue the FAQs appears to be a step in the right direction.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.