I. INTRODUCTION
The Consumer Financial Protection Bureau (CFPB) has issued a bulletin describing its findings that Marketing Services Agreements (MSAs) are often used as a means to circumvent RESPA’s prohibitions on kickbacks and referral fees under the Real Estate Settlement Procedures Act’s Section 8 provisions. The bulletin describes the federal anti-kickback provisions and sets forth examples from the CFPB’s enforcement experience as well as risks faced by lenders entering into these agreements.
Section 8(a) of RESPA prohibits the giving and accepting of “any fee, kickback or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” Section 8(c)(2) states that “[n]othing in this section 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.”
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. They may also involve third parties who are not settlement services providers, such as membership organizations. MSAs are usually framed as payments for advertising or promotional services, but in some cases the payments are actually disguised compensation for referrals.
According to the bulletin, while MSAs are purportedly designed to permit individuals or entities to pay service providers bona fide compensation for goods, facilities, or services actually provided—which is expressly permitted under RESPA —in some cases, MSAs are actually used as a cover for illegal referral fee arrangements. The bulletin further notes that even facially-compliant MSAs can be implemented in a manner that ultimately results in the impermissible exchange of compensation for referrals of settlement service business, often as a result of the significant financial pressures that exist for participants in the mortgage and settlement service markets. The CFPB’s guidance emphasizes the dangers posed to consumers by MSA arrangements that hide or indirectly or inadvertently facilitate the unlawful exchange of payment for referrals of settlement service business, including potential increases in mortgage pricing and negative impacts on consumers’ ability to freely shop for mortgages and mortgage-related settlement services.
The CFPB encourages all mortgage industry participants to consider carefully RESPA’s requirements and restrictions and the adverse consequences that can follow from non-compliance.” The bulletin follows several CFPB administrative enforcement actions that have altered the application and reach of the criminal Section 8 provisions under RESPA.
II. CFPB EXPERIENCE
Determining whether an MSA violates RESPA requires a review of the facts and circumstances surrounding the creation of each agreement and its implementation. The nature of this fact-intensive inquiry means that, while some guidance may be found in the Bureau’s previous public actions, the outcome of one matter is not necessarily dispositive to the outcome of another. Nevertheless, 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.
The CFPB’s Office of Enforcement has identified violations of RESPA Section 8(a) in the course of its investigations, including investigations that involved the use of oral or written MSAs. In addition, the CFPB has received numerous examples of MSAs from industry whistleblowers that, upon initial review, appear to use MSAs to disguise kickbacks and referral fees.
Impermissible actions that some MSAs attempt to disguise, such as the steering of business in connection with kickbacks and referral fees, may result in consumers paying higher prices for mortgages than would likely be the case without disguised kickback or referral fees. These practices also tend to indirectly undermine consumers’ ability to shop for mortgages, which can raise costs for consumers.
To illustrate various RESPA compliance risks that the CFPB has identified in connection with the use of MSAs, the bulletin references recent enforcement actions and other circumstances in which the CFPB has determined that entities and/or individuals may have committed a violation in connection with an MSA relationship. The MSA-related risks highlighted by the bulletin include:
III. LEGAL AND COMPLIANCE RISKS CREATED BY MARKETING SERVICES AGREEMENTS
In recent months, various mortgage industry participants have publicly announced their determination that the risks and complexity of designing and monitoring MSAs for RESPA compliance outweigh the benefits of entering the agreements. Accordingly, certain lenders have dissolved existing agreements and decided that they will no longer enter into MSAs. The CFPB encourages all mortgage industry participants to consider carefully RESPA’s requirements and restrictions and the adverse consequences that can follow from non-compliance.
The CFPB has found 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. MSAs appear to create opportunities for parties to pay or accept illegal compensation for making referrals of settlement service business. The CFPB also found that efforts made to adequately monitor activities that in turn are performed by a wide range of individuals pursuant to MSAs are inherently difficult. Especially in view of the strong financial incentives and pressures that exist in the mortgage and settlement service markets, the risk of behaviors that may violate RESPA are likely to remain significant. That can be true even where the terms of the MSA have been carefully drafted to be technically compliant with the provisions of RESPA.
IV. CONCLUSION
The CFPB’s experience in this area gives rise to grave concerns about the use of MSAs in ways that evade the requirements of RESPA. The CFPB reiterated that a more careful consideration of legal and compliance risk arising from MSAs would be in order for mortgage industry participants generally. The CFPB intends to continue actively scrutinizing the use of such agreements and related arrangements in the course of its enforcement and supervision work. Any industry participant that suspects unlawful activity by others or that wishes to self-report its own conduct that may have violated RESPA is encouraged to contact the CFPB. Self-reporting and cooperation, consistent with the Responsible Business Conduct bulletin, CFPB Bulletin 2013-06, will be taken into account in resolving such matters.