The CFPB on MSAs: Consider Yourself Warned

By: Holly Spencer BuntingPhillip L. Schulman

Settlement service providers have been begging the Consumer Financial Protection Bureau (“CFPB”) for regulatory guidance regarding marketing services agreements (“MSAs”) under Section 8 of the Real Estate Settlement Procedures Act (“RESPA”).  Yesterday, they got it − sort of.  After months of the industry deciphering enforcement actions in an attempt to gauge whether the CFPB believes MSAs between settlement service providers are legal under RESPA, the CFPB issued Compliance Bulletin 2015-05 (“Bulletin”) regarding “RESPA Compliance and Marketing Services Agreements.”  But, the Bulletin neither answers the legality question nor provides clear guidelines on what can and cannot be done in an MSA.  Rather, the Bulletin, as stated by the CFPB, “describe[s] the substantial risks posed by entering into [MSAs].”  It is safe to say this is not the kind of guidance the industry was looking for.

The Bulletin ties MSA risks to whistleblower tips and the CFPB’s enforcement and investigation experience related to MSAs and other arrangements between settlement service providers.  Because the CFPB has yet to receive input from industry or tipsters to suggest that MSAs benefit either consumers or industry, the CFPB states that “it appears that many MSAs are designed to evade RESPA’s prohibition on the payment and acceptance of kickbacks and referral fees.”  The Bulletin stops short of declaring MSAs per se illegal under Section 8 of RESPA, but the CFPB clearly communicates its dislike for the arrangements.

The CFPB acknowledges that determining whether an MSA violates RESPA requires the facts and circumstances surrounding the creation of each agreement, as well as its implementation, to be carefully evaluated.  The Bulletin then focuses on the facts and circumstances the CFPB views as problematic with MSAs, while broadly declaring 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.”  Although not a direct recitation of the CFPB director’s analysis of Section 8(c)(2) in recent enforcement actions, the same theme creeps through.  For instance, where a company enters into an MSA as a quid pro quo for the referral of business and pays fees under the agreement based, in part, on the number of referrals, the CFPB takes issue.  In addition, the CFPB notes that when services agreed to under an MSA are not performed and payments continue to be made, a “reasonable inference can be drawn that the MSA is part of an agreement to refer settlement services business in exchange for kickbacks.”  These facts and circumstances seem to be well settled based on the requirements of Section 8 of RESPA.  But, the Bulletin does not stop here; next comes the CFPB’s litany of risks presented by MSAs for noncompliance with RESPA.  Some of the highlights include:

• Steering incentives inherent in MSAs are clear and “create tangible legal and regulatory risks for the monitoring and administration of such agreements.”

• Instead of directing advertising services towards consumers, “some companies that frequently enter into MSAs actually direct the bulk of their advertising and promotional efforts toward other settlement service providers in an effort to establish more MSAs.”

• “Certain other companies use a third-party consultant to set prices for the services that the MSA purports to cover, but independently established market-rate compensation for marketing services, alone, does not suffice to ensure the legality of an MSA.”  This is the first time regulators have focused on the role that independent opinions regarding fair market value of marketing services play in the analysis of MSAs.

• “[M]any 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.”

• Efforts undertaken to monitor activities performed by a range of individuals under MSAs are “inherently difficult,” and there is a significant risk that these efforts may violate RESPA, even when the terms of an MSA have been carefully constructed to be “technically compliant” with RESPA.

The CFPB calls these facts, circumstances, and risks “grave concerns,” and issues two warnings: mortgage industry participants should carefully consider the legal and compliance risks of MSAs, and the CFPB “intends to continue actively scrutinizing” MSAs as part of its enforcement and supervision work.  Thus, despite the CFPB’s clear prejudice against MSAs, they avoid claiming MSAs are per se illegal; instead, they caution careful consideration of legal and compliance risks for those choosing to engage in MSAs.  Good advice in today’s highly charged enforcement atmosphere.

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