Marketing Services Agreements Under The Microscope
The Consumer Financial Protection Bureau (CFPB) is an independent entity housed in the Federal Reserve with its own budget and director, having broad authority and expansive power to prevent and address financial abuses. Since becoming operational on July 21, 2011, the CFPB has moved swiftly and aggressively in pursuit of its enforcement efforts, using its unparalleled power and limited accountability to not only investigate violations of federal consumer protection laws, but also to implement broad enforcement relief. The bureau, which has not been shy in announcing that it intends to exercise, to the fullest extent, its regulatory authority over service providers, has now turned its attention to marketing services agreements (MSAs).
Having assumed oversight of consumer compliance rules from seven different federal agencies, the CFPB maintains primary enforcement authority over federal consumer protection laws. It is with this power that the Bureau has, for the first time, publicly addressed MSAs. Not surprisingly, this was done by way of an enforcement action in which the CFPB issued a consent order against a title agency in Michigan by the name of Lighthouse Title. The order included a $200,000 civil penalty and a requirement that Lighthouse Title cancel all of its existing MSAs.
MSAs have increased in popularity over the last several years as an effective tool to strengthen the relationship between a real estate brokerage and a title company or mortgage broker. Under such agreements, the real estate office typically agrees to market the services of the title company or mortgage broker (the provider), in exchange for the payment of a “marketing fee” by the provider to the real estate office. And while MSAs, in and of themselves, are permitted under RESPA, it is critical that the agreement comply with the bureau’s interpretation of Section 8 of the Real Estate Settlement and Procedures Act (REPSA).
As previously mentioned, a typical MSA constitutes an agreement between a title company or mortgage broker that engages another settlement service provider, typically a real estate brokerage, to perform general marketing services in exchange for fixed fees that are not based on the business generated. Rather, the fees paid must compensate the provider only for those marketing services actually rendered.
Unfortunately for Lighthouse Title, the CFPB determined that its MSAs based compensation, in part, on: (1) how many referrals Lighthouse had received; and (2) the price that competing title companies were willing to pay to enter into a substantially similar agreement. The CFPB additionally concluded that Lighthouse failed to monitor the other parties to its MSAs to ensure that it received the services for which it contracted. The bureau’s consent order therefore emphasizes the importance of carefully calculating the fair market value of the services performed under an MSA and thoroughly documenting that analysis. It additionally stresses the need to monitor the contracted services, thereby ensuring that the provider gets what it paid for. Parties to MSAs may therefore want to implement reporting requirements to account for and create a record of the services actually provided.
Finally, it is worth noting that by way of the Lighthouse Title consent order, the CFPB opined that a contract, such as an MSA, constitutes a “thing of value” under RESPA’s anti-kickback provisions. While the effects of this position are not yet known, the bureau expressed that “Entering a contract with the agreement or understanding that in exchange the counterparty will refer settlement services related to federally related mortgage loans violates Section 8(a) [of RESPA].” Whether this sentiment is in fact supported by RESPA is very much in debate and will almost certainly be challenged on the basis that the act itself suggests that contracts are a necessary component of the Section 8(c) exemption that permits various settlement service providers to work together.
To be clear, the Lighthouse Title consent order does not prohibit or outlaw MSAs. The order does, however, clarify that the provider is obligated to prove that the marketing services indentified in the MSA were actually performed and done in exchange for the fair market value of the services rendered. Title companies and mortgage brokers, as well as real estate brokers, may therefore want to review their existing MSAs to ensure they do not fall prey to the same pitfalls that ensnared Lighthouse Title.
Agents with questions regarding RESPA compliance are urged to speak with their broker and brokers are advised to consult with independent legal counsel.
About the Author:
Scott M. Drucker, Esq., a licensed Arizona attorney, is General Counsel for the Arizona Association of REALTORS® serving as the primary legal advisor to the association. This article is of a general nature and reflects only the opinion of the author at the time it was drafted. It is not intended as definitive legal advice, and you should not act upon it without seeking independent legal counsel.
Tags: marketing, MSA