RESPA Hot Topics: Marketing Alliances In A Competitive Mortgage Market – Financial Services

In this article, the authors begin with a RESPA Section 8
overview. They then turn to a detailed discussion of CFPB’s
FAQs, which provide important guidance concerning compliance with
Section 8. Finally, they discuss FAQ guidance as applied to MSAs
and conclude with tips for RESPA compliance.

The enforcement landscape under Section 8 of the Real Estate
Settlement Procedures Act (“RESPA”) remains largely
unchanged, but in today’s competitive residential mortgage
market, strategic marketing alliances among real estate brokers,
mortgage lenders, title insurance agencies, and other service
providers are in high demand, making compliance with RESPA a hot
topic.

With rising interest rates and a steep reduction in applications
for mortgage refinance loans, competition has increased for
purchase-money mortgages. In times like these, there is a tendency
for settlement service providers to enter into creative strategic
alliances as a way to help secure more business. These strategic
alliances are subject to Section 8 of RESPA, and when structuring
them, companies can refer to recent informal guidance from the
Consumer Financial Protection Bureau (“CFPB”) relating to
marketing services agreements (“MSAs”) and other
promotional opportunities. This article discusses the CFPB October
2020 guidance on complying with Section 8 of RESPA, as well as
provides practical tips to assist in structuring new or existing
marketing relationships.

RESPA SECTION 8 OVERVIEW

RESPA contains two provisions that impact how settlement service
providers may enter into strategic arrangements with each other.
First, Section 8(a) of RESPA prohibits any person from giving or
receiving a thing of value pursuant to an agreement or
understanding in return for the referral of settlement service
business in connection with a federally related mortgage
loan.¹ Five elements must be present in order for a
person to violate RESPA Section 8(a):

1. the real estate transaction must involve a federally related
   mortgage loan, which essentially includes most residential mortgage
   loans;




2. a person must make a referral, defined as “any oral or
   written action directed to a person which has the effect of
   affirmatively influencing the selection by any person of a provider
   of a settlement service . . . when such person will pay for such
   settlement service . . .”;




3. the referral must involve settlement services, which are
   defined to include most services related to the origination of a
   mortgage loan;




4. a thing of value must be provided in return for the referred
   settlement business; and




5. the thing of value provided must be pursuant to an agreement or
   understanding that the thing of value is provided in return for the
   referral of settlement service business.

Second, Section 8(b) prohibits unearned fee arrangements in
connection with federally related mortgage loans. A person is
prohibited from giving or accepting any portion, split, or
percentage of charges made or received for a settlement service
unless for services actually performed.

Section 8(c) and Regulation X contain several exceptions to
these two provisions, although three of these exceptions are most
often used to justify strategic alliances. Specifically, the
following are permitted under Section 8 of RESPA:

• a bona fide salary, or compensation, or other payment for goods
  or facilities actually furnished, or for services actually
  performed;




• distributions made according to ownership interests in
  affiliated business arrangements; and




• normal promotional and educational activities that are not
  conditioned on the referral of business and that do not involve the
  defraying of expenses that otherwise would be incurred by persons
  in a position to refer settlement services.²

While the U.S. Department of Housing and Urban Development,
which regulated RESPA until July 2011, often issued informal
guidance and Policy Statements interpreting Section 8 and these
exceptions, the CFPB has issued minimal written guidance. However,
in October 2020, the CFPB issued a series of Frequently Asked
Questions (“FAQs”) addressing Section 8 of RESPA and,
specifically, MSAs and promotional activities.³ As
companies compete to originate and close fewer numbers of mortgage
loans, this guidance provides important parameters for companies
forming and expanding their strategic marketing arrangements.

CFPB’S RESPA FREQUENTLY ASKED QUESTIONS

Gifts and Promotional Activity

The CFPB RESPA FAQs provide important guidance to anyone
considering developing a business arrangement that includes gifts
and promotional activities. Importantly, gifts and promotions are
generally considered “things of value” under RESPA, and
accordingly, cannot be given or accepted as a part of any agreement
or understanding for the referral of a settlement service. The
value of the gift or promotion is not relevant according to the
CFPB, so presumably, even a minimally valuable gift or promotion
could be considered a “thing of value” for purposes of
Section 8.

Although gifts and promotional activities are prohibited when
made in exchange for the referral of a settlement service, a
“normal promotional or educational activity” is not
prohibited under Regulation X. Normal promotional and educational
activities are permitted if: (1) they are not conditioned on the
referral of business and (2) they do not defray expenses that would
otherwise be incurred by the referral source. The CFPB specifies in
the FAQs that whether a particular activity meets these conditions
is a factual question, but the guidance lays out several factors
that are relevant to whether each of the two conditions are
met.

The CFPB indicates that a promotional activity is more likely to
indicate a RESPA violation if:

• The item or activity is narrowly targeted to potential or
  current referral sources. For example, a promotional item is only
  provided to a limited set of settlement service providers who are
  current referral sources or the item is targeted to a group of
  future referral sources.




• A referral source is routinely and frequently provided with an
  item or included in an activity, particularly if done so more often
  than in comparison with other persons.




• The item or activity involves a good or service that the
  referral source would otherwise have to pay for themselves. For
  example, the promotional activity involves paying for mandatory
  continuing education expenses, certifications, licenses, or other
  items that the referral source would otherwise pay for on their
  own. Or if the activity involves paying for the referral
  source’s office supplies branded with the referral source’s
  name, contact information, or logo.

According to the FAQs, a promotional activity is less likely to
indicate a RESPA violation if:

• The item or activity is provided to a broader set of
  recipients, such as the general public or all settlement service
  providers offering similar services in an area.




• A referral source is provided with office supplies featuring
  the name, contact information, or logo of the entity providing the
  supplies.

Additionally, the FAQs provide examples of activities that are
more likely to be considered normal promotional and educational
activities:

• A settlement agent hosting a one-time drawing for a mini
  basketball set. The drawing is announced in an e-mail to all prior
  customers and loan originators in the locality. The e-mail also
  provides details about the settlement agent and their services.
  Entries are automatically made for each such person, regardless of
  whether each person made or will make a referral to the settlement
  agent. The agent also includes a drawing entry submission form on
  their website. The CFPB notes that here, entry in the drawing is
  not conditioned on referrals and the prize does not defray expenses
  because it is not an expense otherwise incurred by the drawing
  entrants.




• A title company hosts a continuing education course that can be
  used by real estate agents to fulfill their licensing requirements.
  The title company charges a course fee equivalent to the fair
  market value of the course, and invites all local real estate
  agents. Real estate agents pay for the course on their own. The
  CFPB notes that here, admission is not conditioned on referrals,
  and the real estate agent’s costs are not defrayed.




• A title company routinely hosts free seminars on recent real
  estate market developments. The seminars are open to the public and
  advertised to all the area’s real estate agents. The CFPB notes
  that here, admission is not conditioned on referrals, and the
  attendees’ costs are not defrayed because the seminars are
  routinely free.

In contrast to the above examples, the CFPB also provides
examples of conduct that are likely to violate RESPA:

• A settlement service provider gives current or potential
  referral sources tickets to attend professional sporting events,
  trips, restaurant meals, or sponsorship of events (or the
  opportunity to win any of these items in a drawing or contest) in
  exchange for referrals as part of an agreement or
  understanding.




• A settlement agent hosts a one-time drawing for a mini
  basketball set. An e-mail announcing the drawing and promoting the
  settlement agent is sent only to certain mortgage loan originators,
  who are given drawing entries for each referral an originator
  makes. The CFPB notes that here, the opportunity to win the prize
  is conditioned on the referral of business because the only persons
  in the drawing are those who made referrals and the number of
  entries is based on the number of referrals.




• A title company offers a continuing education course that real
  estate agents can use to meet their license requirements. The
  admission fee is waived if the real estate agent makes a certain
  number of referrals. The CFPB notes that the admission fee waiver
  is conditioned on referrals and defrays the real estate agent’s
  expenses.




• A title company offers a continuing education course that real
  estate agents can use to meet their license requirements. The
  course is open to the public and the title company charges an
  admission fee, but waives the fee for all real estate agents. The
  conduct likely is not a normal promotional or educational activity
  because the waiver defrays the real estate agent’s
  expenses.

Marketing Services Agreements

The CFPB FAQs also provide guidance on MSAs, particularly on the
differences between referrals and marketing services, as well as
when certain MSAs may be prohibited under RESPA. An MSA is an
agreement whereby one person agrees to provide marketing services
for another person in return for compensation. The MSA FAQ guidance
is an update to the CFPB’s position regarding such agreements.
In 2015, the CFPB had issued a compliance bulletin that noted
“grave concerns” with noncompliant MSAs and suggested
mortgage industry participants more carefully evaluate the risks of
MSAs, but the CFPB provided very little guidance on how MSAs could
be compliantly structured.⁴ The CFPB officially
rescinded that compliance bulletin on the same date it issued the
FAQs. The FAQs provide substantive guidance on the factors relevant
to whether an MSA is structured and implemented in a compliant
manner.

Whether a particular activity is considered a referral or a
marketing service is a fact-specific question according to the
FAQs. A referral includes any oral or written action that has the
effect of affirmatively influencing the selection of a particular
settlement service provider, made to a person paying a charge
attributable to the service or business, such as a mortgage lender
handing a client the contact information for a title company. A
marketing service, in contrast, is not directed to a person but to
a wider audience, such as placing advertisements in a newspaper.
MSAs that involve payments for referrals are prohibited under
RESPA. The FAQs indicate that MSAs providing for payments for
marketing services are permitted under Section 8 of RESPA if
structured and implemented appropriately.

The CFPB indicates MSAs that include the following conditions
are more likely to be considered compliant with RESPA:

• Any compensation provided under the MSA is in exchange for
  actual marketing services provided.




• The marketing services are purchased at fair market value.




• The marketing services are actual, necessary, and distinct from
  the primary services performed by the person providing the
  services.




• The marketing services are actually performed.

In contrast, the CFPB emphasizes that MSAs must not include
payments based on the number of referrals received or otherwise
include an agreement to pay for referrals. The FAQs include
examples of MSAs that would not comply with RESPA:

• A charge is paid for marketing services not actually
  performed.




• The compensation exceeds the value of the services
  provided.




• The services provided are nominal.




• Payments are duplicative.




• The MSA is designed or implemented in a way to disguise the
  payment for referrals.

Not surprisingly, this guidance closely tracks the two
requirements to satisfy the Section 8(c)(2) exception – (1)
the performance of actual, necessary, and distinct goods and/or
services and (2) the payment of a fair market value amount for such
goods and/or services. If one or both of these conditions are not
present in the MSA, the arrangement is likely to violate Section 8
of RESPA.

COMPLIANCE TIPS

It often happens that the kinds of strategic alliances that
exist in the market become more creative and more aggressive in
their structure when competition is high for mortgage loans. With
higher interest rates and fewer loans to be made, it can be more
difficult to win the business, and the focus turns to relationship
building and compensating partners to solidify those relationships.
But, as we have discussed, Section 8 of RESPA prohibits
compensation for referrals of settlement service business. The
penalties for violating Section 8 are steep and include criminal
penalties, as well as a private right of action for consumers that
could yield damages in an amount equal to three times the value of
the settlement service. The CFPB has additional penalty authority,
including civil money penalties that could reach over $1 million
per violation for knowing violations of the law. Accordingly,
despite the market pressures, it is vital for settlement service
providers to carefully follow RESPA, Regulation X, and CFPB
guidance when developing and maintaining strategic relationships
with other persons.

Promotional Activities

Promotional activities are the heart of any business
development, but Section 8 necessitates extra attention to those
activities with persons and companies in a position to refer
settlement service business. Regulation X is explicit that
promotional and educational activities must not be conditioned on
the referral of settlement service business or defray the expenses
that otherwise would be incurred by the person in a position to
refer that business. The CFPB’s FAQs articulate factors to
guide settlement service providers in complying with these
requirements:

• If an item or activity is targeted narrowly towards prior,
  ongoing, or future referral sources, this could indicate the item
  or activity is conditioned on referrals of business. The CFPB
  suggests that promotional items should be provided to a broader
  group, including all providers performing similar services in a
  particular locality.




• The frequency of a promotional activity matters. If a
  promotional activity is routine and frequent, this could indicate
  the activity is conditioned on the referral of business.




• If the promotional activity results in the referral source
  receiving goods or services that it would otherwise have to pay
  for, this could indicate that expenses are defrayed. As an example
  of defraying expenses, in a 2007 enforcement action, regulators
  entered into a settlement agreement with a title insurance company
  that allegedly provided a homebuilder with prepaid “just
  sold” and “just listed” postal cards and listing
  agreements at no cost or below market cost, as well as a periodic
  subsidy to cover marketing expenses, retail store gift
  certificates, event tickets, and funds to cover the costs of
  dinners for the homebuilder’s employees.⁵ But, if
  the promotional item is something a referral source would not
  generally use its own funds to acquire, the CFPB indicates this is
  less likely to defray expenses. As noted in the FAQs, this could
  include office supplies branded with the name of a title insurance
  agency and supplied to a real estate broker.




• The activity or item should involve the settlement service
  provider promoting its own business, whether via branded items, or
  distribution of marketing materials, and/or discussion of the
  provider’s services.

MARKETING SERVICES AGREEMENTS

Based on the law and guidance,⁶ regulators have made
clear that MSAs can comply with RESPA as long as they are
structured in accordance with Section 8(c)(2). As settlement
service providers consider whether an MSA is an effective
promotional strategy in today’s market, regulator guidance
provides helpful tips for RESPA compliance:

• The person performing the marketing services should direct
  advertisements to the general public. The CFPB FAQs affirm that
  advertisements in widely circulated media qualifies as a
  compensable marketing service.




• An MSA should be in writing and specify the services to be
  performed. The service provider should maintain documentation that
  it performed the services. The recipient of the services should
  ensure the services are completed before paying for them. As the
  CFPB indicates, an impermissible MSA includes those where payments
  are made but no services are performed. Identifying the exact
  services to be performed and having evidence of such performance
  should aid in demonstrating compliance with RESPA. The CFPB has
  entered into at least one consent order that considered failure to
  ensure services were completed a factor indicating an impermissible
  MSA.⁷




• The MSA should not be exclusive, meaning the service provider
  should not be prohibited from providing services to other
  companies. In evaluating whether an arrangement complies with
  RESPA, regulators have indicated that an exclusive arrangement is
  one that raises red flags in that analysis.




• It is best practice to disclose the existence of a paid
  services agreement to a consumer. Regulators have suggested that
  disclosing the existence of a paid marketing relationship is an
  important factor in measuring compliance.




• Payments should be tied to the value of services actually
  performed and payment amounts should not be adjusted based on the
  number of referrals. For example, past CFPB consent orders indicate
  that adjusting fees based on the number of referrals and failing to
  establish the fair market value of the marketing services provided
  could be viewed as factors indicating the MSA does not comply with
  RESPA. This is an issue the CFPB highlighted in past enforcement
  actions⁸ and emphasized in its recent FAQs.




• The parties to an MSA should not require consumers to use the
  services of the other party. The CFPB has indicated in past consent
  orders that MSAs containing such a requirement are
  improper.⁹

CONCLUSION

Creative strategic relationships may be an attractive option for
many settlement service providers in today’s mortgage market.
RESPA permits certain arrangements as long as they are carefully
structured to comply with exceptions to Section 8, and regulator
guidance offers practical compliance parameters to assist companies
in marketing-related activities. Given the significant penalties
that could apply under Section 8, it is important to be proactive
and cognizant of RESPA risk.

Footnotes

1. 12 U.S.C. § 2601.

2. 12 U.S.C. § 2601(c); 12 C.F.R. §
1024.14(g).

3. CFPB, Real Estate Settlement Procedures Act FAQs (Oct.
7, 2020), https://www.consumerfinance.gov/compliance/compliance-resources/mortgage-resources/real-estate-settlement-procedures-act/real-estate-settlement-procedures-act-faqs/.

4. CFPB, Compliance Bulletin 2015-15, RESPA
Compliance and Marketing Services Agreements (Oct. 8, 2015),
https://www.consumerfinance.gov/policy-compliance/guidance/supervisory-guidance/bulletin-respa-compliance-marketing-services-agreements/.

5. Settlement Agreement with Fidelity National Title
Insurance Company (Feb. 5, 2007), available at http://portal.hud.gov/hudportal/documents/huddoc?id=DOC_19724.pdf.

6. See, e.g., 75 Fed. Reg. 36271 (Jun. 25,
2010); 75 Fed. Reg. 74620 (Dec. 1, 2010); CFPB, Real Estate
Settlement Procedures Act FAQs (Oct. 7, 2020), https://www.consumerfinance.gov/compliance/compliance-resources/mortgage-resources/real-estate-settlement-procedures-act/real-estate-settlement-procedures-act-faqs/.

7. Consent Order, In the Matter of Lighthouse Title,
Inc., 2014- CFPB-0015 (Sept. 30, 2014).

8. See, e.g., Consent Order, In the Matter
of Prospect Mortgage LLC, 2017-CFPB-0006 (Jan. 31, 2017);
Consent Order, In the Matter of RGC Services, Inc.,
2017-CFPB-0009 (Jan. 31, 2017); Consent Order, In the Matter of
Willamette Legacy, LLC, 2017- CFPB-0008 (Jan. 31, 2017);
Consent Order, In the Matter of Lighthouse Title, Inc.,
2014-CFPB-0015 (Sept. 30, 2014).

9. Consent Order, In the Matter of Prospect Mortgage
LLC, 2017- CFPB-0006 (Jan. 31, 2017); Consent Order, In
the Matter of RGC Services, Inc., 2017-CFPB-0009 (Jan. 31,
2017); Consent Order, In the Matter of Willamette Legacy,
LLC, 2017-CFPB-0008 (Jan. 31, 2017)

Originally published in The Review of Banking & Financial
Services.

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