CFPB issues warning about marketing agreements
On October 12, 2015
By Peg Ritenour, OAR Vice President of Legal Services/Administration
Several recent RESPA enforcement actions have prompted the Consumer Financial Protection Bureau (“CFPB”) to issue guidance regarding what it considers the risks of entering into marketing services agreements. Whether you currently have a marketing services agreement with a lender, title company, home inspector or other settlement service provider, or are or are thinking of entering into one, this CFPB Compliance Bulletin about the RESPA prohibition against referral fees is a “must read.”
So what is a marketing services agreement, or an “MSA?” It is an arrangement under which one settlement service provider receives compensation from another settlement service provider for marketing its services. For example, a real estate broker may enter into an MSA with a title company or lender under which the broker receives compensation for providing that company with advertising space on the brokerage website, placing signage and materials in the brokerage reception area, including promotional pieces in the brokerage’s listing and buyer packets, etc.
While an MSA is usually structured as payment for advertising or promotional services, a RESPA violation can occur if the compensation is found to be paid in exchange for referrals. Of course, RESPA prohibits both the payment and receipt of anything of value between settlement service providers in exchange for referrals. For this reason, if the compensation that is paid under an MSA is based on the number of referrals or business actually received, a violation of RESPA will be found to have occurred. To avoid a violation, payment for marketing services should be structured as a flat fee for marketing services that are actually rendered and that payment should not vary based upon whether any referrals or business is generated from that advertising.
Another crucial issue is the amount of compensation that is paid for the marketing services. To comply with RESPA, the payment for the advertising or marketing services must be based on the fair market value of that service. In arriving at this payment it is highly recommended that an outside third party be utilized to arrive at the current fair market value of the service being provided. Payment that exceeds the fair market value has been considered by the CFPB as disguised compensation for the referral of business.
In some instances, real estate licensees can violate RESPA when they engage in joint advertising with another settlement services provider without each party paying its proportional share. An example of this is where an agent and title company run a joint advertisement in a newspaper or magazine, but the title company pays for the entire cost of the ad, or more than its proportionate share of the ad. Likewise, a violation could potentially occur where a lender advertises on an agent’s website and underwrites all or most of the cost of the agent’s website. If such payments exceed the value of the marketing being provided, this could be viewed as a hidden referral fee.
Another issue that has resulted in enforcement action by the CFPB is where the entity that has agreed to provide marketing services under the MSA fails to provide all or part of the services, yet is still compensated. So for example under the MSA the brokerage is required to display the lender’s ad on the banner of the brokerage website for one year, but only actually displays the banner for a few months. Because the marketing services are not being provided in exchange for the payments, the CFPB has viewed such compensation as disguised referral fees. For this reason it is imperative that monitoring or auditing be done by the participants to the MSA to assure that the paid for services are actually performed.
In the Bulletin issued last week by the CFPB, it indicates that it is receiving an increased number of complaints about sham MSAs from whistleblowers and also indicated its intent to actively scrutinize MSA arrangements. It cautions that “the risk of behaviors that may violate RESPA are likely to remain significant,” even where a carefully drafted MSA has been technically drafted to comply with RESPA.
Due to this increased scrutiny by the CFPB it is crucial for brokers or agents who have entered into such agreements to have their contract and practices reviewed by an attorney who is knowledgeable about how RESPA applies to MSAs. To watch an NAR webinar on the Do’s and Don’ts of Marketing Services Agreements, click here.