Last week the Consumer Financial Protection Bureau (CFPB) made good on an earlier promise to fine lenders and real estate companies for partnering together.
When lenders and real estate companies do this it’s called an MSA or marketing services agreement, and they come in many forms from lenders and real estate companies doing joint marketing together, to lenders paying real estate companies to have access to their offices or sales meetings, to a lender and real estate company co-owning a lending arm together.
In early October 2015, the CFPB issued an MSA guidance bulletin saying, “Based on the Bureau’s investigative efforts, it appears that many MSAs are designed to evade RESPA’s prohibition on the payment and acceptance of kickbacks and referral fees.”
It doesn’t get much more clear than that.
And in case it wasn’t clear, a couple weeks later CFPB head Richard Cordray said this in reference to the MSA bulletin at the mortgage industry’s biggest conference: “These bulletins are our way of trying to make crystal clear our expectations. We intend for everyone to pay careful attention to what we are saying and act accordingly.”
What is still not totally clear to some in the consumer finance industry is the CFPB’s regulatory methodology. And to put it in simplest terms, there is a large body of existing laws the CFPB enforces, and they’ve relied heavily on two mechanisms to do so:
(1) bulletins (like the MSA bulletin) which provide guidance on select issues, and
(2) enforcements actions they take against consumer finance companies which provide further guidance on the enforcement issue at hand.
The CFPB can’t get to every consumer finance company on every issue. So their model since they began in July 2011 has been to issue bulletins and take enforcement actions against individual companies on issues they deem most important–and strongly encourage all industry participants to study the details of each enforcement against their peers and take them as seriously as if they were the company getting hit with the enforcement.
On this note, it’s worth adding that for the MSA issue, real estate brokerages can also get hit with enforcements like they did in this last round. So in case they thought they were immune, last week’s actions make it clear they’re not.
With that, here’s some attorney and MBA comments on these latest MSA enforcements that Rob Chrisman published this weekend. I’ve bolded a few particularly important notes (FYI “consent orders” are often the resulting documents that come from enforcements):
Chicago-based mortgage banking attorney Brian Levy, who offers RESPA training, had this to say about the recent Consent Orders involving Prospect Mortgage. “These Orders have huge direct implications for agreements with referral sources such as MSAs, lead sharing, desk leases, internet co-marketing and the like that rely on the 8(c)(2) exception to RESPA’s referral fee prohibition. After taking some time to consider their impact as regulatory interpretations (as Director Cordray notes, it would be compliance malpractice not to do so), it is apparent that while a few of the lessons in the Orders can be addressed by making some changes to your agreements, there is a deeper undercurrent of organizational compliance understanding that needs to be addressed as well. If you have these kinds of arrangements, you need to make sure your compliance house is in order, and that means your entire organization (and your referral sources) clearly understand what they are and are not.
“The Orders are more examples of the CFPB’s efforts to provide regulatory interpretation through enforcement with all of the problems identified in my prior writings with that approach. Still, while the CFPB has placed a high bar for compliance, they again did not declare these relationships illegal. No doubt, certain identified practices in the Orders are going to result in new scrutiny (such as pre-qualification requirements or exclusive web marketing relationships). On the flip side, for some of these arrangements, the Orders may have provided industry with some actual ‘how to’ guidance as to what might be a compliant structure. In that regard, consider carefully language in the Orders that says something to the effect, ‘Prospect did X, instead of Y.’ Although not exactly a reliable legal precedent, CFPB is essentially telling us that X is what they did wrong, but Y is something you can do.
“I’m sure the contracts used by Prospect in these relationships were prepared by some of the best attorneys in the business (no, it wasn’t me). I can also assume that Prospect’s lead share, MSA, and office lease agreements all relied on the 8 (c)(2) ‘services rendered’ exception to RESPA, yet, remarkably (but probably due to the ongoing PHH litigation), the Orders have no mention whatsoever of 8(c)(2) and very little mention of the applicable contracts. Clearly, what happened in implementation and the totality of the relationship(s) is what mattered to CFPB even more than what the agreements said.
“Illustratively, the evidence offered by the CFPB against Prospect was largely reflective of how the salespeople, in fact, interacted with each other. Looking at the coupling of payments with referral activity, CFPB determined all of the various 8 (c)(2) dependent agreements were really a guise for payment of referral fees. CFPB used several alleged comments made by Prospect’s staff and their realtor referral sources about the relationships to support their case. The CFPB appears to be telling us (just as they did in PHH) that they think any time you couple a payment for services with an expectation of referrals you will have the burden to prove that the payment was really for something other than the referrals.
“As I highlight for my RESPA trainees, you must know and be able to articulate the narrative of any relationship with a referral source to decouple the services, goods or facilities purchased from the referrals received. If true, however, the statements by various Prospect employees and, worse, the allegations of blatant payments to agents by the realtors for referrals, would be extremely damaging, if not fatal, to any narrative that these kinds of relationships were just about purchasing goods, services or facilities.
“Accordingly, beyond structuring contracts for these kinds of relationship(s) with referral sources to be legally compliant (including paying no more than reasonable market value for services and managing a compliance system to verify compliance), these Orders reinforce the need to make sure that your leadership, sales team and their business sources all understand and can articulate the basis of those relationships separate and apart from any referrals that may be obtained; i.e., everyone needs to understand what these kinds of relationships are and are not. This guidance about knowing your narrative is old news for anyone who has heard my RESPA training, however, I must admit, I was pleasantly surprised that CFPB finally took action against realtors involved in alleged RESPA violations.” (Brian is with Katten & Temple, LLP.)
Pete Mills, SVP of Residential Policy and Member Engagement with the MBA, wrote, “Rob – as you know, the CFPB issued 4 concurrent consent orders on January 31 dealing with alleged Section 8 violations. While certain aspects of the orders are routine and would have raised concerns under HUD’s ‘traditional’ interpretations of Section 8, others raise new questions about the CFPB’s evolving application of RESPA to common industry arrangements through the enforcement process. The bottom line is that it is clear that RESPA generally, and business arrangements with parties in a position to refer business, remain a supervisory and enforcement priority for the CFPB. The MBA believes these arrangements entail very significant CFPB enforcement risks. And the MBA continues to urge the CFPB to provide further guidance – until they do, MBA strongly urges members to proceed with the utmost caution on such arrangements.
–Prospect Mortgage To Pay $3.5 million to settle kickback charges