Consumer Financial Protection Bureau Revisits Marketing Agreements

In a series of new FAQs, the Consumer Financial Protection Bureau (CFPB) has revisited the status of marketing services agreements (MSAs) under the Section 8 anti‑kickback provisions of the Real Estate Settlement Procedures Act (RESPA). However, before examining the new FAQs guidance, it is necessary to review the underlying provisions of RESPA and the CFPB’s 2015 compliance bulletin in which the agency “describe[d] the substantial risks posed by entering into” MSAs.

Section 8 Prohibitions

In brief, Section (8)(a) of RESPA prohibits kickbacks (defined as any things of value) for business referrals of residential mortgage loan settlement services, e.g., title insurance, real estate brokerage, flood insurance, mortgage lending or brokerage. Section 8(b) adds that sharing or splitting fees for other than actual services performed is impermissible. Section 8(c) goes on to list examples of permissible payments and these examples emphasize that such payments must be reasonable and for actual services rendered.

MSAs are typically arrangements whereby a settlement service provider or another party, for compensation, provides goods or renders services promoting a(nother) settlement service provider. For example, a real estate agent promoting a mortgage lender or broker, or a lender or broker promoting a title insurance agency. The 2015 bulletin and the new FAQs address concerns over whether MSAs are abused and whether they can be vehicles for disguising otherwise impermissible referral fees.

2015 Guidance

Pointing out that “the primary purpose of RESPA is to eliminate kickbacks or referral fees that tend to increase unnecessarily the cost of [residual mortgage loan] settlement services,” the CFPB stated in 2015 that based on its own investigations and reports from industry whistleblowers, MSAs appear to be used “to disguise kickbacks and referral fees.” The agency cited examples of MSA misuse among lenders, appraisal management and title insurance companies. The CFPB found that MSA participants often failed to provide the services called for under those agreements and that those parties paying for the services acquiesced in such behavior. The CFPB had already brought enforcement actions for CFPB-perceived MSA-RESPA abuses. See, e.g., In the matter of Lighthouse Title, Inc., CFPB Admin. Proceeding 2014-CFPB-0015. The CFPB concluded that “when services promised under an MSA are not performed, but payments are being made, a reasonable inference can be drawn that the MSA is part of an agreement to refer settlement service business in exchange for kickbacks.”

Building on that inference, the agency went on to advise that MSAs pose “risks that are greater and less capable of being controlled” by parties to such agreements and that monitoring vendor compliance with MSA mandated services is “inherently difficult,” even when the MSA contract had been “carefully drafted to be technically compliant with . . . RESPA.”

Concluding that the agency had “grave concerns” with MSA arrangements, the CFPB committed to “continue actively scrutinizing” such arrangements. While the 2015 bulletin did not state that MSAs are per se violations of RESPA, the agency’s strong condemnation, combined with its enforcement actions, had a not surprisingly chilling effect on MSA adoption. Many industry participants concluded that the CFPB did, in effect, consider MSAs per se RESPA violations and that their continued use were invitations to government enforcement agency scrutiny and penalties.

Rescission of 2015 Guidance

In tandem with issuing the October 2020 FAQs, the CFPB rescinded the 2015 bulletin, stating that the earlier guidance had failed to “provide the regulatory clarity needed on how to comply with RESPA and [its implementing] Regulation X.” Going forward, the agency now advises, “whether a particular MSA violates RESPA Section 8 will depend on specific facts and circumstances, including the details of how the MSA is structured and implemented. MSAs remain subject to scrutiny, and the [CFPB] remain[s] committed to vigorous enforcement of RESPA Section 8.”

How to Comply Going Forward

The new FAQs reveal something akin to guiding principles or a roadmap of how to implement a RESPA Section 8 compliant MSA.

First, MSAs ought not be directed to a specific individual, but, rather, need to be targeted to a wider audience of potential customers. An MSA designed to promote a service provider to a specific person would not qualify.

Second, the services called for under the MSA must be actually performed. Mere enumeration of intended services is insufficient.

Third, the compensation must be reasonably related to the “market value of the provided services only.” While the CFPB declines to further define “reasonable compensation,” presumably, that calculation must exclude the value of a mere referral and may be based only on factors such as time expended, difficulty of contracted tasks, size of target audiences, expertise, experience and other non‑mere referral factors.

Fourth, the payments under the MSA may not be for duplicative services, e.g., paying for services already performed or to be performed by the paying party or others on its behalf.

Fifth, the services to be rendered under the MSA must be more than nominal. Token or de minimus services ought not be the basis of an MSA. Further guidance on what would constitute nominal services would have been helpful but the general intent seems clear; failure to provide substantive services would negate an MSA’s legality.

This writer adds that monitoring and auditing the party providing services under the MSA to ensure that party is, in fact, rendering the mandated services, as well as careful crafting of MSA agreements to reflect the parties’ clear understandings of their respective obligations and limitations, should also be implemented.

Future Enforcement

Have the new FAQs changed the practical status of MSAs? The CFPB FAQs reiterate that disguising kickbacks as MSA payments is illegal under RESPA, and the agency remains committed “to vigorous enforcement of RESPA Section 8.” However, by vacating the inference or presumption of MSA illegality, combined with a general perception that CFPB has not prioritized RESPA Section 8 enforcement, many will likely construe these October 2020 developments as a weakening of Section 8 CFPB enforcement resolve.

Nevertheless, MSA adoption is not without risk. Disingenuous or cynical utilization of MSA formats can trigger state enforcement agency investigations, as well as private litigation. The CFPB itself may also seek out an enforcement opportunity to demonstrate that it is, in fact, still committed to Section 8 compliance. A charge of administration in Washington may also lead to more aggressive enforcement. MSAs should be pursued only after careful review, including an economic (fair market pricing) analysis, documentation preparation and adoption of quality control and compliance procedures.

For more information, please contact Paul Schieber or reach out to the Stevens & Lee attorney with whom you regularly work.

This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.