The CFPB issued Compliance Bulletin 2015-05 (Bulletin) today, which sets forth its position concerning the use of Marketing Services Agreements (MSAs) by mortgage companies and settlement service providers. Importantly, the CFPB does not make new law in its Bulletin. MSAs are not prohibited by the Bulletin. However, the clear signal from the CFPB is that MSAs are unfavorable, represent substantial compliance risk to institutions that utilize them, and that the CFPB has significant questions regarding the ability to completely and correctly ensure that the terms of a MSA are carried out in full compliance with the law.
What Does the Bulletin Say?
The Bulletin gives a broad overview of the prohibition under the Real Estate Settlement Procedures Act (RESPA) against referral fees in the settlement services industry and identifies MSAs as arrangements that are framed as payments for promotional or advertising services that may actually be disguised compensation for referrals of business. MSAs may be between settlement service providers, such as lenders, real estate agents/brokers or title companies, or between a settlement service provider and non-settlement service providers, such as membership organizations.
As noted in the Bulletin, the determination of whether an MSA violates RESPA requires a fact-specific inquiry, and a finding that one arrangement violates RESPA will not necessarily dictate that the same finding will follow in another MSA analysis. The CFPB notes, however, that if a thing of value is exchanged for the referral of settlement service business, the arrangement “likely violates RESPA,” regardless of whether an MSA is part of the transaction.
The Bulletin discusses recent enforcement actions that the CFPB has undertaken related to MSAs that, the CFPB alleged, were structured as a quid pro quo for the referral of business, that impermissibly steered consumers to a particular settlement service provider and that did not result in the agreed upon services being performed under the MSA. Direct payment is not required—one enforcement action involved a title company defraying loan officers’ marketing expenses in exchange for the referral of title work. In addition, direct consumer marketing is not required in order for the MSA to be problematic. MSAs that direct promotional efforts toward other settlement service providers in an effort to establish more MSAs are a concern of the CFPB as well.
Importantly, the CFPB appears to dismiss industry efforts to establish RESPA-compliant MSAs. The Bulletin indicates that monitoring activities conducted under MSAs is difficult and the risk that the activities may violate RESPA is significant even if the MSA has been drafted in a manner that is compliant with RESPA. Furthermore, the Bulletin critiques independent valuations of MSAs, saying that “[c]ertain other companies use a third-party consultant to set prices for the services that the MSA purports to cover, but independently established market-rate compensation for marketing services, alone, does not suffice to ensure the legality of an MSA.” The CFPB has expressed its intent to “continue actively scrutinizing” MSAs and their permissibility under REPSA.FS
What Does the Bulletin Fail to Do?
- The Bulletin falls short of stating that MSAs are illegal. Nevertheless, while the Bulletin does not take that dramatic step, the Bulletin’s tone and pronouncements strongly suggest that the CFPB believes that a fully compliant MSA is the exception, rather than the norm.
- The Bulletin does not state that MSAs must be terminated and that any past agreements are not in compliance with RESPA. However, the Bulletin carefully notes that “various mortgage industry participants have publicly announced their determination that the risks and complexity of designing and monitoring MSAs for RESPA compliance outweigh the benefits of entering the agreements.” The Bulletin further encourages all mortgage industry members to consider RESPA’s requirements, restrictions, and the adverse consequences that may result based on non-compliance. It is the clear preference of the CFPB to limit or eliminate the use of MSAs.
- The Bulletin does not state that MSAs cannot be established in a compliant manner. However, it has concluded that entering into MSAs presents a heightened legal and regulatory risk and that the monitoring required to ensure adequate compliance with the terms of MSAs is “inherently difficult.”
Reading Between the Tea Leaves
- The Bulletin represents the first non-enforcement directive from the CFPB relating to the MSAs. While the mortgage industry previously could suggest that enforcement actions were fact-specific, the CFPB and other regulatory agencies now can point to the Bulletin to demonstrate that the mortgage industry is on notice about the risks associated with the use of MSAs.
- Industry members should expect that the use of MSAs will result in heightened scrutiny during CFPB examinations and may result in more significant enforcement actions.
- CFPB and other regulatory examinations likely will explore past relationships in greater depth and carefully consider the services provided by participants in MSAs. The Bulletin states that risks associated with MSAs are “less capable of being controlled by careful monitoring than mortgage industry participants may have recognized in the past.” Because of challenges associated with third party monitoring, it is reasonable to believe that the CFPB may conclude that the mere necessity of such monitoring is a weakness in an institution’s Compliance Management System.
- In carefully worded language, the CFPB notes that strong financial pressures potentially lead to risky behaviors that could violate RESPA, even in instances “where the terms of the MSA have been carefully drafted to be technically compliant with the provisions of RESPA.” It is this latter language that should give members of industry pause concerning MSAs. This language implies that the CFPB is highly skeptical of MSAs by suggesting it is possible to technically comply with RESPA through carefully documented agreements, but intimating that those agreements are nonetheless mere instruments designed to evade the law. To the extent that the CFPB truly believes all MSAs are designed to circumvent the provisions of RESPA, the penalties included in enforcement actions based upon activity subsequent to the issuance of the Bulletin may be severe.
- When the CFPB encourages the industry to “carefully consider RESPA’s requirements and restrictions and the adverse consequences that can follow from non-compliance,” industry participants should remember that violations of RESPA potentially could result in criminal sanctions.