Some have called compliance the “new black.” That may be partially correct, but complying with laws and regulations has never gone out of style. What has changed, though, is the lens through which regulators are using to interpret compliance. With the Consumer Financial Protection Bureau on the beat, regulators are laser-focused on the consumer experience.
“The CFPB has taken a strategic approach on their enforcement actions,” said Michelle Korsmo, ALTA’s chief executive officer. “They’ve taken a blend of different products and services offered by large and small companies. When you analyze each case, the key question is whether the bureau believed the consumer was harmed in some way. Enforcement will continue and will target settlement agents and transactions with lenders. It’s prudent that title and settlement agents continue to pay attention to regulators’ interpretations of regulations.”
To understand how the CFPB and other regulators are viewing compliance, there needs to be historical comprehension of the laws and regulations that govern the industry.
More than two decades before the Real Estate Settlement Procedures Act (RESPA) was passed, Congress directed the U.S. Department of Housing and Urban Development (HUD) and the Department of Veterans Affairs to study and make recommendations on ways to reduce and standardize the costs borrowers paid for settlement fees.
In 1972, the joint HUD/VA report alleged there was a lack of competition among settlement service providers and that charges were inflated due to kickbacks and referral fees.
The report recommended that Congress allow HUD and the VA to prescribe maximum allowable settlement charges. HUD proposed charges for six settlement items in six metropolitan areas—with an intention of rolling out equivalent rates nationally—but Congress ultimately decided to indirectly regulate rates by targeting business relationships.
According to Senate Report No. 93-866 from 1974, most borrowers did not shop for their settlement service providers. Instead, borrowers were referred to title insurance companies and other settlement service providers by real estate brokers, closing attorneys and other professionals. With the 1974 passage of RESPA, Congress opted for a statute designed to provide for more “advance disclosure to home buyers and sellers of settlement costs” and eliminate “kickbacks or referral fees” that can drive up settlement costs.
RESPA applies to “federally related” mortgage loans that are secured by a lien on residential real estate designated principally for the occupancy of from one to four families. Section 8 of RESPA spells out what is not allowed. Specifically, Section 8(a) says:
No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.
In addition, Section 8(b) says:
No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.
Meanwhile, Section 8(c) outlines permissible conduct identified as acceptable:
- “payment of a fee” to attorneys, title company agents, or lender agents “for services actually performed” (Section 8(c)(1))
- “payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed” (Section 8(c)(2))
- “payments pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and brokers” (Section8(c)(3))
- affiliated business arrangements “so long as [safe harbor requirements are satisfied]” (Section 8(c)(4))
Under Section 8(c)(2), RESPA allows payments for goods and/or services that are actual, necessary and distinct. The payment also must be commensurate with the value of goods and/or services. A Section 8 violation may result in civil and/or criminal liability, including a fine of up to $10,000, imprisonment of up to one year and civil liability of up to three times the amount paid for the settlement service at issue.
Marketing Services Agreements
Over the past few years, new regulatory requirements including higher net worth standards for mortgage banking operations and the inclusion of affiliate fees in the points and fees test for qualified mortgages have made affiliated business arrangements (AfBAs) less appealing, according to Phil Schulman of the law firm K&L Gates.
As the appetite for AfBAs waned, interest in marketing services agreements (MSAs) grew. In typical MSAs, a settlement service provider, such as a mortgage company, typically engages another settlement service provider, such as a title company, to perform general marketing services in exchange for periodic fixed fees that are not directly based on volume of business. These services may include website banner advertisements, physical signage, and inclusion of mortgage company logos and marks on publications and other resources, to name a few. Fees generally are structured to compensate the service provider only for those marketing and advertising services actually performed. There are flat-fee and per-transaction agreements.
Companies entering into these agreements over the past few years have been guided by a 2010 interpretive rule issued by HUD. In the rule, Schulman said HUD confirmed that Section 8(c)(2) of RESPA permits a person to pay another person in a position to refer settlement service business for the performance of general marketing and advertising services that do not involve direct-to-consumer solicitations, as long as the payment for the marketing services is fair market value for the actual services performed.
According to HUD’s 2010 rule, paying a referral fee is permissible:
- to an attorney for services actually performed
- by a title company to its duly appointed title agent for services performed in issuance of a title policy
- by a lender to its duly appointed agent
- under cooperative agreements between listing and selling agents
- payments by employer to employee
- for secondary market transactions
- for services rendered or goods/facilities actually provided under Section 8(c)(2)
New Cop, New View
The same year HUD issued its rule, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) established the CFPB. With the bureau’s main goals of “protecting the consumer and bringing supervision and accountability to the financial services industry, the regulatory landscape was primed for a significant change. While Dodd-Frank does not give the CFPB authority to examine or supervise the business of insurance, it does give the bureau power to write regulations and enforce federal consumer financial laws such as RESPA.
In 2014—40 years after passage of the statute—the CFPB made its mark on RESPA enforcement against the title industry in three direct actions against title companies. All three consent orders and fines were in connection with alleged RESPA violations for affiliated business arrangement disclosures, payment of referral fees and marketing service agreements (MSAs), respectively. The consent orders announced by the CFPB in January 2015 highlight the role another title company allegedly played in violations of RESPA related to marketing services and commission payments.
“While there has been considerable analysis and debate of CFPB’s interpretation of RESPA, there is no question as to CFPB’s intent to establish itself in the enforcement arena,” the law firm Carlton Fields Jorden Burt wrote in a brief.
In 2015, the bureau sharpened its enforcement teeth on MSAs. Setting the stage, the CFPB issued a consent order and fining one title company $200,000 for referrals derived from MSAs. According to the CFPB the agreements made it appear as if the payments would be based on marketing services the companies were supposed to provide to the title agency. However, the CFPB found that the title agency was setting the fees it would pay under the MSAs, in part, by considering the number of referrals it received or expected to receive from each company. Many have said this was the proverbial shot across the bow as the consent order offered the first glimpse into the CFPB’s concerns regarding methods used in determining payments under MSAs.
CFPB Issues Guidance, Sort Of
After a handful of other enforcement actions, the bureau in October released its much-anticipated guidance on MSAs and compliance with the RESPA. The CFPB bulletin reminded “participants in the mortgage industry of the prohibition on kickbacks and referral fees” and described “the substantial risks posed by entering into (MSAs).” It indicated that “while (MSAs) are usually framed as payments for advertising or promotional services, in some cases the payments are actually disguised compensation for referrals.” The CFPB also suggested that the “steering incentives that are inherent in many MSAs are clear enough to create tangible legal and regulatory risks for the monitoring and administration of such agreements.”
In short, the CFPB’s bulletin warns that “any agreement that entails exchanging a thing of value for referrals of settlement service business involving a federally related mortgage loan likely violates RESPA, whether or not an MSA or some related arrangement is part of the transaction.” While not stating that MSAs are per se illegal—a fact confirmed by public statements by senior CFPB staff—the bulletin identifies “substantial legal and regulatory risk” for parties to an MSA and voices “grave concerns” about the use of MSAs that may evade RESPA requirements.
“Clearly, the CFPB is making its case against MSAs,” said Tim Kemp, partner of the law firm Locke Lord. “They do not like them. And, they intend to continue scrutinizing MSAs through their examination and supervisory functions.”
Companies that have MSAs in place should consider conducting a wholesale review of the terms and conditions, as well as all payments associated with each MSA, according to Kemp This will help determine whether the MSA involves any kind of referral—on paper or in practice—that might be viewed by the CFPB as problematic under RESPA. If you find that an MSA does confer benefits that regulators may perceive as a referral, you should speak with inside or outside counsel immediately to determine whether further analysis, remediation and/or even self-reporting to the CFPB is appropriate.”
Whether or not MSAs are part of a company’s business model, Kemp suggests company executives review business objectives in light of the substantial risks and consequences of non-compliance with the CFPB’s interpretation of RESPA, which is not always the same as HUD’s precedent.
“If, after careful analysis you determine that the potential rewards of an MSA are worth the growing regulatory risk, at a minimum you should go forward with these agreements only after consulting counsel and independent third-party valuators and satisfying yourself that your process for monitoring and documenting the performance of the MSA parties on an ongoing basis is adequate to withstand inevitable regulatory scrutiny,” Kemp said.
Earlier this year, the Mortgage Bankers Association urged lenders to “immediately re-evaluate their MSA programs if they wish to avoid supervisory or enforcement scrutiny that considers many of these arrangements to be violations.”
“The CFPB views MSAs as highly risky ventures often designed to evade the Real Estate Settlement Procedures Act that hurt consumers and are likely to violate Section 8 of RESPA,” the MBA said.
The regulatory concerns have led many lenders to re-write their MSAs, while Bank of America, Wells Fargo, Prospect Mortgage and PHH Mortgage have abandoned them. The same day Wells Fargo made its announcement, the CFPB issued a statement that said it was “concerned that such agreements can carry significant legal risk for companies and undermine transparency for consumers.”
The CFPB’s bulletin on MSAs encourages mortgage industry participants to carefully consider the compliance and legal risks associated with MSAs and to consider self-reporting their own conduct to the extent it may violate RESPA in accordance with CFPB’s earlier bulletin on responsible business conduct and self-reporting. In 2013, the CFPB issued a bulletin that shed light on the factors the bureau considered when exercising its enforcement muscle. These included:
- the nature, extent and severity of the violations identified
- the actual or potential harm from those violations
- whether there is a history of past violations
- a party’s effectiveness in addressing violations
The CFPB put additional emphasis on companies that self-report violations. “Of the four categories, however, prompt and complete self-reporting to the Bureau of significant violations and potential violations is worth special mention. While no substitute for effective self-policing, self-reporting substantially advances the Bureau’s protection of consumers and enhances its enforcement mission by reducing the resources it must expend to identify potential or actual violations that are significant enough to warrant an enforcement investigation and making those resources available for other significant matters. Prompt self-reporting of serious violations also represents concrete evidence of a party’s commitment to responsibly address the conduct at issue. For these reasons, the Bureau puts special emphasis on this category in its evaluation of a party’s overall conduct,” the bureau stated in the bulletin.
Highlighting how it values self-reporting, the CFPB did not penalize an unnamed third lender involved in a consent order involving a title company.
The CFPB may be sympathetic to companies that self report violations, but it does not look favorably on MSAs where the services are directed toward other settlement service providers rather than toward consumers.
“It’s a dangerous area when you have enforcement at the CFPB pressing forward with a policy that is contrary to what the regulations say, and it puts people in the industry in a very difficult position, and it renders (MSAs) a little risky,” said Mitch Kider, chairman and managing partner at the law firm Weiner Brodsky Kider.
While the CFPB has not issued a wholesale ban of MSAs, the agency’s examination and enforcement actions focus on whether consumers benefit from the arrangements, Kider said. “Bottom line with all of this is, the CFPB wants you, if you are going to be making a referral, to be making that referral for the right reasons, not because you are getting paid for it,” he added.
Schulman said marketing agreements can be structured properly as long as any payments are made specifically for advertising, not referrals. He added that if a lender or settlement service provider cannot determine the fair market value for the services it receives, it is likely a violation. He offered the following 10 best practices for MSAs.
- Avoid quid-pro-quo agreements: payments never for referral of business
- Get an independent third-party valuation
- Trust but verify: have the broker certify to the services performed, but conduct periodic on-site audits
- Services should be geared to advertising to general public, not individual consumers
- Do not pay for direct consumer solicitations or access to sales staff
- Avoid exclusive arrangements
- Avoid preferential designations
- Disclosure statement to consumers encouraged
- Justify reasons for adjusting monthly fees
- Comply with Section 8(c)(2)
Korsmo said this will remain a complicated matter because each MSA must be evaluated on its own merit and the way the bureau determines whether a scenario is compliant with RESPA is very fact-intensive.
“It’s always appropriate to follow the law; unfortunately we have regulators that say compliance depends on every situation. The only way the industry receives fact-specific guidance is through enforcement and that’s not the best way to do this,” Korsmo added. “There’s a lot of speculation about the future of MSAs, and there is no one answer whether they are legal or not. A good avenue is to review RESPA requirements and restrictions, and assess the CFPB consent orders regarding MSAs. Companies should use real scrutiny and the rule of reason when evaluating marketing activities of their products and services.”
The reality is that lenders and real estate agents continue to influence consumer selection of settlement service providers. However, a more informed consumer makes for a better marketplace. Because of this, ALTA encourages members to market directly to the consumer.
“Market disrupters such as technology change the way companies approach marketing their products and services,” Korsmo said. “One area where companies should have little fear of regulatory repercussions is marketing their products and services directly to the consumer. To help members reach consumers, ALTA developed the member-exclusive consumer education program (Homebuyer Outreach Program) to assist in providing homebuyers information about the benefits of title insurance.”
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