We are a mortgage broker company that would like to advertise in a local newspaper. Rather than pay the newspaper a flat fee for the advertisement, we would like to pay based upon the number of leads we receive in response to the advertisement. Is this permissible?
The primary concern is whether the marketing plan, as described above, violates the Real Estate Settlement Procedures Act (RESPA) and its implementing regulation, Regulation X. In particular is the concern as to whether Section 8 of the Act regarding illegal kickbacks is violated.
RESPA Section 8 reads as follows:
“No person (broker) shall give and no person (newspaper) shall accept any fee (advertising fee based on loans closed or leads), kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a real estate settlement service (mortgage origination) involving a federally related mortgage loan shall be referred to any person (broker).” (Interpolations in parentheses added.)
Thus, there are three elements to an illegal kickback: (1) a “thing of value,” (2) an “agreement or understanding,” and (3) a “referral” of a real estate settlement service (mortgage origination is a “settlement service”). If any of these three essential elements is missing, the activity is not illegal under RESPA.
Oftentimes, one misconstrues Section 8 to only apply to referrals among settlement service providers. However, that is an erroneous interpretation. The RESPA definition of “person” is not limited to settlement service providers. Rather, the term includes all individuals, corporations, associations, partnerships, and trusts. [12 CFR 1024.3; 12 USC 2602(5)] Thus, “person” encompasses a newspaper publisher.
The next question is, what constitutes a referral?
RESPA defines “referral” to include “any oral or written action (advertisement) directed to a person which has the effect of affirmatively influencing the selection by any person (consumer audience) of a provider (broker) of a settlement service or business incident to or part of a settlement service when such person (consumer) will pay for such settlement service or business (broker) incident thereto or pay a charge attributable in whole or in part to such settlement service or business”. (Interpolations in parentheses added.) [12 CFR 1026.14(f)] The RESPA definition of “referral” is extremely broad.
So, let’s apply the three elements to our scenario. As to the first and second elements, clearly these elements are satisfied as the broker will be paying a fee to the newspaper based upon an agreement between the two parties. Which brings us to the question as to whether an advertisement can be deemed a “referral.” As the advertisement is directed to those consumers viewing same with the intention of persuading the consumer to use the broker’s services, the advertisement falls under the definition of “referral.”
However, RESPA provides certain exceptions to the broad reach of Section 8 liability. In particular, RESPA provides that “nothing in this section shall be construed as prohibiting…the payment to any person…compensation…for services actually performed.” [12 USC § 2607(c)(2)] Under Section 8(c), flat fees for advertising services are viewed as exempt from Section 8(a), so long as the value of those services is reasonably related to the fees paid, without considering the value of any referrals that might occur. It is generally accepted that “reasonable payments for goods, facilities or services actually furnished are not prohibited by RESPA.”
Clearly, if the newspaper were charging a flat fee for the advertising, which fee would be the same charged to any other non-settlement service provider, there would be no issue, as the broker would be paying the fair market value of the advertising. However, in our scenario, payment to the newspaper is dependent upon the number of responses (or referrals) the mortgage broker receives with respect to the advertisement. If the newspaper is receiving less than fair market value for the advertising space, there is a potential RESPA violation.
Under the outlined scenario, one can argue that the broker is paying the newspaper for leads. However, in order for that to hold true, the consumer would have to contact the newspaper in response to the advertisement, rather than the broker directly, and the newspaper would then have to sell the lead to the broker. If acting as a lead generator, in order for the lead not to be deemed a referral, the newspaper must be careful not to introduce the consumer to the broker purchasing the leads, endorse or recommend the broker, or use a designation such as a “preferred” or “recommended” broker. Note that once the newspaper has direct access with a consumer, a regulator will assert that the newspaper is engaging in the licensable activity. Moreover, the newspaper would have to disclose to the consumer its financial relationship with the broker. In somewhat similar situations, the Consumer Financial Protection Bureau has found that failure to disclose such a relationship constitutes a UDAAP violation. [In the Matter of NewDay Financial LLC, 2015-CFPB-0004, Feb. 10, 2015]
Joyce Wilkins Pollison, Esq.
Executive Director/Lenders Compliance Group
Director/Legal and Regulatory Compliance