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?
ANSWER
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
