QUESTION
We are a large mortgage lender that uses a Marketing Service Agreement (“MSA”) in many relationships. I am the company’s General Counsel. We have a Compliance Manager.
Recently, the Consumer Financial Protection Bureau (CFPB) cited us for violations of RESPA Section 8 with respect to defective MSAs. I realize that this is a highly litigious area. We have retained outside counsel for these agreements, yet we still seem to be locking horns with the CFPB.
My staff and the compliance people are avid readers of your Mortgage FAQs. We believe that you can shed additional light on how to go about training our management on the risks of MSAs.
We are drafting a PowerPoint for our Executive Management on the risks associated with MSAs. In preparing it, we would like to get your view of the following four areas in particular.
(1) What are Marketing Services Agreements?
(2) What distinction may be made between referrals and marketing services?
(3) What criteria may be applied to determine if an MSA is unlawful?
(4) Are there some examples of MSAs that are prohibited?
ANSWER
Thank you for your question. The risks relating to MSAs are enormous not only in incurring potential litigation but also in operational, strategic, financial, and regulatory risks. Enter these waters very cautiously and guardedly. If you are not thoroughly versed in MSAs, bring in legal counsel or highly competent compliance professionals to guide you. As General Counsel, you must understand that MSAs have far-reaching implications beyond contract law.
I will answer each of your questions with the proviso that you understand I cannot here provide legal advice and my remarks are not to be construed as such. Each MSA must be separately evaluated, and the entire corporate and legal structure on which each and every MSA sits must be taken into consideration.
(1) What are Marketing Services Agreements?
First, let us define a Marketing Services Agreement (“MSA”). It is an agreement that commonly involves an arrangement where a person or entity agrees to market or promote the services of another and receives compensation in return.
MSAs may involve only settlement service providers or may also involve third parties that are not settlement service providers. For instance, an MSA exists when a mortgage loan originator agrees to market or promote the services of a real estate agent in return for compensation.
Now, what is a lawful MSA? A lawful MSA is an agreement for the performance of marketing services where the payments under the MSA are reasonably related to the value of services actually performed.[i] To be clear, this is distinguished from an MSA that – whether oral, written, or indicated by a course of conduct, and looking to both how the MSA is structured and how it is implemented – involves an agreement for referrals. But, unlike referrals, marketing services are compensable services under RESPA.[ii]
Moreover, when a person performing settlement services receives payment for performing marketing services as part of a real estate transaction, the marketing services must be actual, necessary, and distinct from the primary services performed by the person. These marketing services cannot be nominal, and the payments cannot be for a duplicative charge or referrals.[iii]
(2) What distinction may be made between referrals and marketing services?
This is a fact-specific question as to whether a particular activity is a referral or a marketing service for purposes of the analysis under RESPA Section 8(a).
In RESPA Section 8(a), referrals include any oral or written action directed to a person where the action has the effect of affirmatively influencing the selection of a particular provider of settlement services or business incident thereto by a person paying a charge attributable to the service or business.[iv] For instance, referrals include a settlement service provider directly handing clients the contact information of another settlement service provider that happens to result in the client using that other settlement service provider.
However, a marketing service is not directed to a person; rather, it is generally targeted at a wide audience. Thus, placing advertisements for a settlement service provider in widely circulated media (i.e., a newspaper, a trade publication, or a website) is a marketing service.
MSAs that involve payments for referrals are prohibited under RESPA Section 8(a), whereas MSAs that involve payments for marketing services may be permitted under RESPA Section 8(c)(2), based on the facts and circumstances of the structure and implementation. In furtherance of explicating this question about referrals and marketing services, please read my answers to questions (3) and (4).
(3) What criteria may be applied to determine if an MSA is unlawful?
MSAs are not referenced in RESPA or Regulation X. Although entering into, performing services under, and making payments under MSAs are not, by themselves, prohibited acts under RESPA or Regulation X, the determination of whether an MSA itself or the payments or conduct under an MSA is lawful depends on whether it violates the prohibitions under RESPA Section 8(a) or RESPA Section 8(b), or is permitted under RESPA Section 8(c). And that analysis under RESPA Section 8 depends on the facts and circumstances, including the details of the MSA and how it is both structured and implemented.
The following describes how specific provisions of RESPA may be used to frame that analysis.
Under RESPA Section 8(a), if an MSA involves an agreement or understanding to refer business incident to or part of a settlement service in exchange for a fee, kickback, or thing of value, then the MSA or conduct under the MSA is prohibited. Therefore, this includes, but is not limited to, agreements structured or implemented to provide payments based on the number of referrals received.
Under RESPA Section 8(b), if the MSA serves as a method of splitting charges made or received for real estate settlement services in connection with a federally related mortgage loan, other than for services actually performed, the MSA or the conduct under the MSA is prohibited. MSAs would violate RESPA Section 8(b) if they disguise kickbacks by purporting to provide payment for services, but a split charge is paid even though the person receiving the split charge does not actually perform services. Or, a violation of RESPA Section 8(b) occurs if the services are performed, but the amount of the split charge exceeds the value of the services performed by the person receiving the split.
Under RESPA Section 8(c)(2), however, if the MSA or conduct under the MSA reflects an agreement for the payment for bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed, the MSA or the conduct is not prohibited.[v]
RESPA Section 8(c)(2) does not apply to MSAs that involve payments for referrals because they are not agreements for marketing services actually performed. RESPA Section 8 does not prohibit payments under MSAs if the marketing services are actually provided, and if the payments are reasonably related to the market value of the provided services only.
Note: Under Regulation X, the value of the referral (i.e., any additional business that might be provided by the referral) cannot be taken into consideration when determining whether the payment has a reasonable relationship to the value of the services provided.[vi]
(4) Are there some examples of MSAs that are prohibited?
Obviously, there are a plethora of scenarios where MSAs are prohibited.
Let’s reiterate that an MSA can be lawful under RESPA if it is structured and implemented consistently as an agreement for the performance of actual marketing services and where the payments under the MSA are reasonably related to the value of the services performed.[vii]
However, MSAs can be unlawful when entered into based on their structure or can become unlawful based on how they are implemented. The CFPB has enforced violations of RESPA Section 8 in investigations that involved the use of oral or written MSAs. An MSA is or can become unlawful if the facts and circumstances show that the MSA as structured, or the parties’ implementation of the MSA – in form or substance, and including as a matter of course of conduct – involves the following features:
- An agreement to pay for referrals.
- An agreement to pay for marketing services, but the payment is in excess of the reasonable market value for the services performed.
- An agreement to pay for marketing services, but either as structured or when implemented, the services are not actually performed, the services are nominal, or the payments are duplicative.
- An agreement designed or implemented in a way to disguise the payment for kickbacks or split charges.
In this scenario, the lender and real estate agent would not meet the standard in RESPA Section 8(c)(2), because the marketing services are not actually provided or the payments are not reasonably related to the value of the marketing services provided.[viii] Furthermore, in this scenario if the MSA was structured or implemented as a way for the lender to compensate the real estate agent for client referrals to the lender, the MSA would violate RESPA Section 8(a).
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[i] 12 USC § 2607(c)(2); 12 CFR § 1024.14(g)(1)(iv)
[ii] 12 CFR § 1024.14(b) and (g)(2)
[iii] 12 CFR § 1024.14(b), (c), and (g)(3)
[iv] 12 CFR § 1024.14(f)(1)
[v] 12 USC § 2607(c)(2); 12 CFR § 1024.14(g)(1)(iv)
[vi] 12 CFR § 1024.14(g)(2). See also 12 CFR § 1024.14(b)
[vii] 12 USC § 2607(c)(2); 12 CFR § 1024.14(g)(1)(iv) and (g)(2)
[viii] 12 CFR § 1024.14(g)(1)(iv)
