QUESTION
I know you have written about Marketing Services Agreements. One of our takeaways is that you advise not to get into them without the guidance of highly competent compliance professionals.
A competitor of ours could have used your advice because they got into a world of trouble with the state banking department over these agreements. They are licensed in many states, so all the other states jumped on board. It was like a feeding frenzy!
That kept us from getting into Marketing Services Agreements. But
now we have a new sales manager who decided that most of our loans come from
three real estate firms. He says those firms are really doing the marketing for
us. So he wants to reward them by giving them a monthly fee because they are
doing the marketing for us. Is it permitted to have such an arrangement?
One other thing. If the Marketing Services Agreement can't be done, the sales manager wants to have a contest for all the real estate firms. The winner gets an all-expense paid vacation. Is this permitted?
ANSWER
I could use a few more details. However, if you were a client and
I had all the facts, I would certainly point out a few compliance concerns. Since
evaluating an MSA to determine if it would survive regulatory scrutiny is a very
complex compliance review, you should contact us HERE to discuss this matter in
more detail.
Regulatory agencies have been particularly aggressive in diminishing the viability of Marketing Services Agreement (MSA) relationships. Do not get into MSAs without working closely with expert compliance professionals.
Let’s set the stage by briefly elucidating three Section 8 caveats.
Section 8(a) of the Real Estate Settlement Procedures Act (RESPA) prohibits
the transfer of a thing of value pursuant to an understanding that business
will be referred to any person. Regulation X, RESPA’s implementing regulation,
adds the general rule that “[a]ny referral of a settlement service is not a
compensable service.”
Section 8(b) prohibits the splitting of any charge made or received for the
performance of a settlement service except for services actually performed.
Section 8(c) goes on to list a few payments and arrangements not prohibited by
Section 8, such as the payment of a bona fide salary or other
compensation for goods or facilities actually furnished or services actually
performed.
On the face of it, it appears that your sales manager is suggesting an MSA, in which one person agrees to market or promote the services of another and receives compensation in return. In this case, the compensation or “thing of value” being suggested is the monthly fee.
While the suggestion may not seem unusual or peculiar, it suffers from a significant compliance defect from the start. The sales manager is obviously looking for a way to reward two or three real estate firms in your company’s various market areas for their past referrals of business and, presumably, for continued referrals. RESPA § 8 frowns on this kind of reward.
An acceptable, RESPA-compliant MSA would be structured and consistently implemented as an agreement for the performance of actual marketing services, where the payments under the MSA are reasonably related to the value of the services performed.
For example, an MSA might require the real estate firm to decide on and coordinate direct mail campaigns and media advertising for your company. Simply agreeing to make more referrals in the future would be entirely invalid and violate Section 8.
When we review an MSA’s structure, we determine whether a particular activity is a referral or a marketing service based on fact-specific information. Referrals include any oral or written action directed to a person when the action has the effect of affirmatively influencing the selection of a particular provider of settlement services or related business by a person paying a charge attributable to the service or business.
For example, a settlement service provider (such as a real estate agent) directly hands a consumer the contact information of another settlement service provider (such as your company for a potential lender) that happens to result in the consumer using the other settlement service provider.
In contrast, a marketing service is not meant to be directed to a particular consumer, but is instead generally targeted to a wide audience. For example, placing advertisements for a settlement service provider in a newspaper or on a website is a marketing service.
RESPA prohibits MSAs that involve payments for referrals, but may permit MSAs that involve payments for marketing services. Put it this way: the determination of whether an MSA is lawful depends on whether it violates RESPA Section 8(a) or 8(b) or is permitted under Section 8(c).
To be permitted, an MSA must involve marketing services that are actually provided, with payments reasonably related to the provided services' market value only (and not also to the value or perceived value of any referral).
In other words, the value of the referral – that is, any additional business that the referral might provide – cannot be taken into consideration when determining whether the payment has a reasonable relationship to the services provided.
With respect to the contest, the CFPB has recently opined on such arrangements in its Real Estate Settlement Procedures Act FAQs issued in October 2020. The issuance reiterates the same answer as Question 16 in the old HUD Industry FAQs About RESPA and various HUD rulings issued long ago.
The relevant paragraph in the CFPB's 2020 FAQs reads as follows:
"... if a settlement service provider gives current or potential referral sources tickets to attend professional sporting events, trips, restaurant meals, or sponsorship of events (or the opportunity to win any of these items in a drawing or contest) in exchange for referrals as part of an agreement or understanding, such conduct violates RESPA Section 8(a). 12 CFR § 1024.14(b). Such an agreement or understanding need not be written or oral and can be established by a practice, pattern, or course of conduct. 12 CFR § 1024.14(e)." [My emphasis.]
Jonathan Foxx, Ph.D., MBA
Lenders Compliance Group
