Blind Spots in Mortgage Compliance

QUESTION 

Our compliance department is being downsized. Apparently, I am one of the first to be fired–oh, excuse me, I mean downsized. Suppose I sound like I have a chip on my shoulder. In that case, I suppose I do, since this is my fourth compliance job that, through no fault of my own, is being downsized. It especially bothers me that the Chief Compliance Officer asks me, before I leave at the end of the month, to provide a list of compliance blind spots that we have encountered over the last few years. 

Anyway, I have been working on the list. However, the list is only involved with our company's blind spots. How about everyone else? I want to highlight some potential blind spots that may or may not be occurring in our company, but which could happen elsewhere. Since you have many clients across the country, I wonder if you could share the types of compliance blind spots that your clients encounter. 

Thank you in advance! By the way, I have read your articles for years. I will continue to subscribe wherever I go. I have my résumé out, but many companies are not hiring. So wish me well! 

What are some compliance blind spots in mortgage banking? 

SOLUTION 

We recommend the following Compliance Tune-up®! 

CMS Tune-up®

Compliance Management System 

The Compliance Tune-up® series assesses the overall strengths and weaknesses of departments, functions, and regulatory compliance, regardless of a financial institution’s size, regulator, complexity, or risk profile. 

ANSWER 

I am sorry that you are being downsized or, as you put it, fired. The tendency to use terms that mask the reality of circumstances can be infuriating. To be downsized means your position is eliminated as part of your company's permanent reduction of its workforce. It usually happens to cut costs or restructure. This is a business decision, not a reflection of your performance, and can be a response to economic downturns, technological changes, mergers, or a need for greater efficiency. I wish you all the best. Wherever you go, please stay in touch! 

Working with many clients provides an advantage because we can share our knowledge and experience with each client. The fact is, these days, no individual compliance department can master all the diverse issues associated with mortgage compliance. After a while, a company begins to form a rather parochial, narrow, and lopsided view of compliance challenges, as its understanding of compliance is specific to its particular experience. This model is problematic because a company faces numerous risks, and therefore, it can be blindsided by a lack of knowledge relating to compliance issues affecting other companies. 

I will share some blind spots that we have come across over the years. After nearly two decades, many compliance challenges have changed. But there are some perennials. My feedback here is certainly not comprehensive. I hope it helps! 

Fair Lending BLIND SPOTS 

First up in blind spots is fair lending. Many compliance managers are familiar with the basics of fair lending and rely on various types of reviews. The blind spots become a veritable regulatory minefield if they manifest themselves. Blind spots in areas such as prohibited practices, equal access to credit, loan applications compliance – including advertising, inquiries, reviews, loan disbursement, ongoing servicing, to name but a few – are areas that have massive legal consequences. However, I think this blind spot may be boiled down to at least these components.

 

·       Data Analysis Limitations

 Lenders sometimes fail to prepare quality Home Mortgage Disclosure Act (HMDA) data or view it in a narrow context, which tends to blind them to disparities in outcomes for minority groups.

 

·       Marketing and Outreach Bias 

Marketing materials may inadvertently exclude or discourage certain demographic groups, for instance, by not featuring diverse imagery or targeting underserved communities. For example, financial institutions risk bias when renting mailing lists based on criteria that skew toward specific neighborhoods.

Pitfalls of Mortgage Comparison Platforms

QUESTION 

We are facing a lawsuit and potential administrative action for steering. For several years, we have run a successful website that compares rates for mortgage lenders. When a visitor selects a mortgage lender, we refer them to the lender. We charge the lender for the referral. We believe we act as only an intermediary, passing on the referral. We only get paid for the referral whether or not the lender closes the loan. We provide a disclosure regarding our terms. 

However, a lawyer is starting a lawsuit against us for violating RESPA Section 8. They claim our referrals are illegal. We’ve hired some top lawyers to defend us, but they’re not particularly optimistic about the outcome going in our favor. They say we may be violating RESPA and the CFPB will likely get involved.

We are not the only comparison platform that refers people for a fee. Our attorneys want us to change our website and terms immediately. I am looking for another opinion. I have read your FAQ emails for years and trust you to give me your candid opinion. 

Are payments for referrals from rate comparison websites a violation of RESPA? 

What are the guardrails we need to know to comply with RESPA? 

ANSWER 

Several years ago, we provided compliance support to an online comparison website. We found RESPA 8 violations, such as compliance concerns involving referrals, and offered guidance to cure the violations proactively. We also asked the client to revise their contracts with the posted lenders.[i] The client refused to follow our advice. 

The lawsuit and the potential for CFPB’s investigation are red flags. It is one thing to be alerted to possible RESPA violations. I do not know how your referral model works for being paid by the lenders with respect to a shopper’s selection. 

Indeed, earlier this year,[ii] the CFPB made known its considerable interest in companies operating digital platforms that appear to shoppers as providing objective lender comparisons but may illegally refer people to only those lenders paying referral fees. The Bureau issued an Advisory Opinion[iii] outlining how companies violate RESPA when they steer shoppers to lenders by using pay-to-play tactics rather than providing them with comprehensive and objective information. 

Three prongs are associated with evaluating if a platform receives a prohibited referral fee, and these are triggered when the platform: 

1.     non-neutrally uses or presents information about one or more settlement service providers

2.     in a way that has the effect of steering the consumer to use (or affirmatively influences the selection of) those settlement service providers, constituting referral activity,

3.     in exchange for a payment or other thing of value that is, at least in part, for that referral activity. 

Let’s cut to the chase: the CFPB maintains that operators of online comparison platforms receive a prohibited referral fee when they use or present information in a way that steers consumers to mortgage lenders in exchange for a payment or something else of value. 

For more context and information, I have written extensively about the compliance of digital mortgage comparison platforms here and here. 

Now, let’s turn to those guardrails! 

This area of mortgage compliance requires an expansive understanding of your particular operations. Thus, I will offer only some generic pitfalls to watch out for, derived from our professional experience, the aforementioned Advisory, RESPA Section 8,[iv] HUD’s Statement of Policy,[v] and HUD CLO Policy Statement,[vi] among other things. 

Indeed, these online mortgage comparison platforms could implicate the Dodd-Frank Act’s prohibition on unfair, deceptive, or abusive acts or practices (UDAAP), Truth in Lending Act (TILA), Equal Credit Opportunity Act (ECOA), Telemarketing Sales Rule (TSR), Federal Trade Commission Act (FTCA), Telephone Consumer Protection Act (TCPA) and Fair Credit Reporting Act (FCRA), including state and federal privacy and licensing laws. 

I begin with an outline of some pitfalls and follow with a few scenarios that lead to RESPA 8 violations involving mortgage comparison platforms. 

PITFALLS OF ONLINE MORTGAGE COMPARISON PLATFORMS 

Non-neutral Presentations constitute a Referral 

·       RESPA prohibits payments under an agreement for referrals of settlement-service business. 

·       The CFPB says digital platform operators make a referral when they “non-neutrally” use or present information that steers a consumer to a settlement service provider or otherwise influences the consumer’s selection. 

·       Neutral presentations and similar fees are critical to avoiding allegations of steering consumers to providers paying the highest fees to the platform operator. 

Disclosure is not Necessarily Protective 

·       Some platforms disclose how they use and present information. However, such disclosure would not, absent other facts, turn a directed action that has the effect of affirmatively influencing into one that does not so influence. 

Referrals encompass Multiple Parties 

·       The applicable regulation defines a referral as an “oral or written action directed to a person.” 

·       That includes consumers, appraisers, real estate agents, title companies and agents, lenders, mortgage brokers, or other companies that provide information in connection with settlements, such as credit reports and flood determinations. 

Algorithms are not a Defense 

·       The CFPB says “it is no defense” if a platform’s non-neutral use or presentation of information “was allegedly the product of a complex algorithm. 

·       Operators are expected to know whether their platform uses or presents information in a non-neutral manner, even if the platform may employ complex algorithms in using or presenting the information. 

Non-neutral Steering (i.e., Referrals) 

·       Non-neutral use of information can involve “manipulation or biasing of the inputs or formula” an operator uses to generate comparisons. For example:

o   A company could let consumers compare options based on purportedly objective criteria, such as interest rates, but make sure lenders who pay rank high anyway. 

o   Platforms can exclude or place low weight on criteria favoring a competitor and manipulate formulas to favor certain providers. 

·       Platform operators may stray from neutrality in their presentation of information by:

o   Providing names and phone numbers of all participating providers but providing links only for higher-paying providers. 

o   Listing lenders that pay more on the first page of results ranked by interest rate. That position creates the impression the platform has ranked all participants by interest rates, even though a check on a second or third page of results would reveal lenders offering the same or lower rate. 

o   Highlighting a top-ranked (and high-paying) lender by showing competitors in a smaller font or requiring users to scroll down. 

o   Labeling a lender as “sponsored” or “featured.” Lenders typically pay for this enhanced placement, but some platforms imply the lender earned that placement due to a ranking of neutral criteria. 

o   Listing a lender that has paid for enhanced placement multiple times, using the same or an affiliated name. 

o   Showing a “top-ranked” lender alongside other options but only showing the “top-ranked” lender when a consumer returns to the site. 

Paying “a thing of value” for a Referral 

·       A “thing of value” includes payments a platform operator receives as part of a contract. 

·       If the lender receives enhanced or non-neutral placement, there presumably would be an express agreement or understanding to pay for the improved placement. 

·       Even absent an express agreement or understanding for enhanced placement, an agreement or understanding for referrals likely can be established through a pattern, practice, or course of conduct. 

Violations for charging the Same or Different Fees 

·       Charging different fees to similarly situated service providers can constitute evidence of an illegal referral fee. 

·       Nevertheless, an operator can violate RESPA’s ban on referrals even if charging service providers the same fees. 

RESPA does not permit Payments for Non-Neutral Steering 

·       RESPA allows payments for goods or facilities furnished or services performed,[vii] but the CFPB says it does not apply to online mortgage comparison platforms. 

·       Referrals resulting from non-neutral steering are not compensable services under RESPA. 

Number of Lenders may qualify for a CLO 

·       There is no clear guidance on the number of lenders or providers a platform must feature to qualify as a valid computer loan origination (CLO) system.  

·       Presenting a greater number of lender comparisons rather than fewer may demonstrate that the operator is not steering the consumer to one or more settlement service providers. Because there is no guidance, an operator with “many” lenders does not have a dispositive defense.

 

VIOLATION SCENARIOS 

Ensuring the “best match” is the highest bidder 

·       Consumers often share criteria to find the best match, such as their desired location, loan amount, and credit score.

·       When a platform skews results to display the highest bidding participant as the “best match,” that may violate a prohibition on unfair, deceptive, or abusive acts or practices (UDAAP) if the platform misrepresents the accuracy of platform information, including objectivity in rankings.

 

Ranking Lenders by Rotation 

·       Platforms may run afoul of RESPA by purporting to rank lenders on a consumer’s input but, in reality, displaying top lenders as part of a structure where lenders take turns in the top spot.

 

Favoring an Affiliate 

·       Digital platform operators should avoid promoting an affiliate.

·       Significantly, the RESPA exemption related to affiliated business arrangements may not apply.

 

Sending texts or emails favoring a Lender 

·       If a platform is paid to encourage a consumer to apply with a lender by engaging in promotional activity that undermines its neutral presentation, that activity influences the consumer’s selection and amounts to a referral.

 

Offering to connect a Consumer with a Lender 

·       Some platforms offer consumers a call or chat with a lender, known as a “warm handoff” or “live transfer.”

·       A platform may tell the consumer they will be “in good hands,” but, in fact, the lender receiving the lead may be the first lender to respond when the platform flags a prospect. In such cases, the operator is providing a promotional service that is not actual, necessary, and distinct from the operator’s comparison function. 

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

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[i] Structuring or implementing a contractual agreement to participate on a Digital Mortgage Comparison Shopping Platform that results in steering or other affirmative influence based on non-neutral criteria, settlement service providers likely would know that the operator is non-neutrally using or presenting information.

[ii] CFPB Issues Guidance to Protect Mortgage Borrowers from Pay-to-Play Digital Comparison-Shopping Platforms, Announcement, Consumer Financial Protection Bureau, February 7, 2023

[iii] See 12 CFR Part 1024, Advisory Opinion, Real Estate Settlement Procedures Act (Regulation X); Digital Mortgage Comparison-Shopping Platforms and Related Payments to Operators, Bureau of Consumer Financial Protection. FR Vol. 88, No. 29, February 13, 2023 (Rules and Regulations)

[iv] 12 U.S.C. 2607(a). Regulation X, 12 CFR 1024.14(b), implements RESPA section 8(a)’s prohibition.

[v] HUD, RESPA Statement of Policy 1996–1, Regarding Computer Loan Origination Systems (CLOs), 61 FR 29255 (June 7, 1996)

[vi] The HUD CLO Policy Statement was issued as part of a broader set of HUD regulations and interpretations that addressed employer-to-employee payments. CLO is the acronym for Computer Loan Orrigination systems. See 61 FR 29238 (June 7, 1996). Because some of these regulations and interpretations were never finalized, see 61 FR 58472 (November 15, 1996), certain aspects of the HUD CLO Policy Statement not relevant to this Advisory Opinion – for example, Section 4, addressing “Payments of Commissions or Bonuses to Employees” – were not made effective by HUD and would not be applied by the CFPB.

[vii] Section 8(c)(2)

RESPA Section 8 Triggers on Mortgage Comparison Platforms

QUESTION 

Last week, you wrote about Digital Mortgage Comparison Platforms. Your article was eye-opening. Thank you! 

The article triggered a lot of feedback and concerns from our management. We advertise on one of these platforms. As the Compliance Officer, I put together a task team to determine which laws and regulations these platforms impact, especially with respect to the CFPB's advisory opinion. 

I was hoping you would elaborate on how the comparison platforms can affect compliance with mortgage advertising, RESPA, and UDAAP. Maybe you can offer some scenarios. 

How can comparison platforms cause mortgage advertising, RESPA, and UDAAP violations? 

Also, what scenario involving a "warm handoff" can impact RESPA section 8? 

ANSWER 

Last week's article, Digital Mortgage Comparison Platforms, provided an overview of the CFPB's position regarding online comparison platforms involved in lead generation. Let's do a little recapitulation to get started. 

The Bureau issued an advisory opinion to address certain circumstances in which operators of digital mortgage comparison-shopping platforms may violate the Real Estate Settlement Procedures Act (RESPA).[i] 

The advisory opinion describes how a digital mortgage comparison-shopping platform operator violates RESPA section 8 if its platform provides enhanced placement or otherwise steers consumers to platform participants based on compensation that the platform operator receives from those participants rather than based on neutral criteria. 

Specifically, the advisory opinion states that an operator of a digital mortgage comparison-shopping platform receives a prohibited referral fee in violation of RESPA section 8 when: 

1.   The digital mortgage comparison-shopping platform "non-neutrally" uses or presents information about one or more settlement service providers participating on the platform; 

2.   That non-neutral use or presentation of information has the effect of steering the consumer to use or otherwise affirmatively influences the selection of those settlement service providers, thus constituting referral activity; and 

3.   The operator receives a payment or other thing of value that is, at least in part, for that referral activity. 

Indeed, if an operator of a comparison platform receives a higher fee for including one settlement service provider compared to what it receives for including other settlement service providers participating on the same platform, that can be evidence of an illegal referral fee arrangement absent other facts indicating that the payment is not for enhanced placement or other form of steering. 

Digging deeper, I will discuss some ways that RESPA section 8 is triggered as it relates to the operational factors of online comparison platforms. 

RESPA section 8 applies broadly and, in many circumstances, covers conduct by persons connecting settlement service providers to consumers interested in purchasing a home, applying for a mortgage, or otherwise using a settlement service provider in a RESPA-covered transaction. This may include selling the consumer's contact information (i.e., leads) to settlement service providers. Leads are increasingly sold through various digital platforms and related business agreements. 

In particular, some digital platforms are structured as consumer-facing websites or online applications allowing consumers to search for and compare mortgage options or other settlement services. These digital platforms – in some cases called online marketplaces – can facilitate a consumer's choice among alternative products or settlement service providers and may be operated by settlement service providers or third parties. Consumers often provide their contact information to set up an account through interaction with these digital platforms. Sometimes, they may provide additional information, typically part of a mortgage application, or fill out an online long form. 

The platform operator then purports to use the consumer's information to help the consumer compare a range of options to find a suitable lender or other settlement service provider that the consumer can contact. The platforms typically generate leads for the participating lender or other settlement service provider by facilitating the consumer's click-through to the website of the participating provider, selling the consumer's contact information to the provider, or both. 

The comparison information may be presented to the consumer viewing the platform in a static or interactive format. In the latter case, the platform may give consumers the ability to sort the options or rankings based on different criteria or to customize the presentation of options or rankings based on factors they can select (sometimes after default options or rankings are presented). 

Furthermore, digital platforms may also combine online marketplace and lead generation activities with other services, such as advertising to consumers. 

There are several ways that comparison platforms can violate RESPA. I will describe a few scenarios. The advisory opinion provides examples of digital mortgage comparison-shopping platforms where the CFPB would find a RESPA section 8 violation. 

Pay to Play and Steering to the Highest Bidder 

In an example of conduct that would violate RESPA section 8, let's make these assumptions: 

·      Assume the operator permits the consumer to input relevant information on the digital mortgage comparison-shopping platform to aid in the consumer's search for mortgage options (i.e., location, anticipated loan amount, credit score) and represents that the platform will use the information to identify the best match; and 

·      Assume that the platform presents a supposedly "best match" lender to the consumer or ranks the lenders but skews the comparison function results to ensure that the best match is the highest bidding lender participating on the platform. 

Such a process would violate RESPA section 8 because the operator non-neutrally uses the information to preference the highest bidding lender, resulting in the operator steering the consumer to that lender. The operator's actions imply an endorsement by leading the consumer to believe that the operator did an analysis behind the scenes (possibly driven by an algorithm) to determine the most suitable lender for the consumer, thereby influencing the consumer to select that lender. 

Moreover, the operator is not merely receiving a bona fide payment for services under RESPA section 8(c)(2). The CFPB notes that this example could also potentially implicate the prohibition against unfair, deceptive, or abusive acts or practices (UDAAPs), particularly if the digital mortgage comparison-shopping platform were to contain misrepresentations about the accuracy of the information on the platform (including about the objectivity of the rankings). Deceptive misrepresentations could serve to accentuate the affirmative influence noted above.

Marketing Services Agreements: RESPA Section 8 Pitfalls

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.

Consider this scenario: a lender enters into an MSA with a real estate agent that also makes referrals to the lender. The MSA requires the real estate agent to perform marketing services, including deciding on and coordinating direct mail campaigns and media advertising for the lender. But, the real estate agent either does not actually perform the MSA’s identified marketing services or the real estate agent is paid compensation that is in excess of the reasonable market value of those marketing services.

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).

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group
_____________________________
[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)

Builder Incentives

QUESTION

We have an Affiliated Business Arrangement (AfBA) with a homebuilder. The builder currently discounts the purchase price of its homes if the buyer uses our company to finance the purchase. If the buyer chooses to use another mortgage company, there is still a discount, but it is lower. The builder, who is the majority owner of our company, now wants to offer discounts only to those buyers who use our company to finance the purchase. Is this a compliance problem? 

ANSWER

The issue of builder incentives and preferred and/or affiliate lenders continues to be a controversial one. There are two sides (at least) to the argument. On the pro-builder side is the assertion that a preferred lender or affiliated lender allows for better coordination between lender and builder, and thus a smoother, more predictable financing process, thereby improving the overall experience for the consumer. 

The counter to this argument is that, even if there is no express “requirement” for the buyer to use the builder’s lender affiliate, as a practical matter the buyer is being “required” to do so, in violation of the AfBA exception to RESPA Section 8 (12 U.S.C. §1024.15), one of the conditions of which is that, with limited exceptions:  “No person making a referral has required (as defined in 12 U.S.C. § 1024.2) any person to use any particular provider of settlement services or business incident thereto…” (Emphasis added.) (12 U.S.C. §1024.15(B)(2)). Critics also argue that the builder is “steering” the consumer to the builder’s preferred or affiliate lender, thus preventing the consumer from shopping in violation of anti-steering provisions.

Much depends on the definition of “required use,” which is found in 12 U.S.C. §1024.2 is as follows:

“Required use means a situation in which a person must use a particular provider of a settlement service in order to have access to some distinct service or property, and the person will pay for the settlement service of the particular provider or will pay a charge attributable, in whole or in part, to the settlement service. However, the offering of a package (or combination of settlement services) or the offering of discounts or rebates to consumers for the purchase of multiple settlement services does not constitute a required use. Any package or discount must be optional to the purchaser. The discount must be a true discount below the prices that are otherwise generally available, and must not be made up by higher costs elsewhere in the settlement process.” (Emphasis added.)

Some builders try to address this issue by having a list of preferred lenders. To one degree or another, however, that may still thwart the consumer from shopping outside that list. By excluding other mortgage companies from the builder incentive, the risk of a RESPA violation increases because it could be argued that such exclusivity of the incentive is a de facto “requirement.” 

Affiliated Business Arrangements and Marketing Services Agreements

Question

What are the differences between an Affiliated Business Arrangement (“ABA”) and a Marketing Services Agreement (“MSA”)?

Answer

There are significant differences between MSAs and ABAs. These differences relate to ownership, structure and permissible referral activities.

An ABA involves two are more entities that are under common ownership or control. An example of an ABA would be a real estate brokerage company having an ownership interest in a title company. On the other hand, a MSA involves a marketing relationship between two unrelated parties. An example of a MSA would be a lender entering into a marketing relationship with an unrelated real estate brokerage company. The parties involved in MSAs usually do not have common ownership or control.

Under a properly structured ABA, the two commonly owned or controlled entities may refer settlement business to each other. The Real Estate Settlement Procedures Act (“RESPA”) states that settlement service providers can legally refer business under an ABA relationship. Section 8 of  RESPA and Section 3500.14 of Regulation X define ABAs as arrangements in which: (1) a person who is in a position to refer business incident to or a part of a real estate settlement service involving a federally related mortgage loan, or an associate of such person, has either an affiliate relationship with or a direct or beneficial ownership interest of more than one percent in a provider of the settlement service; and (2) either of such persons directly or indirectly refers such business to that provider or affirmatively influences the selection of that provider. [ 24 CFR 3500.14]

In order to properly structure an ABA relationship under RESPA, the affiliated companies must: (1) disclose the nature of the affiliated relationship to the consumer at or prior to the referral, (2) not require that the consumer use the referred service provider, and (3) not give any consideration or item of value in exchange for the arrangement, except for the fair market value of the goods, facilities or services actually furnished. 

Under a MSA relationship, the two unaffiliated entities absolutely cannot have an agreement to refer settlement business to each other. Rather, a settlement service provider, such as a mortgage company, may enter into a MSA with an unaffiliated settlement service provider, such as a real estate brokerage company, to perform general marketing services in exchange for a fee. Fees paid under a MSA must be based on the fair market value of the advertising and marketing services provided and cannot be based on volume of business.

Unlike ABAs, MSAs do not have an explicit statutory basis. Furthermore, and notwithstanding that RESPA permits “the 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,” [12 U.S.C. 2607(c)(2)] the Consumer Financial Protection Bureau (“CFPB”) has cautioned against the use of MSAs and specifically indicated they cannot be established to circumvent RESPA’s general prohibition on the payment and acceptance of kickbacks and referral fees. [CFPB Compliance Bulletin 2015-05]

Given the CFPB’s position, a MSA should only be entered into after careful evaluation of the risks and rewards associated therewith. A MSA relationship must be properly structured so as not to appear to evade RESPA’s prohibition on the payment and acceptance of kickbacks and referral fees. The marketing services to be performed under a MSA must be clearly articulated and documented within the agreement between the parties. A qualified and independent third party should determine the fair market value for the proposed services and a party should not pay or receive a fee above this amount as it could be a potential violation of Section 8 of RESPA. Prior to making any payments, the parties must, therefore, verify that the services contracted for have actually been performed. If any of the services are not rendered, a regulator may determine that all or a portion of the fee paid as part of the MSA is a referral fee in violation of Section 8 of RESPA.

Neil Garfinkel

Executive Director/Realty Compliance Group

Director/Legal & Regulatory Compliance 

Lenders Compliance Group

Affiliated Business Arrangement Exemption

QUESTION

We are a builder that owns a mortgage company and a title company. Recently, we were told that we are exempt from the RESPA section 8 requirements. I do not want to violate RESPA and I would like a better understanding. Are relationships such as ours subject to being an affiliated business arrangement?

ANSWER

Actually, the relationship you describe is a classic case of an affiliated business arrangement, known by its most common acronym “ABA”. If you do not conform to the applicable RESPA guidelines for ABAs, your firm would be in violation of section 8. There are exemptions, but your ownership of a mortgage company and a title company does mandate compliance with the ABA requirements.

Specifically, there are three conditions for satisfying an exemption, if and only if certain requirements are implemented.

I will summarize these three conditions, cautioning you to consult with a regulatory compliance professional for guidance in satisfying all the requirements of these conditions. 

The following three conditions pertain to exemptions, such that, if implemented, the relationship between the parties to an ABA would not be viewed as violating RESPA:

Disclosure. 

The person making each referral has provided to each person whose business is referred a written disclosure, in the format of the Affiliated Business Arrangement Disclosure Statement, which outlines the nature of the relationship (i.e., explaining the ownership and financial interest) between the provider of settlement services (or business incident thereto) and the person making the referral and of an estimated charge or range of charges generally made by such provider. The disclosures must be provided on a separate piece of paper no later than the time of each referral or, if the lender requires use of a particular provider, the time of the loan application.

Choice of Provider. 

No person making a referral has required any person to use any particular provider of settlement services (or business incident thereto), except if such person is a lender, for requiring a buyer, borrower or seller to pay for the services of an attorney, credit reporting agency, or real estate appraiser chosen by the lender to represent the lender's interest in a real estate transaction, or except if such person is an attorney or law firm for arranging for issuance of a title insurance policy for a client, directly as agent or through a separate corporate title insurance agency that may be operated as an adjunct to the law practice of the attorney or law firm, as part of representation of that client in a real estate transaction.

Thing of Value. 

The only thing of value that is received from the arrangement - other than payments specifically exempted in RESPA and Regulation X - is a return on an ownership interest or franchise relationship. [24 CFR § 3500.15(b)]

Jonathan Foxx

President & Managing Director

Lenders Compliance Group

Affiliated Business Arrangements

QUESTION 

What is an Affiliated Business Arrangement under RESPA and what is required when an originator and a settlement service provider have an affiliated business arrangement?  

ANSWER 

An Affiliated Business Arrangement is defined in Section 8 of the Real Estate Settlement Procedures Act (RESPA) and Section 3500.14 of Regulation X, its implementing regulation, as an arrangement in which:

(1) a person who is in a position to refer business incident to or a part of a real estate settlement service involving a federally related mortgage loan, or an associate of such person has either an affiliate relationship with or a direct or beneficial ownership interest of more than 1 percent in a provider of the settlement service; and 

(2) either of such persons directly or indirectly refers such business to that provider or affirmatively influences the selection of that provider.

The term “associate” includes the following: spouse, parents, or child of the referrer; a corporation/business entity that controls the, or is under common control with, the referrer; an employer, officer, director, or partner of the referrer; and anyone who has an agreement the purpose of which is to enable a financial benefit to occur as a result of the referral of settlement services.

A referral to an affiliated business is permissible if all of the following requirements are satisfied:

(1) The consumer is provided at or prior to the time each referral is made with an Affiliated Business Arrangement Disclosure which describes the relationship (explaining the ownership and financial interest) between the provider and the loan originator, and giving an estimated charge or range of charges made by such service provider; 

(2)  The consumer is not required to use the referred service provider (with certain exceptions such as the lenders attorney, credit reporting agency and appraiser); and

(3) There is no consideration or item of value received from the arrangement other than reasonable payments for goods, facilities or services actually furnished and revenues derived from a party having an ownership interest in the provider.  

A sample Affiliated Business Arrangement Disclosure can be found in Appendix D of Regulation X. 

* Michael Barone

Director/Legal and Regulatory Compliance

Lenders Compliance Group