Endorsements and Testimonials - FTC Rules

QUESTION 

I am the Director of Marketing at a mortgage lender in the Northwest. We are developing a marketing campaign using endorsements and testimonials on social media, social media influencers, press, radio, YouTube, and TV. While our compliance and legal departments are happy to review these promotions, they are not giving us clear guidelines to follow. 

Our legal department tells us that, because of the wide distribution of our campaign channels, some of the rules we must follow are based on the Federal Trade Commission's rules. I don't know if this is so, but I do know those rules can be kind of strict. I need to find out about some of the FTC's regulations involving endorsements and testimonials. 

What are some FTC guidelines for endorsements and testimonials? 

SOLUTION 

Advertising Tune-up

Marketing Tune-up

Advertising Manual

Advertising Compliance  

RESPONSE 

The Federal Trade Commission's (FTC) regulations are essential to follow for marketing campaigns. Indeed, the FTC implemented the Mortgage Acts and Practices – Advertising (MAP) rules![i] MAP rules are designed to prohibit misrepresentations regarding mortgage products. Yes, there are other Acts, regulations, and laws – federal and state – such as the following (to name a few salient ones): 

·       Fair Housing Act,

·       Equal Credit Opportunity Act,

·       Truth-in-Lending Act,

·       FHA/HUD, VA, USDA Regulations,

·       Real Estate Settlement Procedures Act,

·       State Regulations,

·       Fair Lending,

·       Unfair, Deceptive, or Abusive Acts or Practices, and

·       Federally required logos and disclosures. 

The Federal Trade Commission's MAP rules must be implemented in your marketing campaign. 

Advertising and marketing compliance is a highly complex area that requires very careful consideration prior to launching a marketing campaign. If you do not handle endorsements and testimonials appropriately, you can easily cause legal disputes and attract regulators. 

I have listed a few compliance solutions above. You can always contact me to discuss your particular marketing plan. We have worked for years with banks and nonbanks on their marketing campaigns. Here are just a few articles we've published on advertising compliance. 

The FTC requires endorsers to clearly and conspicuously disclose their sponsorship by the advertiser and requires that endorsements reflect the honest experience or opinion of the endorser and not contain representations that would be deceptive or unsubstantiated if the advertiser made them directly.[ii] Therefore, if an endorsement represents that the endorser uses the advertiser's product, the endorser must actually use the product at the time they endorse it.[iii] 

Advertisers using "consumer endorsements" must make clear whether the endorser's experience reflects the actual experience of typical consumers who use the product rather than the experience of a few individuals.[iv] Ensuring this clarity is critical because, in 2009, the FTC revised its guidance regarding consumer endorsements to eliminate the safe harbor previously provided for the use of disclaimers in conjunction with non-representative consumer testimonials, such as "results not typical" and "not all consumers will get this result." In other words, these disclaimers are no longer acceptable because the FTC believes they are not sufficient to overcome the misleading implication that a non-representative result depicted in an advertisement is what consumers will generally experience.

Restrictions on Gifts and Promotional Activities

QUESTION 

I am the Compliance Manager of a mortgage lender in the mid-West. Recently, we received a notice from the CFPB after their examination. One of their allegations is that we violated RESPA’s restrictions on referrals involving “gifts and promotional activities.” 

Our General Counsel has asked me not to go into the details. However, he approved my request to ask you a generic question about referrals. We need an “advanced warning” guideline to ensure this violation won’t happen. 

I want to know how to determine when a referral is a violation of RESPA. Maybe you can provide some guidance on whether an arrangement can be deemed an illegal referral. I want to be able to evaluate the arrangement based on a simple set of criteria to determine if it can lead to a referral violation. 

How can I determine if a referral is illegal under RESPA? 

COMPLIANCE SOLUTIONS 

Policies and Procedures 

Referrals Tune-up® 

Advertising & Marketing Compliance 

ANSWER 

It is possible to provide a generic guideline to act as an “advanced warning” of gifts and promotional activities that would likely trigger a violation of the Real Estate Settlement Procedures Act (RESPA). Under RESPA Section 8(a), gifts and promotions generally are “things of value” and, therefore, could, depending on the circumstances, violate RESPA Section 8(a).[i] 

If the gifts or promotions are given or accepted as part of an agreement or understanding for the referral of business incident to or part of a real estate settlement service involving a federally related mortgage loan, they are prohibited. 

Here’s an example. A settlement service provider[ii] gives professional sporting event tickets, trips, restaurant meals, or sponsorship of events (or the opportunity to win any of these items in a drawing or contest) to current or potential referral sources in exchange for referrals as part of an agreement or understanding, such conduct violates RESPA Section 8(a). By the way, the agreement or understanding need not be written or oral; a practice, pattern, or course of conduct can establish it. 

However, in certain circumstances, gifts or promotions directed to a referral source are not prohibited if they are a normal promotional or educational activity meeting the conditions in Regulation X, RESPA’s implementing regulation. 

Regulation X allows normal promotional and educational activities directed to a referral source if the activities meet two conditions: 

1.The activities are not conditioned on the referral of business.

2.The activities do not involve defraying expenses that otherwise would be incurred by the referral source. 

First Condition 

The first condition is that normal promotional and educational activities must not be conditioned on the referral of business. 

Factors that are relevant to whether the first condition is met may include the following: 

• Whether the item or activity is targeted to referral sources. If an item or activity is targeted narrowly towards prior, ongoing, or future referral sources, this could indicate that the item or activity is conditioned on referrals of business. 

Example A 

Suppose a promotional item is provided only to a limited set of settlement service providers who also happen to be current referral sources or an intentionally targeted group of future referral sources. In that case, this may suggest that the recipient is receiving the promotional item because of past or future referrals, and thus, the promotional item may be conditioned on referrals. 

Example B 

If, instead, a promotional item is provided to a broader set of recipients, such as the general public or all settlement service providers offering similar services in a given locality, then that may indicate that the promotional item is not conditioned on the referral of business. 

How often is the item or activity given to the referral source? If a referral source is routinely and frequently provided with an item or included in an activity, and particularly if that referral source is provided with the item or included in the activity more often than other persons, this could indicate that the item or activity is conditioned on referrals. 

Second Condition 

The second condition is that normal promotional and educational activities must not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or business incident to those settlement services. 

Factors that may be relevant to whether the second condition is met may include the following:

• Whether the item or activity involves a good or service that the referral source would otherwise have to pay for itself. 

Example A 

Suppose a promotional activity involves paying for mandatory continuing education expenses, certifications, licenses, or other items that the referral source would otherwise need to pay for on its own. In that case, the promotional item or activity is more likely to defray expenses. 

Example B 

Similarly, suppose the activity involves paying for the referral source’s office supplies branded with the referral source’s name, contact information, or logo. In that case, this is more likely to defray the expenses of the referral source. But suppose the activity involves providing the referral source with office supplies featuring the name, contact information, or logo of the entity providing the supplies. In that case, this is less likely to defray expenses, since it is unlikely that the referral source would otherwise use its own funds to purchase office supplies featuring the name and information of another entity. 

If the particular item or activity does not meet either of these conditions, it is not a normal promotional or educational activity meeting the conditions in Regulation X.

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

Lenders Compliance Group

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[i] 12 CFR § 1024.14

[ii] 12 CFR § 1024.2(b)(29)

Self-Police, Self-Report, Remediate, and Cooperate

QUESTION
In our recent state banking examination report, we were asked to continually evaluate our compliance with mortgage banking requirements. They said we are “responsible for business conduct, including self-policing, self-reporting, remediation, and cooperation.”

Frankly, I must admit that we do not “self-assess,” as our compliance manager calls it. We rely on outside internal auditors, compliance’s regular review of department functions, and management reviews of various reports, such as quality control reports for originations and servicing.

But we do not self-police ourselves at all. Never did! We don’t have guidelines to follow for self-policing. Hopefully, you can help us with suggestions and guidelines.

What do we have to do to self-police? 

What are suggested guidelines we can provide in a hand-out to our employees?

ANSWER
Although you are finding out about self-policing now, banking departments long ago expected “self-assessment” to be a feature of proper regulatory compliance. Nearly all supervising compliance personnel are aware of this requirement. Or they should be!

The phrase you noted, “responsible business conduct,” goes all the way back to 2013, when the CFPB issued a directive to its supervised institutions to ensure “self-policing, self-reporting, remediation, and cooperation.”[i] I will treat each of these factors separately.

In its bulletin, the CFPB offered assurance that its described “responsible conduct” may favorably affect the ultimate resolution of a CFPB enforcement investigation. It also warned that vigorous, consistent enforcement of the law and the imposition of appropriate sanctions are essential in promoting the agency’s commitment to the best interests of consumers.

Conduct can be so egregious or the harm so great that no amount of cooperation or other mitigating actions could justify a decision not to bring an enforcement action.

To quote the Bureau:

 “In short, the fact that a party may argue it has satisfied some or all of the elements set forth in this guidance will not foreclose the Bureau from bringing any enforcement action or seeking any remedy if it believes such a course is necessary and appropriate.”

Before I get to suggestions for self-policing guidelines, an enforcement action against Wells Fargo and JPMorgan Chase would demonstrate how the CFPB applies the self-policing expectation.

On January 22, 2015, the CFPB brought an enforcement action against Wells Fargo and JPMorgan Chase that stemmed from its expectations regarding “responsible conduct.” The CFPB and the Maryland Attorney General announced consent orders regarding the two firms’ alleged involvement in a Marketing Services Scheme with Genuine Title.[ii]

According to the CFPB, Genuine Title provided substantial marketing services to loan officers of the lenders. For example, Genuine Title purchased marketing leads – data on consumers likely to refinance their mortgage loans – from a third-party vendor and provided the leads to loan officers at Wells Fargo and Chase.

For some loan officers, Genuine Title not only analyzed and purchased leads from a third-party vendor but also paid the costs of producing and mailing marketing letters. The loan officers did not pay for the full cost of the leads, marketing, printing, and processing of the marketing materials, or mailing. In return, the loan officers referred real estate closings to Genuine Title. According to the CFPB, these arrangements violated RESPA § 8(a) and Dodd-Frank Act § 1036, as well as the Maryland Consumer Protection Act.

At the time, Maryland’s Attorney General Brian Frosh said:

 “Homeowners were steered toward this title company, not because they were the best or most affordable, but because they were providing kickbacks to loan officers who referred consumers to them.”

“This type of quid pro quo arrangement is illegal, and it’s unfair to other businesses that play by the rules.”[iii]

The CFPB alleged that, despite the fact that Wells Fargo had multiple warnings of the illegal arrangements between its loan officers and Genuine Title, including a lawsuit explicitly alleging the existence of the agreements, the bank failed to take action to stop the practices and did not have an adequate system in place to identify the violations. The proposed consent order would require Wells Fargo to pay $10.8 million in redress and $24 million in civil penalties.

The CFPB also alleged that at least six Chase loan officers in three different branches in Maryland, Virginia, and New York were involved in the scheme. The loan officers referred settlement business to Genuine Title on almost 200 loans. The CFPB claimed that Chase did not have an adequate system in place to ensure its loan officers were complying with RESPA. Under the proposed consent order, Chase would pay about $300,000 in redress and $600,000 in civil penalties.

According to the CFPB, several loan officers at a third financial institution also participated in the scheme with Genuine Title. While Wells Fargo and JPMorgan Chase had not identified or addressed the conduct, the third financial institution had self-identified the practices and fired the loan officers involved. The institution also had cooperated with the CFPB’s investigation and self-initiated a remediation plan. The CFPB resolved its investigation of that institution without an enforcement action, consistent with the agency’s “Bulletin on Responsible Business Conduct.”

Now to outline and paraphrase the factors provided by the CFPB.[iv]

Self-policing

- What is the nature of the violation or potential violation, and how did it arise?

o Was the conduct pervasive or an isolated act?

o How long did it last?

o Was the conduct significant to the party’s profitability or business model?

- How was the violation or potential violation detected, and who uncovered it?

o What compliance procedures or self-policing mechanisms were in place to prevent, identify, or limit the conduct that occurred and preserve relevant information?

o In what ways, if any, were the party’s self-policing mechanisms particularly noteworthy and effective?

- If the party’s self-policing functions have previously been the subject of supervisory examination by the Bureau or other regulators, what have been the results of such examination?

o How, if at all, has the party changed its self-policing following such examination?

o If the party’s self-policing functions have not previously been the subject of supervisory examination, how do those functions measure up to customary supervisory expectations?

- If the party is a business entity, what was the “tone at the top” of the business about compliance?

o Was there a culture of compliance®?[v]

o How high up in the chain of command did people know of or participate in the conduct at issue?

o Did senior personnel participate in, or turn a blind eye toward, obvious indicia of misconduct or deficiencies in compliance procedures?

Self-reporting 

- Did the party completely and effectively disclose the existence of the conduct to the Bureau, to other regulators, and, if applicable, to self-regulators?

o Did affected consumers receive appropriate information related to the violations or potential violations within a reasonable period of time?

- Did the party report the conduct promptly to the Bureau?

o If it delayed, what justification, if any, existed for the delay?

o How did the delay affect the preservation of relevant information, the ability of the Bureau to conduct its investigation, or the interests of affected consumers?

- Did the party proactively self-report, or wait until discovery or disclosure was likely to happen anyway, for example, due to impending supervisory activity, public company reporting requirements, the emergence of a whistleblower, consumer complaints or actions, or the conduct of a Bureau investigation?

Remediation

- What steps did the party take upon learning of the misconduct?

o Did it immediately stop the misconduct?

o How long after the misconduct was uncovered did it take to implement an effective response?

- If the party is a business, were there any consequences imposed on the individuals responsible for the misconduct?

- Did the party take prompt and effective steps to preserve information, identify the extent of the harm to consumers, and appropriately recompense those adversely affected?

o In situations where the harm caused by the violation goes beyond the amounts the victims may have paid to the party, did the party identify and implement additional ways to completely redress the harm?

- What assurances are there that the misconduct is unlikely to recur?

o By the time of the resolution of the Bureau matter, did the party improve internal controls and procedures designed to prevent and detect a recurrence of such violations?

o Similarly, have the party’s business practices, policies, and procedures changed to remove harmful incentives and encourage proper compliance?

Cooperation 

- Did the party cooperate promptly and completely with the Bureau and other appropriate regulatory and law enforcement bodies?

o Was that cooperation present throughout the course of the investigation?

o Did the actor identify any additional related misconduct likely to have occurred?

- Did the party take proper steps to develop the truth quickly and completely and to fully share its findings with the Bureau?

o Did it undertake a thorough review of the nature, extent, origins, and consequences of the misconduct and related behavior?

o Who conducted the review, and did they have a vested interest or bias in the outcome? Were scope limitations placed on the review?

o If so, why and what were they?

- Did the party promptly make available to the Bureau the results of its review and provide sufficient documentation reflecting its response to the situation?

o Did it provide evidence with sufficient precision and completeness to facilitate, among other things, enforcement actions against others who violated the law?

o Did the party produce a complete and thorough written report detailing the findings of its review?

o Did it voluntarily disclose material information not directly requested by the Bureau or that otherwise might not have been uncovered?

o If the party is a business, did it direct its employees to cooperate with the Bureau and make reasonable efforts to secure such cooperation?

So, hopefully, you can recognize how responsible business conduct is critical to meeting the banking department’s expectations.

Finally, you requested a set of brief suggestions that could be handed out to affected personnel at the company. Here are a few that are consistent with the foregoing outline. 

Suggested Guidelines for a Hand-out 

- Keep up the “tone at the top” about compliance and be sure it trickles down, never turning a blind eye toward even suspected misconduct or compliance deficiencies.

- Emphasize profitability through compliance, not profitability on the margins of compliance.

- Nurture mutual respect for agency examiners, and treat them as critical members of the financial institution’s team to share a commitment to the institution’s success.

- Conduct regular, persistent self-examinations aimed at early detection of potential violations and prompt elimination of violations.

- Quickly focus on any potential violation and determine whether an actual violation occurred.

- If an actual violation occurs:

o Determine the scope of persons affected and realistically assess any harm, including additional related misconduct that might have occurred.

o Promptly notify the primary regulator (“self-report”).

o Resolve the matter with the affected customer(s) quickly, fairly, and forthrightly.

o Be careful to include oversight by persons without a vested interest or bias in the outcome.

o Take any necessary steps to improve internal controls and procedures so it does not recur.

- Take appropriate action regarding the individuals responsible for any violation. Analyze why they behaved the way they did and remove any improper incentives that may have motivated them.

- Thoroughly document each investigation.

- Do not neglect challenges that have been the subject of a previous supervisory examination, but focus on them to be sure they do not reappear.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group 

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[i] ‘‘Responsible Business Conduct: Self-Policing, Self-Reporting, Remediation, and Cooperation, “ Bulletin 2013-6, June 25, 2013, Consumer Financial Protection Bureau

[ii] “CFPB Takes Action Against Wells Fargo and JPMorgan Chase for Illegal Mortgage Kickbacks,” Press Release, January 22, 2015, Consumer Financial Protection Bureau

[iii] Idem

[iv] Op. Cit. i

[v] “Culture of Compliance” is a registered trademark of Lenders Compliance Group, Inc.

Marketing Services Agreement: Playing Favorites

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

Chairman & Managing Director
Lenders Compliance Group

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
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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)

Examination Hot Topics

QUESTION

As a stateside, non-depository, mortgage licensee, I am interested in learning about areas of concern relating to regulatory examinations. What are some of the hot topics and regulator recommendations in these areas?

ANSWER

I recently attended the 29th Annual Regulatory Conference, held in Boston, for the American Association of Residential Mortgage Regulators (AARMR). One of the breakout sessions was entitled Examination Hot Topics.  The session was moderated by a state regulator from Georgia and included three state regulators from the states of Missouri, Connecticut and Michigan.

Topics and issues raised are detailed below.

Loan Brokerage Fee Agreement: The disclosure should be provided by the broker and not the lender.

Profit-based Bonuses: Broker, mortgage loan originator, profit-based bonuses are exceeding the 10 % threshold.

Marketing Services Agreements: The use of Marketing Services Agreements has increased resulting in RESPA issues. One area of contention is whether advertising should be paid by the mortgage company or the loan officer. 

Rental Agreements: There is no basis by which to establish market value of rental agreements. The example referenced two identical office spaces within the same office complex valued at $300 and $600, respectively.

Change in Circumstances: The calculations do not provide adequate supporting information in the file to facilitate the examination review.

Mortgage Fraud known as “Convenience Fraud:” MLOs are signing borrowers’ names on forms. They are also using electronic signatures. This activity has resulted in loss of licenses.

Cut and Paste Tactics: This activity is on the rise. The activity includes altering IRS Form 4506-T relating to designation of third parties to receive the tax return information. It also includes the forging of signatures on borrower loan documents, claiming as an excuse that the borrower was on vacation. One regulator stated that they found practice signature evidence and the actual cuts in the borrower loan file!

Unlicensed Loan Originations: Unlicensed individuals are taking applications over the phone (usually in call centers), due to lack of management oversight of their operations. This process results in more loan volume. Companies offer the excuse that they are only taking “partial” applications.

Mortgage Call Report (MCR): The MCR information is inaccurate. The requested loan list at the time of examination does not correlate with the loans listed on the Mortgage Call Report. Companies need to establish a process that includes work papers to back-up the information. It was also recommended that MCR reporting duties should not be assigned to untrained individuals and that a back-up person be assigned to the task.

Unlicensed Underwriting: Brokers are doing underwriting without the required lender licensing.

Third-Party Processing: Lenders are inquiring about the requirements for third-party processing and underwriting. Many are engaged in the activity without the proper license.

Hiring Practices: There is evidence of companies hiring convicted felons in direct violation of statutes and regulations. Some of these companies have been reported to the regulators by competitors.

Disclosure Text Errors: Incorrect language is being used in disclosures related to TRID and foreclosures. Be certain to reference state and federal requirements in this area.

Advertising: Issues have been identified relating to advertising. The main point is that marketing and compliance departments have two different goals. The compliance group must review all ads prior to being released to the public. There are issues with companies misleading the public by holding themselves out as government agencies.

Mortgage Servicing Compliance: Examinations of mortgage servicers identified issues involving the lack of compliance with the terms and conditions by the new servicer. Recommendation was for servicers to have robust policies and procedures. It was also noted that companies are not posting payments properly. Files need to have better documentation.

Commingling of Funds: Companies are commingling operating funds and escrow funds in direct violation of the law.

It is my hope that you have come away with some new insights into examination areas of concern raised by state regulators.

We can assist you in preparing for examinations and in providing you with the ability to outsource some of the compliance functions in your operation. Our compliance support includes all mortgage banking policies and procedures, mortgage and servicing compliance, quality control analytics, vendor management, licensing and Mortgage Call Reports. Please contact us for a free consultation.

Alan Cicchetti

Director/Agency Relations, Lenders Compliance Group

Executive Director, Brokers Compliance Group

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

Marketing Services Agreements

QUESTION
Are Marketing Services Agreements legal or are they no longer permitted?

ANSWER

There has been no specific ruling or order that prohibits Marketing Services Agreements (“MSAs”).  However, in recent months there has been much discussion over the legality of MSAs. This is primarily due to recent enforcement actions by the Consumer Finance Protection Bureau (“CFPB”) involving MSAs and alleged illegal kickbacks. In particular, in the 2014 Lighthouse Title, Inc. (“Lighthouse”) Consent Order, the CFPB indicated that Lighthouse violated the Real Estate Settlement Procedures Act (RESPA) when it entered into MSAs with the “agreement or understanding” that, in return, the counterparties would refer closings and title insurance business to them.  

Further, the Consent Order indicated that the parties did not determine a fair market value for the marketing services received, did not document how they valued the marketing services, and that Lighthouse did not monitor their counterparties to ensure the marketing services were actually being performed. [In the Matter of Lighthouse Title, Inc., Administrative Proceeding File No. 2014-CFPB-0015]  

More recently, the CFPB announced actions against Wells Fargo and JPMorgan Chase for engaging in illegal marketing services with a title company. The proposed Consent Order indicated the title company gave the banks’ loan officers cash, marketing materials, and consumer information in exchange for business referrals. [CFPB and State of Maryland, Office of the Attorney General v. Wells Fargo Bank, N/A, JPMorgan Chase Bank, N.A., et al, Case No. 1:15-cv-00179-RDB] 

Despite these and other actions, the CFPB has not indicated that MSAs are illegal. In fact, the CFPB has not provided any guidance regarding MSAs and continues to regulate through Consent Orders. Further, there has not been any blanket regulation or court decision banning MSAs. Although some lenders recently announced decisions to discontinue such arrangements with real estate brokers, MSAs can still serve as a viable marketing tool.  

Mortgage and real estate professionals interested in entering into or continuing MSA relationships must act prudently and maintain a compliant MSA program that monitors all aspects of the MSA relationship. MSAs should only be entered into after careful evaluation of the structure of the relationship. MSAs cannot be a proxy for illegal referral or kickback payments, nor can the arrangement require exclusivity. Further, the services to be performed under an 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.

The CFPB could have chosen to state or infer that MSAs are not permitted in the above Consent Orders or in other industry guidance. While it has not done so, any party to a MSA must ensure that they have policies and procedures in place which adhere to the factors set forth above and in the Consent Orders.

Neil Garfinkel

Executive Director/Realty & Title Services Compliance Group

Director/Legal & Regulatory Compliance

Lenders Compliance Group