The Consumer Financial Protection Bureau has provided guidance on the use of marketing services agreements — which present substantial liability to residential lenders that utilize them.
According to the CFPB, the primary purpose of the Real Estate Settlement Procedures Act is to eliminate kickbacks or referral fees that tend to unnecessarily increase the costs of settlement services.
But whether or not MSAs violate RESPA is not clear, and mortgage firms are exposed to liability in a variety of situations involving the agreements — with several recently facing regulatory actions.
On a recent episode of Lykken on Lending, Mortgage Bankers Association President and Chief Executive Officer David Stevens weighed in on issues facing lenders that use the agreements.
He quoted an unnamed “very senior official”
who will have a role in enforcement on MSAs as saying, “you have a good reason to be concerned.”
Other statements the official reportedly made include, “there’s a pending investigation which you’ll hear about” and “it’s very difficult to manage all the legal risk involved.”
“I think we’re in a period where we desperately need the bureau to
define and tell us what constitutes an MSA, if they’re considered legitimate in the first place, according to the bureau,” Stevens said. “Because we are seeing a redefining of, sort of, RESPA compliance using marketing service agreements.”
Concern about liability from MSAs recently prompted
Wells Fargo Bank, N.A., and Prospect Mortgage LLC to abandon the agreements.
On Thursday, the CFPB
issued Compliance Bulletin 2015-05 providing guidance about MSAs.
The bureau indicated that the agreements
carry legal and regulatory risk for lenders. It noted that it has obtained injunctive relief that includes bans of MSAs or working in the mortgage industry for up to five years.
So far, RESPA violations have cost industry participants — including companies and individuals — more than $75 million in penalties.
“We are deeply concerned about how marketing services agreements are undermining important consumer protections against kickbacks,” CFPB Director Richard Cordray said in an accompanying announcement. “Companies do not seem to be recognizing the extent of the risks posed by implementing and monitoring these agreements within the bounds of the law.”
In the bulletin, the CFPB noted that while is has received
a number of inquiries and whistleblower tips describing the harm that can stem from the use of MSAs, it hasn’t received similar input suggesting how MSAs benefits either consumers or the industry.
The bulletin said that while MSAs are usually framed as
payments for advertising or promotional services, the payments actually are, in some cases, disguised compensation for referrals.
“Based on the bureau’s investigative efforts, it appears that many MSAs are designed to evade RESPA’s prohibition on the payment and acceptance of kickbacks and referral fees,” the bulletin states.
In order to determine whether an MSA violates RESPA, a review of the unique facts and circumstances is needed for each agreement and its implementation.
But the need for such a fact-intensive inquiry means that lenders can’t rely on previous public actions to determine
whether their own MSAs violate RESPA.
The bulletin cited the case of a title company that paid fees under MSAs based, in part, on the volume of title insurance referrals and amount of revenues generated. It’s investigation found that referrals significantly increased when an MSA was in place.
MSAs were found in two cases resulting in regulatory actions to deter borrowers from shopping around because settlement providers either buried the disclosure that consumers can shop for settlement services or didn’t provide it at all.
“The steering incentives that are inherent in many MSAs are clear enough to create tangible legal and regulatory risks for the monitoring and administration of such agreements,” the bulletin states.
Another issue is
payments being made for services that were never performed. The CFPB said that many of the cases where regulatory actions were taken involved underwriting, processing and closing services that were never done. Other cases had no title insurance work not being executed, marketing services not being carried out and financing to fund the origination of loans not being delivered.
“When services promised under an MSA are not performed, but payments are being made, a reasonable inference can be drawn that the MSA is part of an agreement to refer settlement services business in exchange for kickbacks,” the bureau said.
The CFPB warned that lenders face compliance risks when their originators receive free
marketing services in exchange for referrals. In one case involving a title company that ended in an enforcement action, the title company entered into unwritten agreements with individual loan officers to defray the cost of valuable lead information and marketing materials in return for title company referrals. Lenders didn’t detect, prevent or correct the RESPA violations even when they had reason to know about the arrangements.
The bulletin touched upon how some firms
frequently enter into MSAs and direct most of their marketing resources toward other settlement service providers instead of consumers, as MSAs purport to contemplate, in order to establish more MSAs.
And while some companies utilize third-party consultants to set prices that the MSAs purport to cover — such independently established compensation rates don’t necessarily
suffice to ensure the legality of an MSA.
“The bureau intends to continue actively scrutinizing the use of such agreements and related arrangements in the course of its enforcement and supervision work,” the bulletin states. “Any industry participant that suspects unlawful activity by others or that wishes to self-report its own conduct that may have violated RESPA is encouraged to contact the CFPB.
“Self-reporting and cooperation, consistent with the Responsible Business Conduct bulletin, CFPB Bulletin 2013-06, will be taken into account in resolving such matters.”
