Anyone doubting that regulators are still focused on marketing services agreements need look no further than the HUD Audit and Consumer Financial Protection Bureau consent decree released recently.
In the case of the HUD Audit, they found a mortgage company engaged in an impermissible marketing arrangement that violated section 8 of the Real Estate Settlement Procedures Act and the Department of Housing and Urban Development's conflict of interest rules. The RESPA violation resulted from the fact that the agreement permitted and promoted the Realtor to literally put borrowers into a specific lender's office, exclusive to other lenders. The conflict of interest was premised on the agency’s conclusion that the agreement was with a Realtor office, run by a principal, who was the lender’s branch manager.
In the CFPB consent decree, a title company was found to have violated section 8 of RESPA. The lack of auditing, lack of demonstrable valuation and perceived inequity in the value of service compared to the compensation fueled the CFPB’s conclusions that it's true intent was to initiate referrals — not merely engage in marketing. In addition, a comparison of referrals between companies with and without MSA relationships as well as the pre-MSA level of referrals further strengthened the agency’s position. Notwithstanding the existence of the MSA, the CFPB found it was impermissibly intended as compensation for referrals.
In the HUD audit, the agency looked at the terms of the MSA and based on its exclusivity arrangements found it violated RESPA, among other things. In the case of the CFPB consent decree, the agency looked past the terms of the MSA to examine the realities of the relationship. The lesson is clear — an MSA cannot shield or rehabilitate an otherwise impermissible arrangement. Forming an MSA should involve a careful assessment of how the parties legitimately want it to work together, including compliance protections, and avoiding pitfalls that can lead regulators to find violations of RESPA and other laws.
