No Doubt About It, MSAs Must Go
Prospect Mortgage and Wells Fargo, and most recently, PHH, have announced decisions to abandon the practice of using marketing services agreements. These companies should only be the first wave: it is time for the practice of MSAs to end once and for all.
By eliminating MSAs, regulators can help reduce the cost of mortgage originations without causing further restrictions to credit availability. In other words, there is zero downside, particularly for consumers.
These arrangements have been common between lenders and referral sources, such as real estate brokers and builders, for years. In simple terms, an MSA is a contract whereby a lender or other service provider will compensate brokers and builders for marketing their services to clients' agents and sales professionals.
This could include advertising and "desk rentals," where the provider has a physical presence in the client's office. There has always been a fine line between legal MSA arrangements and the payment of referral fees or "kickbacks," which are illegal according to the Real Estate Settlement Procedures Act.
Where that line actually resides is a matter of interpretation of RESPA's guidelines, but common sense makes it clear that compensation paid directly to a referral source is a form of kickback no matter how we dress it up with more flattering terms.
Few argue that the practice of MSAs has any real consumer benefit. At best, they add unnecessary cost to the origination process, which, of course, is ultimately paid by the consumer.
At worst, they can lead to the nefarious practice of steering consumers to loan products that have excessive fees or harmful terms. The latter is more common in minority neighborhoods, where homebuyers are often more vulnerable to steering.
Anybody with practical knowledge in the business will tell you that the application of MSAs varies from company to company. There are companies that try and stay within the guidelines and there are plenty of companies that blatantly cross the line by paying excessive fees or by tying the compensation to production or profitability targets. While there have been some recent actions by the Consumer Financial Protection Bureau, enforcement of MSA violations have historically been few and far between.
Several reputable mortgage companies I have spoken with have uniformly told me that while they don't like the practice of MSAs, they do them because not participating would put their loan originators at a competitive disadvantage.
These companies also all agree that the practice of MSAs is rife with abuses and that companies that exploit the rules make it harder for the companies that try to do it within the spirit of the regulations.
The lenders I spoke with generally just want an even playing field with their competition, an environment that is driven by quality service and competitive pricing, and not by who is willing to pay the most in MSA fees.
This is not a small problem; the payment of kickbacks is one of the less-frequently discussed causes of the foreclosure crises.
Real estate agents and brokers are critical, trusted advisors to their clients, especially for minority and first-time buyers. At the same time, brokers are struggling more than ever to create profitable businesses.
Providing ancillary services for their clients such as mortgage originations, escrow services and title insurance can substantially add to the bottom line. Brokerages that are willing and able to make the necessary investments should be allowed to participate in these fees by providing legitimate services for which they deserve fair compensation.
Nobody in the real estate and mortgage industries wants to see more regulation. However, eliminating MSAs is the right thing to do and is one of the current industry practices that I truly believe few will miss.
Gary Acosta is the co-founder and CEO of the National Association of Hispanic Real Estate Professionals and currently serves on the consumer advisory board of the Consumer Financial Protection Bureau.