In previous articles, I have questioned whether marketing services agreements (MSA) can be developed in such a way as to comply with the limitations found in Section 8 of the Real Estate Settlement Procedures Act (RESPA). While some have criticized my approach as too conservative, I offer you 200,000 reasons why approaching MSAs conservatively is sound.
On September 30, Lighthouse Title, Inc. (title company), a Michigan-based title insurance company, was fined $200,000 by the Consumer Financial Protection Bureau (CFPB) when it concluded that the MSAs that the title company entered violated RESPA. What did the title company do?
The title company entered MSAs with various real estate brokers asking the brokers and their agents to:
- Market the title company’s services to its own employees
- ‘Endorse’ the title company
- Market the title company to clients
- Include the title company in advertisements and mass emails to clients.
Does this sound familiar? What did the title company do wrong?
The CFPB concluded that the title company entered these MSAs because it anticipated that title work would be referred predominantly to those title companies that participated in a MSA. Additionally, the CFPB determined that neither the title company nor the brokers made any efforts to value the “marketing services” identified in the MSAs. Further, the title company did not provide any metrics to determine whether it was receiving the benefit of the marketing services. In fact, the fees paid under the MSAs were determined by the anticipated quantity of referrals that would be generated; the fees that competitors were paying in the market place; or a combination of these two factors. The CFPB noted that the title company enjoyed a statistically significant increase in title work after it signed the MSAs.
Section 8(a) provides “No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding… that business incident to or a part of a real estate settlement service… shall be referred to any person.” The CFPB readily concluded these MSAs were poorly disguised payments for referrals.
There’s more... and it’s a biggie!
The CFPB concluded that “entering a contract is a ‘thing of value’ within the meaning of Section 8, even if the fees paid under the contract are fair market value for the goods or services provided.” (emphasis added). Think about what this means. If you enter into a contract with another settlement service provider, even if the payment is for fair market value, and there is an understanding that settlement services will be referred because of the contract, you have violated RESPA. In other words, a successful business arrangement could be your downfall!
The $200,000 fine is probably enough to get your attention but there are some other aspects of the Consent Agreement that warrant mention. The title company was ordered to:
- Terminate all existing MSAs.
- Document the exchange of any ‘thing of value’ that is valued at more than $5.00.
- Not enter into any other MSAs.
- Maintain records for five years.
Two other major areas of concern are evolving: (1) will the CFPB begin prosecuting the real estate brokers who are paid as part of the MSA; and (2) what impact does this order have on the leases that so often accompany MSAs? The general tenor in the industry is the CFPB will begin targeting the “other side” (e.g., brokers) of the MSA, and soon.
As for the leases... take a close look and make sure that the rental value is objectively accurate. If you pay rent at $15 per square foot, you better be charging $15 per square foot. Another take away from this decision is the lease better be for a defined space; i.e. an office. If your business model is to support an open floor plan, leasing space to a mortgage broker or title company is probably a dangerous row to hoe.