Are MSA's now illegal?

The Real Estate Settlement Procedures Act (RESPA) is one of the key federal consumer protection laws that apply exclusively to residential real estate transactions. I have written many articles and taught many courses in which I have warned against violating RESPA, cautioned that fines and penalties can be extreme, and warned that jail time is a possibility. Still, there are licensees who continuously look for ways to maximize their earnings by capitalizing on the many relationships that are essential to a successful transaction.  One of the more recent developments that is gaining steam is the Marketing Service Agreement (MSA); but have they suddenly run out of gas?  According to one federal court, maybe.

Many within the real estate industry have expressed concerns and doubts about whether marketing service agreements violate RESPA’s Section 8 prohibition against fee splitting and kickbacks. Paying for business referrals is, generally, prohibited. RESPA states, "No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person." Similarly, splitting fees or charges is likewise frowned upon: "No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed."

In the Central District of California, Melissa Henson (among others), a buyer, is suing Fidelity National Financial, Inc., alleging that it had written agreements with several overnight delivery companies that violated RESPA Section 8. As a buyer, Henson was required to pay fees for overnight delivery services from a company (e.g., UPS, Federal Express) selected by the title company.  Henson argues that the decision to use certain overnight service companies was driven by a master agreement with a subsidiary of Fidelity, and in return, the subsidiary received a portion of the delivery fees from the overnight carriers.  Fidelity argued that the fees were "marketing fees" that it negotiated with the carriers based upon the volume of business Fidelity was able to direct to those specific carriers.

Fidelity filed a motion asking the court to dismiss the lawsuit, arguing that the subsidiary performed actual services in exchange for the marketing fees.  Because actual services were performed, there is no Section 8 violation. The court disagreed.  RESPA does not prohibit payment for settlement services actually performed. Fidelity did not perform the overnight delivery; it was the passive intermediary in that transaction. Thus the court could not reconcile the marketing fee with any service performed at closing.

On the one hand, Fidelity argued that it was performing an actual service (marketing) and was being paid an actual fee for those services. Thus, there is no Section 8 violation.  On the other hand, the court wondered if claiming to promote services was just putting a different name on a kickback.  Because there is a factual dispute that is critical to determining which argument prevails, the court refused to dismiss the lawsuit.

The concern for Realtors® is the court’s struggle with reconciling the fee paid for actual marketing services performed with the exception under Section 8.  Section 8 allows for services actually performed. This court interpreted "services" to mean "settlement services". Under the court’s analysis, the only fees that can be paid are fees for settlement services.  Marketing fees are not settlement services.

All is not lost; this decision is an anomaly. None of the cases to date, and none of the enforcement actions brought by the CFPB, have taken such a restrictive approach.  Combine this with the fact that affiliated business arrangements are accepted by both the courts and the CFPB, there is every reason to expect that this interpretation will be short lived.  This decision highlights the importance of working closely with counsel any time fees are exchanged for services as part of a residential real estate closing.

07001-011/ FL12472