Just a few years ago, a cloud of regulatory uncertainty hovered over Marketing Services Agreements (MSAs) after Consumer Financial Protection Agency (CFPB) Director Richard Cordray expressed his opinion in a 2015 MSA Compliance Bulletin that any settlement service arrangement anticipating future referrals was suspect under the Real Estate Settlement and Procedures Act (RESPA). The guidance was vague and confusing, but one thing was clear, the CFPB believed that MSAs were inherently illegal, and you had to prove that yours was not.
Since then, CFPB leadership has changed hands and the D.C. Circuit Court of Appeals, in CFPB v. PHH Corp., rejected Cordray’s view that payments made by one settlement service provider to another in a referral arrangement violate RESPA even if they are for the fair market value of the services provided. So, what does this mean for companies considering or reconsidering real estate MSAs? Here’s what three leading RESPA attorneys, Phil Schulman of Mayer Brown, Richard Andreano of Ballard Spahr, and Brian Levy of Katten & Temple had to say about today’s regulatory lay of the land.
“The change is really dramatic,” Levy said. “The PHH ruling was strong. When RESPA states that nothing in RESPA shall be construed as prohibiting market value payments for services, nothing means nothing. The PHH case effectively gutted the CFPB’s 2015 MSA Compliance Bulletin.”
“You see folks reconsider MSAs,” Andreano noted. “You no longer have a CFPB director who is hostile to MSAs regardless of what the law says. But, all the PHH case said was that RESPA says what we thought it said. You still have to structure an MSA in a compliant way.”
The attorneys all emphasized that to be RESPA-compliant payments under an MSA must be reasonably related to the fair market value of the marketing services. It should not be based on the expected volume or quality of business, and any periodic adjustments should not be based on results.
Marketing services that are compensated should be actual, necessary, and distinct from the services that the real estate broker or agent typically performs in the course of their job. There should be no payments for nominal services or for services for which there has been a duplicative charge.
The attorneys unanimously advised against payments for direct sales pitches by real estate brokers or agents to individual customers. HUD’s 2010 Interpretive Rule on home warranty company payments to real estate brokers and agents spells out why: RESPA prohibits payments for referrals, which are oral or written actions directed to a person which has the effect of “affirmatively influencing” their selection. Homebuyers and sellers are more likely to accept a real estate broker/agent’s recommendation of a provider, so the broker/agent is in a “unique position” to “affirmatively influence” their selection. Therefore, compensation to a real estate broker/agent to market to individual customers is an illegal payment for a referral.
What does this mean for MSAs? “It’s OK to pay for marketing to the general public, but it’s not OK to pay for real estate agents’ email promotions,” Shulman said. “Real estate brokers shouldn’t encourage individual marketing by pressuring their agents to refer business to the MSA partner, or require people to get pre-qualified by a mortgage partner.” Andreano recommends focusing on more traditional forms of advertising, such as banner ads or signs. “The real estate agent shouldn’t be chatting [up] the [MSA partner’s] services,” he said.
Both MSA partners also need to ensure that the services identified in the MSA are performed through data collection and regular reporting requirements. “MSA partners have to keep on top of the real estate broker and be ready to debit payments if five services are paid for, but only four are done,” Schulman said. “You also should do annual on-site reviews.”
Levy advised that the MSA be disclosed to the consumer, even in the absence of a specific disclosure requirement in RESPA regulations. “If you’re hiding an illegal relationship, RESPA’s one-year statute of limitations could be equitably tolled to extend the liability for violations past one year,” he said. “With disclosure, any claim, regardless of merit, can be limited to the one-year RESPA time frame. There also could be a UDAP [Unfair and Deceptive Acts and Practices] issue under state or federal law that is generally minimized through disclosure.”
Finally, and most importantly, remember that RESPA is still being enforced by the CFPB, plaintiff’s bar, and state regulators. Legal analyses of MSAs can be fact-specific, so it’s essential to consult with an attorney with RESPA compliance experience when creating your agreements.
Sue Johnson is the former executive director of RESPRO, the Real Estate Services Providers Council Inc. She retired in 2015 and is now a strategic alliance consultant.
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