Brokers must still be diligent about marketing service agreements
Two events have upended the federal regulatory environment over Marketing Services Agreements (MSAs) in recent months: the departure of Consumer Financial Protection Bureau (CFPB) Director Richard Cordray and the D.C. Circuit Court of Appeals’ decision in PHH Corp. v. CFPB.
MSAs, under Cordray’s tenure, were considered by many to be a precarious business given his 2015 Compliance Bulletin warning against their “substantial risks” and his novel RESPA interpretations that ignored the statute and longstanding HUD guidelines. Cordray’s exit, coupled with the PHH court’s rejection of his view that any arrangement anticipating future referrals is suspect under RESPA, removed a significant disincentive towards their use. What does this mean for companies considering or reconsidering MSAs? While one black cloud of regulatory uncertainty has been removed, it’s still important to remember the remaining legal pitfalls associated with MSAs and to mind, the traditional do’s and don’ts.
The Remaining Legal Risks
First, Acting CFPB Director Mick Mulvaney has made clear that he will continue to enforce consumer financial protection laws such as RESPA. The era of “regulation by enforcement” and rogue RESPA interpretations may be over at the federal level, but the CFPB will pursue core RESPA violations under traditional enforcement theories.
Second, many state regulators will be more than willing to fill any void they perceive in CFPB enforcement. The Dodd-Frank Act authorized state Attorney Generals to enforce federal consumer financial protection laws and its Unfair, Deceptive and Abusive Acts and Practices (UDAAP) prohibition, and many states have their anti-kickback laws that are similar to RESPA. It’s still possible that aggressive state regulators could adopt Cordray’s RESPA theories when pursuing alleged violations and that their arguments could persuade courts outside of the D.C. circuit.
Finally, the plaintiff’s class action bar remains robust and active and can sue for damages of three times the value of the services involved in the alleged violation under RESPA – potentially resulting in multi-million–dollar claims.
Because of these continued legal risks associated with MSAs, it’s advisable to keep in mind the following do’s and don’ts when structuring and operating an MSA. They’re not comprehensive and legal analyses of MSAs can be fact-specific, so consult with an attorney with RESPA compliance experience when creating and modifying agreements.
Do give or receive payments based on the reasonable, fair market value of services performed.
Do consider mitigating your risk by hiring an independent third party to determine the fair market value of the services.
Do make sure that the services provided are actual, necessary and distinct from what the salespersons normally would do in the course of their job.
Do enter into a written agreement that documents the services to be performed and the fees to be paid for the services.
Do ensure that services identified in the agreement are performed through data collection and through regular reporting requirements that trigger the payment of fees.
Do provide a disclosure to consumers advising them of the MSA relationship.
Do conduct a periodic review of each MSA.
Don’t give or receive payments that exceed the reasonable, fair market value of services performed.
Don’t base the amount of marketing fees on the volume of expected or actual volume or quality of business.
Don’t pay for direct sales pitches to particular customers.
Don’t enter into exclusive MSAs in which the partner agrees to perform marketing or advertising services for only one company.
Don’t enter into an MSA in which the partner is named as the partner’s preferred company.
Don’t base periodic adjustments of fees based on results.
It will be interesting to see if the CFPB under Mulvaney or his successor revises its 2015 MSA Compliance Bulletin (which conflicts with the court’s opinion in PHH) or engages in a RESPA rulemaking to provide more precise guidance to companies that operate MSAs. In the meantime, attention to longstanding RESPA requirements and applicable state laws is warranted.