Affiliated business arrangements (AfBA) entity must fully comply with state and federal regulations before and during operation. Entities that enter marketing service agreements (MSAs) as defined in the Real Estate Settlement Procedures Act of 1974 (RESPA) and its amendments may face significant regulatory risks. The statutes and penalties for certain advertising strategies, promotional actives and marketing practices are outlined in the 2013 amendment of Regulation X and RESPA Section 8.
According to Section 8 of RESPA, entities that use affiliated business arrangements or joint venture compliance models are generally allowed to engage in marketing and promotional activities if they follow RESPA’s strict guidelines for exemption. With regulatory crackdowns and increasingly strict interpretations of RESPA Section 8, real estate service providers and individuals must err on the side of caution. Adequate disclosures and compliance oversight can protect entities from significant financial and legal risks that are associated with contemporary interpretations of these business agreements under RESPA. To conclude, affiliated business arrangements disclosure models are clearer, more concise and robust. Furthermore, regulators prefer them over MSAs.
The first consent order for RESPA violations related to MSAs was brought on September 20, 2014. The Consumer Financial Protection Bureau (CFPB) entered the order against a Michigan-based title insurance company called Lighthouse Title Inc.
In the Lighthouse order, the CFPB established a significantly more aggressive position against MSAs. Previous documents, including HUD guidelines, did not prohibit MSAs, and neither does the language in the Lighthouse order. However, the CFPB has stated that it intended to send a clear message to the industry that these agreements are discouraged and will result in penalties.
Reviews show that the Lighthouse order was not made in complete accordance with HUD’s own interpretation of RESPA or the language included in the act. Nevertheless, past CFPB actions indicate that lenders and other parties that use MSAs and similar marketing plans face significant financial and regulatory risks. The CFPB alleges that Lighthouse violated Section 8 of RESPA by engaging in multiple MSAs that encouraged business referrals for closing services and title insurance. The following are potential violations and problematic practices alleged in the order.
According to the Lighthouse order, the CFPB claims that marketing contracts are a “thing of value.” Based on this idea, contracts could violate Section 8 of RESPA even if the closing fees are within the fair market value of the goods or services that are provided.
In summary, the CFPB infers that accepting express or implied contracts or verbal agreements where a beneficiary would refer business to a particular settlement company constitutes a Section 8 RESPA violation.
According to this interpretation, if service providers have a paid contract or MSA with a marketer, that party cannot
make paid referrals to the same service provider. This concept goes against the language in RESPA and HUD’s Interpretive Rule. Based on available information, RESPA only permits the payment of a bona fide salary or another form of legitimate compensation specifically for services that are performed. Usually, this should vary from month to month as business fluctuates.
In its Interpretive Rule, HUD emphasized that all marketing fees must come under the fair market value of services that are actually provided. Marketing fees must not include compensation for referrals. HUD’s statement does not expressly prohibit referrals to a real estate settlement service when that company has a designated marketer or MSA.
Following an action against the New Jersey-based mortgage provider PHH Corporation, the CFPB published a compliance bulletin. These guidelines were released after industry groups pushed for additional information on alleged RESPA violations related to promotional agreements, marketing tactics and advertising plans.
After reviewing PHH’s referral practices in February 2015, the CFPB announced that it entered a consent order with the lender. The terms of this order related to allegedly unfair and deceptive practices, including referral payments and endorsements considered to be violations of RESPA Section 8. The basis of this investigation was a relationship with a military veterans group that referred members to an affiliated broker. PHH made payouts to the veterans group and to the broker. The CFPB also alleges that PHH distributed a variety of marketing materials to the group’s members. It claims that these documents appeared to be published by the organization and encouraged members to use affiliated lending services. Consumers who contacted either the veterans group or the broker to request more information were referred to PHH.
The CFPB not only alleged that these marketing strategies were deceptive and unfair. The bureau claimed that the
marketing agreement and payments for referrals constituted an affiliate relationship that violated Section 8 of RESPA.
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