The Consumer Financial Protection Bureau (“CFPB”) has, for the first time, publicly expressed views on marketing services agreements (“MSAs”) under Section 8 of the Real Estate Settlement Procedures Act (“RESPA”). After months of rumors regarding the CFPB’s investigation, it issued a consent order against Lighthouse Title, Inc. (“Lighthouse Title”), a Michigan title insurance agency that had entered into a series of MSAs with various settlement service providers (“Consent Order”). [1] Although the Consent Order fails to describe the nature of the services performed under the agreements, it clarifies the CFPB’s concerns regarding methods used in determining the payments under such agreements. The Consent Order also raises troubling questions about how the CFPB interprets Section 8 of the Act, since many of those interpretations seem to be at odds with guidance previously offered by the U.S. Department of Housing and Urban Development (“HUD”). [2] Below, we provide a brief background regarding MSAs, highlight issues raised by the CFPB Consent Order and discuss lessons learned for structuring new and existing MSAs.
I. Background
Marketing services agreements have become a popular choice among settlement service providers over the last few years as a means for downstream settlement service providers to purchase general advertising services directed towards a target consumer population. This is particularly the case as new regulatory requirements, including higher net worth standards for mortgage banking operations and the inclusion of affiliate fees in the points and fees test for qualified mortgages, have made affiliated business arrangements and the significant up-front expenses associated with such ventures less appealing. Under these MSAs, a settlement service provider, such as a mortgage company, typically engages another settlement service provider, such as a real estate brokerage company, to perform general marketing services in exchange for periodic fixed fees that are not directly based on volume of business. These services may include website banner advertisements, physical signage, and inclusion of mortgage company logos and marks on publications and other resources, to name a few. Fees generally are structured to compensate the service provider only for those marketing and advertising services actually performed.
As companies have entered into these MSAs over the last few years, they have been guided by a 2010 Interpretive Rule issued by HUD, [3] which was the only applicable regulatory guidance regarding MSAs under RESPA. There, HUD confirmed that Section 8(c)(2) of RESPA permits a person to pay another person in a position to refer settlement service business for the performance of general marketing and advertising services that do not involve direct-to-consumer solicitations, as long as the payment for the marketing services is fair market value for the actual services performed. The Interpretive Rule detailed other considerations that HUD deemed indicative of a valid services agreement under RESPA, which many settlement service providers have incorporated into their MSAs.
With the CFPB’s first pronouncement concerning MSAs, the Consent Order affirms many of the things we already know about structuring MSAs to comply with Section 8 of RESPA. At the same time, the CFPB appears to ignore the fact that RESPA’s statute permits reasonable payments to a person in a position to refer settlement service business for the performance of actual services.
II. The Consent Order
The Consent Order states that, beginning in 2009, Lighthouse Title entered into a series of MSAs with various companies for the provision of marketing and advertising services. While the Consent Order does not detail the services performed under the agreements or the amount of marketing fees paid by the title insurance agency, the Consent Order focuses on the agreement or understanding allegedly established between the parties, as well as the things the parties allegedly did not do as part of the agreements. Notably, the Consent Order states that the title insurance agency entered into the agreements with the “agreement or understanding” that, in return, the counterparties would refer closings and title insurance business to the title agency. Stated differently, the Consent Order states that the title agency believed that the counterparties would refer business elsewhere if the title agency did not enter into the MSAs. It also asserts that the parties did not determine a fair market value for the services received or otherwise document how they arrived at the value for the services. Rather, the Consent Order claims the parties established the marketing fees, in part, by considering how many referrals the title agency had received from the counterparties and the price that competing title insurance companies were willing to pay the same counterparties for marketing and advertising services. Finally, the Consent Order alleges the title insurance agency did not diligently monitor its counterparties to ensure that it received the services for which it contracted.
As part of the Consent Order, the title insurance agency agreed to pay a $200,000 civil money penalty to the CFPB, agreed to maintain records demonstrating compliance with the Consent Order for a five-year period, and agreed to submit to ongoing compliance monitoring by the CFPB. In addition, in what would seem to significantly restrict the title agency’s ability to promote its business in the future, the Consent Order requires the title agency to document all exchanges of things of value worth more than $5 with persons in a position to refer settlement service business, obligates the title agency to terminate any current MSAs, and prohibits the title agency from entering into any future MSAs. Based on the definition of “marketing services agreement” in the Consent Order, that prohibition will still allow the title insurance agency to undertake mass advertising campaigns for consumer consumption where payments are made to a non-settlement service provider to place an advertisement to the public (so long as the non-settlement service provider does not endorse the title agency as part of the advertisement).
The Consent Order provides no further detail on the services performed by the counterparties or whether the CFPB deemed such services to be actual, compensable services under RESPA. The CFPB also does not detail how it arrived at a $200,000 civil money penalty amount or why the documentation of nominal promotional expenses is necessary, given the title agency’s MSAs. Moreover, the CFPB states certain conclusions in the Consent Order under RESPA that appear to differ from HUD’s Interpretive Rule and fail to acknowledge the permissibility of payments to a person in a position to refer settlement service business for actual goods or services provided as explicitly authorized under the RESPA statute and regulations. While these conclusions should not be considered affirmative regulatory guidance from the CFPB, they raise concerns about the manner in which the CFPB is interpreting Section 8.
III. CFPB's RESPA Conclusions
The CFPB cites Section 8(a), Section 8(c)(2), and certain portions of Regulation X to emphasize that payments for services rendered must be based on the fair market value of those services without any consideration for the value of referrals. The Consent Order specifically quotes Section 1024.14(g)(2) of Regulation X: “If the payment of a thing of value bears no reasonable relationship to the market value of the goods or services provided, then the excess is not for services or goods actually performed or provided. These facts may be used as evidence of a violation of Section 8....” The CFPB, however, stops short of actually analyzing the title agency’s MSAs under these legal standards. Unlike HUD’s Interpretive Rule, which outlined the two elements needed to meet the Section 8(c)(2) exemption and affirmed that reasonable payments for actual marketing services satisfy the RESPA standards, the Consent Order includes no analysis of whether actual services were performed or whether the marketing fees paid by the title insurance agency exceeded the fair market value for those services. Rather, the Consent Order states: “Entering a contract is a ‘thing of value’ within the meaning of Section 8, even if the fees paid under that contract are fair market value for the goods or services provided. [Accordingly,] [e]ntering a contract with the agreement or understanding that in exchange the counterparty will refer settlement services related to federally related mortgage loans violates Section 8(a).” (emphasis added). The CFPB seems to take the position that the mere entering into a contract with a person in a position to refer settlement service business is a per se violation of Section 8 of RESPA. We, however, fail to see how such a position is supported by the statute.
RESPA’s definition of “thing of value” does not include mere contracts. In fact, the definition presumes that contracts will exist and hinges the classification of “thing of value” on the value of services or goods provided as part of implied contracts (“services of all types at special or free rates, sales or rentals at special prices or rates, [or] lease or rental payments based in whole or in part on the amount of business referred).” [4] Moreover, the statute expressly permits, and judicial cases have concluded, that payments for goods and services provided, even if those payments are made to a person in a position to refer settlement service business, are an exemption to the prohibitions on referral fees. The performance of services and payment in return for those services requires two parties to agree that will one party will do something in return for consideration from another party, the fundamental definition of a contract. It would seem that a contract is a necessary component of the Section 8(c)(2) exemption and cannot itself be deemed a thing of value given in return for the referral of settlement service business. The CFPB also emphasizes that the counterparties referred significantly more transactions to the title agency when they had MSAs with the agency than when MSAs were not in place. This fact appears to be intended to support the CFPB’s position that the contract is a mere quid pro quo in return for the referral of settlement service business in violation of Section 8. Yet, the fact that the title agency received more business from the counterparties’ customers after the MSAs went into effect suggests the counterparties were actually performing bona fide marketing services. It, therefore, is entirely unclear to us how the CFPB can make conclusions about MSAs under RESPA without analyzing the services performed and whether the fees paid under the contract exceed fair market value in light of Section 8(c)(2). This is particularly the case when the Consent Order otherwise contains important lessons for structuring a services agreement that complies with Section 8(c)(2) of RESPA.
IV. Lessons Learned
Putting aside for a moment conclusions under RESPA, the Consent Order offers important lessons for settlement service providers that maintain MSAs. First, the Consent Order highlights the importance of determining fair market value for the specific services performed under the agreement and documenting that analysis. Settlement service providers could achieve this in a number of ways, such as engaging a third party to analyze proposed services and provide an independent opinion as to fair market value or by using various internal and external data points and cost analyses to arrive at fair market value. If the settlement service provider opts to use a third party to provide a valuation, presumably that company will provide a report summarizing its analysis to document the settlement service provider’s determination of fair market value. Similarly, if a settlement service provider opts to calculate and arrive at fair market value using its own resources, it should consider documenting how it determined that its marketing fees represent fair market value. Regardless of the method used, RESPA does not permit that analysis to be based on referrals of settlement service business or on an analysis of what competitors might be willing to pay under a services agreement.
Second, the Consent Order suggests that the service provider should be monitored to ensure it is performing the services for which it is being compensated under the MSA. Arguably this could be accomplished through certain periodic reporting requirements incorporated into the agreement that affirmatively obligate the service provider to document and report the services performed. In addition, the MSA could require an audit that incorporates recordkeeping and verification of the number and types of services actually performed.
Ultimately, the settlement service provider should be able to demonstrate to the CFPB that the service provider actually performed marketing services as identified in the MSA and received a fee that was determined to be fair market value for the actual services performed.
V. Conclusion
This Consent Order is an important indication of the CFPB’s thinking regarding MSAs, but it is a Consent Order in a single case, issued in response to one company’s particular MSAs. While we have concerns about the CFPB’s analysis of the marketing services agreements under Section 8(c)(2) of RESPA, the Consent Order does not outlaw MSAs. After all, the RESPA statute continues to permit fair market value payments to a person in a position to refer settlement service business for actual goods and services provided, and there is nothing currently under RESPA or its regulations that suggests MSAs cannot qualify as payments in return for actual services rendered.
Along these lines, the Consent Order provides several significant reminders about what not to do in structuring and entering into an MSA. Parties to these agreement must use care to ensure that actual marketing services are performed and that the fees paid in return for those services are, in fact, fair market value and can be documented as fair market value. Now would be a good time for settlement service providers to take a look at their MSAs to ensure that the pitfalls that befell this title agency do not also put their marketing arrangements at risk under RESPA.
Notes:
[1] In re Lighthouse Title, Inc., File No. 2014-CFPB -0015, available at http://files.consumerfinance.gov/f/201409_cfpb_consent-order_lighthouse-title.pdf
[2] “Real Estate Settlement Procedures Act (RESPA): Home Warranty Companies’ Payments to Real Estate Brokers and Agents,” 75 Fed. Reg. 3627 (Jun. 25, 2010); “Real Estate Settlement Procedures Act(RESPA): Home Warranty Companies’ Payments to Real Estate Brokers and Agents Interpretive Rule: Response to Public Comments,” 75 Fed. Reg. 74620 (Dec. 1, 2010).
[3] See id.
[4] See 12 C.F.R. § 1024.14(d).
