A Response to the CFPB’S Recent Compliance Bulletin on MSAs

by Foley & Lardner LLP
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On October 8, 2015, the Consumer Financial Protection Bureau (CFPB or Bureau) issued a Compliance Bulletin on RESPA Compliance and Marketing Services Agreements (“MSAs”)(“Compliance Bulletin”).  The Compliance Bulletin’s message that MSA participants face “substantial risks” under RESPA has reverberated and caused buzz since it was issued.

This response discusses some of the more puzzling and illogical aspects of the Compliance Bulletin.  In doing so, we address questions left unanswered by the Bureau and suggest a framework for properly structuring MSAs to minimize risk.

What Is An MSA, Anyway?
The Compliance Bulletin should have addressed this basic question, but it did not.  An MSA is an agreement in which one party—the marketer—agrees to market, advertise, and/or promote another party in return for a fee.  Under RESPA, MSA payments may be scrutinized under the statute’s prohibition on kickbacks or referral fees.  However, properly structured MSAs have received safe harbor under a separate statutory provision permitting payments for services actually performed.  Thus, the overarching RESPA MSA analysis has been that a marketer should be paid for legitimate advertising and promotional services rendered, not for referrals that the marketer may or may not deliver.

Yet the Bureau’s Compliance Bulletin is not limited to the subject matter of MSAs.  Instead, it reads like a survey course for conduct that the Bureau has examined under RESPA, ranging from legitimate affiliated business arrangements (“ABAs”)—which RESPA permits under a separate three-pronged safe harbor—to prohibited garden variety kickbacks.  Importantly, however, the RESPA ABA rules are unique.  For example, the RESPA regulation provides a model ABA form to disclose (among other things) the nature of the affiliation and the fact that the affiliates may benefit financially from referrals, and to advise consumers that they have the right to shop around.

Nonetheless, the Compliance Bulletin complains about inadequate ABA disclosures, referencing an instance in which “a settlement service provider did not disclose its affiliated relationship with an appraisal management company and did not tell consumers they had the option of shopping for services.”  Likewise, it also references an enforcement action that the Bureau settled with certain affiliated providers, in which the Bureau’s theory had been that the underlying ABA disclosure had buried language regarding the consumer’s right to choose service providers, and therefore allegedly “hindered” the ability to shop¹.  The Bureau’s basis for referencing such ABA disclosure issues in this Compliance Bulletin on MSAs is neither clear nor helpful.

Similarly, the Compliance Bulletin cites another enforcement matter in which a title company allegedly provided refinancing leads, marketing materials, and money to mortgage loan officers in exchange for their agreement to use, and use of, the title company’s services in connection with any refinance transactions that materialized—but that scenario differs from most MSAs because the marketer was receiving the claimed referrals.  The Bulletin does not address the distinction.

If the Bureau wishes to offer “guidance” on MSAs, it would be appropriate to focus on MSAs, and not on other practices for which other separate statutory provisions and rules exist.

What Benefits Do MSAs Offer Consumers and Industry?
The Compliance Bulletin also failed to address this important question.  Instead, the Bureau simply concluded that it has received inquiries and tips from industry participants describing harms that can flow from MSAs, but has not received similar input suggesting that “the use of these agreements benefits either consumers or industry.”  While this is hardly surprising, given the Bureau’s encouragement of tattletale enforcement and the solicitation of complaints from consumers and others, it is obvious that properly structured MSAs do offer significant benefits to consumers and to industry.

MSAs, properly defined and structured, are a means by which settlement service providers (generally smaller ones) offer one-stop-shopping.  The traditional vehicle for offering customers the convenience of meeting multiple needs in one location is by having an affiliate (such as a joint venture or wholly owned subsidiary) provide the ancillary services, pursuant to the ABA safe harbor.  However, an ABA is often out of reach of small settlement service providers, who may not have sufficient capital, business volume, or expertise to undertake it properly.  Instead, a smaller provider may use an MSA to collaborate with and advertise an ancillary provider—typically, someone the marketer respects and whose services are critical to successfully closing the transactions of the marketer’s customers². Such one-stop-shopping efforts provide consumers with convenience and the option to choose quality settlement service providers at the point of the sale, rather than obtaining each provider in a silo approach.

Likewise, although the Compliance Bulletin posits that some MSAs “may attempt to disguise” the steering of business and payment of referral fees, “which may result in consumers paying higher prices,” it is equally true that properly structured MSAs introduce marketing efficiencies, thereby lowering overhead costs and enabling providers to offer lower prices.  For example, a smaller provider might control costs by partnering with a well-known company to get exposure for its products and services much more effectively and efficiently than if the smaller provider were to try to attain the same exposure by marketing itself directly to the public.

Additionally, when one company actively markets another through an MSA, it fosters accountability.  If a problem arises, the marketer is motivated to resolve the issue to the customer’s satisfaction, rather than point fingers at the provider that it marketed. MSAs are a vehicle for encouraging quality and reliable providers and fostering more seamless relationships among providers, which ultimately smooth the consumer experience.

The Bureau should not adopt a reflexive skepticism of MSAs, but instead should provide true and thoughtful guidance about what a properly structured MSA would look like.

How to Structure an MSA Properly (and Puzzling and Illogical Aspects of the Compliance Bulletin That The Bureau Should Address)

Flat Fee Versus Transactional Payments
In recounting the Bureau’s experience, the Compliance Bulletin says the Bureau observed a title company entering MSAs as a quid pro quo for the referral of business, where the fees paid under the agreements were based on how many referrals the title insurance company received.  If true, this is a fairly obvious problem.

But the Compliance Bureau does not comment on the much more typical payment structure:  a flat fee that reflects the reasonable value of advertising and promotional services (e.g., for banner ads on websites, links to providers’ websites, email or direct mail campaigns with advertisements, recorded advertisements on telephone hold messages or video kiosks).  That structure has long been viewed as permissible under RESPA.  Moreover, advertising has never been analyzed as “referral” activity, although it could be claimed to “affirmatively influence” the selection of the provider that is advertised.

Industry needs guidance on where and how the Bureau draws the line between permissible marketing and advertising and impermissible referrals and endorsements (if, in fact, endorsements are improper in the MSA context at all).

Consumer Disclosure
Although the Compliance Bulletin references ABA disclosure inadequacy and expresses concern about practices that thwart consumers’ ability to shop, the Bureau has not indicated that any particular consumer disclosure should be made in the MSA context.

In practice, many MSA participants do disclose the relationship and that the marketer obtains a fee for marketing and advertising the provider.  Many also borrow the ABA disclosure model language about the consumer’s right to shop.  Also borrowing from the model ABA disclosure, some MSA disclosures even set forth the estimated charges or range of charges made by the entity being marketed.  But the ABA disclosure form is otherwise a poor fit for disclosing MSAs, where there is no cross-ownership. The model ABA disclosure form expressly contemplates referrals made to the affiliate, and that the referring party may benefit from any such referrals.  By contrast, in most MSAs, the marketer would not see returns on referrals made to the entity that is marketed—and, for that matter, would not consider the marketing and advertising services to be referral activity at all.

The Bureau has been inexplicably silent on what form of disclosure it believes is necessary or what it would suggest. Unless the Bureau is going to move to prohibit MSAs altogether—and it has stated publicly that MSAs are not per se illegal—then it is irresponsible not to provide such guidance, the absence of which can only result in “gotcha” enforcement.

Advertising and Promotions Directed to Consumers, Versus Other Providers
In the Compliance Bulletin, the Bureau protests that some MSA participants direct the marketing efforts to other service providers “in an effort to establish more MSAs.”  This statement is confusing and illogical for a number of reasons.

First, it is a non-sequitur.  In our experience, we have yet to encounter a settlement service provider that directs advertising to non-consumers for the purpose of establishing more MSAs.  Advertising is expensive and/or time-intensive, and any good businessperson will agree that it is important to try to use marketing efforts that are best calculated to directly reach the target audience.  This may be the consumer, but could also be a person or business that depends on the underlying service or product, or whom the consumer will consult about purchase decision.  For example, home appliance makers certainly advertise furnaces and water heaters to home contractors, builders  and consumers.

Second, in an interpretative RESPA rule that HUD issued in June 2010 on the subject of MSAs between real estate brokers and home warranty companies (“HWCs”)—which was among the HUD statements that the Bureau adopted—HUD took the position that if a real estate broker or agent actively promoted an HWC and its products to consumers by providing “sales pitches’’ (e.g., presenting a warranty’s terms, optional coverage, exclusions, pricing, or claims process)  directly to consumer, that would be considered a “referral” and, hence, would not be compensable.  Based on that guidance, HWCs began directing their marketing and advertising efforts to real estate sales agents, who often purchase home warranties for customers or recommend that customers purchase such warranties.  In the Compliance Bulletin, however, the Bureau now appears to take umbrage with that practice as well.

Most settlement service providers take compliance seriously and want to follow the rules and fairly serve their consumers.  If the Bureau would address these issues, the consumer and industry benefits of MSAs could be provided in the manner the Bureau desires.



The authors are with Foley & Lardner LLP’s Washington, D.C. office, where they regularly counsel and defend civil litigation in the consumer finance area and defend CFPB investigations.  They served as defense counsel in the Bureau investigation and follow-on litigation discussed in note 1.

1 / In fact, however, while the ABA disclosure form in that case varied the language and format of the model form, it also informed consumers of their right to shop around and choose a provider in three different places.  Moreover, the data showed that recipients of the challenged ABA form consistently selected providers other than the affiliate.  Thus, it is not surprising that when that Bureau enforcement action was followed by a class action complaint parroting the same Bureau enforcement theory, the federal district court held that the effectiveness of that ABA disclosure form had not been impaired in any way.  Indeed, in that case, the named plaintiff himself shopped for providers other than the recommended affiliate.

2 / Interestingly, in some of its recent RESPA investigations, the Bureau has sought information about the quality of the providers that were marketed and information about their competitors.  In most cases, the entities in an MSA believe wholeheartedly in the providers they market, and would never want to promote a bad provider to their own customers.  But the Compliance Bulletin does not discuss why or how competitive intelligence factors into the Bureau’s RESPA review of an MSA.  Instead, it states only that “whether an MSA violates RESPA requires a review of the facts and circumstances surrounding the creation of each agreement and its implementation.”  Industry is left wondering if the Bureau intends to audit the mental processes of MSA participants, not whether legitimate advertising and promotional services were provided and fairly compensated.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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