Announcements Mark Out a Clearer Path, but MSAs and Gifts Still Require Careful Review
Last week, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) announced significant changes to how it will view the legality of Marketing and Services Agreements (“MSAs”) under the Real Estate Settlement Procedures Act (“RESPA”). Most strikingly, the Bureau formally rescinded its controversial Compliance Bulletin 2015-05: RESPA Compliance and Marketing Services Agreements (Oct. 8, 2015) (“2015 MSA Bulletin”). MSAs historically have been used as a way for settlement service providers to gain access to additional potential customers via paid advertising and marketing services. But the 2015 Bulletin, issued after a string of Bureau RESPA enforcement actions, expressed the view that virtually all MSAs should be scrutinized and pose a high risk of violating RESPA’s prohibitions on paid referrals and/or the splitting of unearned fees.
In addition to rescinding the prior guidance, the Bureau last week also released a slew of new “Frequently Asked Questions” (“FAQs”) on the legality of MSAs, gifts and promotional activities, and other RESPA matters. In all, the Bureau’s actions last week on MSAs in particular amount to a further repudiation of aggressive RESPA interpretations that the agency advanced during the last decade.
The Bureau believes that its new FAQs provide “clearer rules of the road,” and the framework may indeed breathe new life specifically into the practice of entering into MSAs. But even under the new rules, any analysis of whether an MSA, a gift or a promotional activity violates RESPA will continue to require careful analysis and monitoring, based on numerous factors deemed relevant in the FAQs.
Below, we first highlight the Bureau’s prior stance on MSAs, now apparently disavowed with the rescinding of the 2015 MSA Bulletin, which had caused many firms to abandon MSAs. We then describe the takeaways on the new framework for MSAs, and how it will apply. We also include a section addressing the new FAQs on Gifts and Promotional Activity.
1. Prior CFPB Approach
The 2015 MSA Bulletin all but banned MSAs outright. The CFPB stated that “many MSAs are designed to evade RESPA’s prohibition on the payment and acceptance of kickbacks and referral fees.” The Bureau expressed “grave concerns” about the use of MSAs and described “the substantial risks posed by entering into” MSAs. Further, the Bureau said that it was unaware of evidence “suggesting the use of those agreements benefits either consumers or industry.” The Bulletin provided virtually no guidance on how an MSA could be legally structured, and signaled the Bureau’s intent to “continue actively scrutinizing the use of such agreements and related arrangements.”
The Bulletin capped off a string of CFPB enforcement actions implying that it was very difficult to operate an MSA legally. Beginning with the agency’s highly controversial Consent Order against Lighthouse Title, the CFPB effectively took the position that certain types of agreements themselves violated RESPA. As the Bureau put it in Lighthouse Title, “[e]ntering a contract is [itself] a ‘thing of value’ within the meaning of § 8, even if the fees paid under that contract are fair market value for the goods or services provided.”
This meant that even if the only actual compensation paid under an MSA equaled the fair market value of non-referral services actually provided, such as general advertising services, the MSA could violate RESPA if any uncompensated referrals were made. The Bureau’s position appeared to contradict RESPA’s so-called § 8(c)(2) safe harbor, which permits compensation reasonably related to the fair market value of goods actually furnished or services actually performed. (RESPA § 8(c)(2).)
In 2016 and again in 2018, a federal appeals court flatly rejected the Bureau’s position, albeit in a RESPA case involving a non-MSA agreement. The court held that that the § 8(c)(2) safe harbor allows referrals “so long as” the referred party pays the other party “no more than reasonable market value” for non-referral “services actually provided.” CFPB v. PHH Corp., 839 F.3d 1, 40-49 (D.C. Cir. 2016), reinstated in relevant part, 881 F.3d 75, 83 (2018) (en banc). Last week’s actions by the Bureau, including its decision to rescind the 2015 MSA Bulletin, represent a similar rejection of the Bureau’s prior position, but in regard to MSAs specifically.
2. Takeaways on the New Framework
In line with the appeals court decision, the CFPB’s new FAQs clarify that a settlement service provider may pay another firm pursuant to an MSA for marketing services (1) that are actually performed, if (2) the amount of compensation paid is “reasonably related to the fair market value of” only those services.
MSAs will continue to require careful analysis, however, because the FAQs also state that “[w]hether a particular activity is” an illegal referral under RESPA § 8(a) or a permissible “marketing service is a fact-specific question,” and then describe numerous factors that should be considered in making a legal determination. We have attempted to summarize the now-relevant factors for consideration below:
- Whether the marketing activity “is generally targeted at a wide audience.”
- Such activity, the FAQs explain, is not a referral. For example, “placing advertisements for a settlement service provider in widely circulated media (e.g., a newspaper, a trade publication, or a website) is a” permissible marketing service. Another example would be a real estate agent merely “deciding on and coordinating direct mail campaigns and media advertising for” a mortgage lender.
- The FAQs contrast such “generally targeted” activity with an action that is directed to a particular person, which is a referral if it affirmatively influences the person to select the provider. For example, “referrals include a settlement service provider directly handing clients the contact information of another settlement service provider that happens to result in the client using that other” provider.
- How is the MSA implemented in practice?
- The FAQs emphasize repeatedly that counsel and compliance officers cannot simply sign-off on a legal MSA contract and move on, because the MSA can violate RESPA in how it is “implemented” as well as by how it is structured.
- Put another way, an MSA can violate RESPA either in “form or and substance,” including by agreements that are “indicated by a course of conduct.”
- For example, an MSA can violate RESPA if in implementation it provides “payments based on the number of referrals received,” even if the contract describes the compensation formula differently.
- Whether the marketing services are performed by another settlement service provider — as opposed to a firm that does only advertising and marketing.
- MSAs with other real estate settlement service providers for marketing services will continue to require additional scrutiny. The CFPB will examine whether the provider’s marketing services are “actual, necessary, and distinct from the primary” settlement service that it performs.
- Whether payments under the MSA are reasonably related only to the market value of the permissible marketing services.
- As the FAQs put it, “the value of the referral, e., any additional business that might be provided by the referral, cannot be taken into consideration when determining” the reasonableness of the payment.
- For example, an agreement to pay for permissible marketing services may nonetheless run afoul of the law if “the payment is in excess of the reasonable market value for the services performed.”
3. Going Forward on MSAs
The Bureau summed up the new status quo well in its press release announcing last week’s changes, explaining the:
“rescission of the [2015 MSA] Bulletin does not mean that MSAs are per se or presumptively legal. Whether a particular MSA violates RESPA Section 8 will depend on specific facts and circumstances, including the details of how the MSA is structured and implemented. MSAs remain subject to scrutiny, and we remain committed to vigorous enforcement of RESPA Section 8.”
In addition to the Bureau’s commitment to enforcement, parties must be aware of private litigation over arrangements governed by RESPA, such as the ongoing Zillow lawsuit concerning a “co-marketing program” among real-estate agents and mortgage lenders litigation, which we have previously described. There now are clearer paths ahead for MSAs, if they are carefully reviewed at inception and in operation.
B. New FAQs on Gifts and Promotional Activity
Together with the new MSA materials, the Bureau also published FAQs on how RESPA applies to gifts and promotional activities (the “Gift FAQs”), including with respect to what RESPA’s regulation does allow settlement service providers to offer in that arena: “normal promotional and educational activities.” See 12 CFR § 1024.14(g)(vi).
The Gift FAQs reiterate the government’s prior position that because “gifts or promotions generally are things of value,” an agreement to provide such items for a referral can violate RESPA. Notably, the Bureau also declined to acknowledge any de minimis exception for gifts, stating that there “is no exception to RESPA Section 8 solely based on the value of the gift or promotion.”
Regarding the “normal promotional and educational activities” that RESPA does permit, the Gift FAQ’s elaborated some on the two, negative requirements for such activities, specifically that the offering of an item or activity cannot either: (1) be conditioned on the referral of business; or (2) defray expenses that otherwise would be incurred by a person in a position to refer business. The Bureau observed that the “not conditioned on” requirement will generally turn on how broadly or narrowly the item or activity is offered. The broader the offering, the more likely it will be found to be “not conditioned” on referrals. An example would be offering a promotional item to “the general public or all settlement service providers offering similar services in a given locality.” The Bureau contrasted that scenario with one where an item or activity is “targeted narrowly towards prior, ongoing, or future referral sources.”
The commentary on the “defray expenses” requirement is more straightforward, with the question always turning on whether the recipient would otherwise have incurred the expense. If the offering is a continuing education course, for example, then the answer could turn on whether the course was mandatory for the participant. The Gift FAQs further elaborate with several examples of other offerings by settlement service providers that either are, or are not, allowed under the “normal promotional and educational activities” provision.
 “RESPA” as used here refers to two separate but related prohibitions in the law’s Section 8. First, one person may not agree to give a “thing of value” to another for referrals incident to real estate settlement service business. (RESPA § 8(a).) A “referral” means any “action directed to a person which has the effect of affirmatively influencing the selection” of a settlement service provider; a referral also occurs when any “person paying for a settlement service… is required to use… a particular provider….” (12 CFR § 1024.14(f).) The second RESPA prohibition forbids parties from splitting a settlement service charge for which no or only nominal services are performed, i.e., splitting an “unearned fee.” (RESPA § 8(b).
 MSAs. In a typical MSA, a settlement service provider seeking to increase demand for its services — a lender, for example — will pay to have its services marketed or promoted by another party, such as a real estate brokerage. In this example, the brokerage may be able to advertise the lender’s servicers to potential mortgage borrowers that the lender itself could not reach directly. The lender may pay the brokerage a monthly fee for these advertising services, for example.
 In the Matter of: Lighthouse Title, Consent Order, 2014-CFPB-0015 (Sept. 30, 2014).