Mayer Brown Partner Holly Bunting provided some real-life examples of RESPA scenarios to her audience at RESPRO’s fall seminar, showing how regulators are approaching enforcement.

“They’re really focusing on promotional activities, marketing services agreements (MSAs), and co-advertising,” she said. “That’s what we see reflected in these consent orders.”

Takeaways from 2023 enforcement

“Section 8(c)(2) is the exception that permits payment for bona fide services and goods provided, assuming that payment is fair market value,” Bunting explained. “That statutory exception gives us the employer-to-employee exception we see in regulations. It also gives us the promotional and educational activities exception, and regulators have provided more guidance on what is a key exception to the statute.”

Bunting referred to the enforcement actions the Consumer Financial Protection Bureau (CFPB) brought against a real estate brokerage company and a mortgage lender in August, the first in several years. She said she wasn’t surprised the issues the bureau cited in the consent order resembled those mentioned in its 2020 RESPA FAQs.

There were three things the bureau took issue with in the consent orders. The first was the lender providing real estate agents free access to paid subscription services, with the lender footing the bill. In some cases, if the real estate agent had been paying for the service, it would have been an expense of $300-400 a month. By paying for the service, the mortgage lender was defraying an expense to the real estate agent in return for referrals.

The second issue was with promotional activities. The CFPB called out a specific event where the sanctioned lender held a party for real estate brokers at a bar in Long Island and invited past referral sources from a particular brokerage. They also invited new people to the business and provided free food, alcohol, and entertainment.

Bunting noted there were a lot of facts missing from the consent order, like whether the lender sent any of its loan officers or marketing employees to attend. If they did not, this would run the risk of a violation. But if they did, Bunting said that raises the question of what the bureau really saw as the offending activity.

“When you look at the conditions for a compliant promotional activity, it can’t be conditioned on the referral business, and it can’t defray costs,” Bunting said.

The third issue the bureau mentioned in the consent order dealt with MSAs. According to the CFPB, the sanctioned lender had over 40 MSAs through which they were paying tens of thousands of dollars to real estate brokerages on a monthly basis, including the brokerage named in the other consent order. The bureau alleged that in at least one instance, the brokerage did not perform one of the agreed-upon services the lender was paying for under the MSA.

This fact is a good reminder of one of the fundamentals of RESPA compliance, Bunting said – if there’s an MSA, the parties must be performing services under the agreement and receiving fair market value for their services.

Bunting also referred to the bureau’s formal notice in September stating it considered policy statements from RESPA’s previous enforcing agency, the U.S. Department of Housing and Urban Development, as formal guidance the CFPB continues to apply. As many of these policy statements are older, there are some concerns about how applicable these documents are in today’s regulatory environment.

RESPA in action

Whether something is a RESPA violation often comes down to some of the smallest facts. Bunting shared scenarios to demonstrate some compliance issues lenders may face.

Scenario 1: “A lender hosts a golf tournament and does the following: it pays for the green fees, a buffet lunch, and beer and wine for a total of $20,000. It invites all the real estate agents from all the local offices of five different brokerage companies. It posts signage and marketing materials at holes around the course, as well as the clubhouse, and requires lender employees to attend the event. The lender president addresses the attendees during the lunch to discuss lender products and services, and they’re hosting these golf tournaments every month.”

In a situation like this, a regulator may take issue. Bunting said the event is happening too frequently, too much is being spent, and the marketing efforts during the event could be improved.

“If your dollars spent over the course of time is a number that would make a regulator’s eyes pop, that could be the first red flag, even if it’s a legitimate activity that just happens to be an expensive one,” she said.

The CFPB’s FAQs indicate events like these should be widely targeted, Bunting added. Inviting every real estate agent in town without limiting in any way based on referrals or relationships with brokerages is likely more compliant in the bureau’s mind than inviting real estate agents from select brokerages.

Scenario Two: “The title agency wants to grow its network with local real estate agents. The title agency knows it cannot pay directly for referrals, so it is going to use a multi-pronged strategy. (Assume this is happening in a state where anti-inducement laws provide flexibility.) First, the title agency plans to host quarterly events with food, alcohol, and entertainment. For each event, the title agency intends to invite only real estate agents from one brokerage that have referred business in the past. They plan to reserve space at the trendiest restaurants and bars for each event. They intend to create gift bags for all the attendees to take home that will include marketing materials, as well as title agency branded pens and notepads. There will be a few title agency reps on hand to welcome agents and the entertainment could vary from DJs to live bands.”

This situation is definitely high-risk for a RESPA violation, but Bunting said changing some of the facts can mitigate it. Again, widening the attendee list from one brokerage to all the real estate agents in the title agency’s area helps to lower risk. Whether the spending at the bars, restaurants, and entertainment raises a compliance red flag depends on how much it costs the title agency.

When considering food and drink spending, Bunting said she has seen lenders implement an “Applebee’s standard” – meaning to shoot for costs that would be typical at a casual dining restaurant.

Gift bags with promotional and branded items are generally compliant. This would probably change if the bags instead contained Apple products or tickets to a sporting event.

Bunting added to this scenario. In addition to the promotional events, the title agency also plans to subscribe to a mobile app containing valuable real estate data and to provide access to real estate agents. Access is not conditioned on referrals to the title agency. Any agent could gain access to the app via the title agency, which pays a monthly fee for the app based on users, and it intends to pass through the monthly per-user fee to the real estate agent that signs up for the app through the title agency.

Is this a RESPA violation?

Bunting said most likely not.

“The fact here for me is that they’re intending to pass the cost through to the real estate agent,” Bunting said. “The agents aren’t having their costs defrayed by getting access to this particular app.”