Prospect Mortgage LLC, real estate brokers Re/Max Gold Coast and Keller Williams Mid-Willamette, and mortgage servicer Planet Home Lending recently entered into consent orders after the Consumer Financial Protection Bureau (CFPB) determined that certain marketing service agreements (MSAs), lead agreements, desk license agreements and co-marketing arrangements were disguising payments for referrals in violation of RESPA Section 8(a).

The major takeaways

The orders are an illustrative example of some of the basic tenets of RESPA compliance, said Katie Johnson, chief counsel at the National Association of Realtors (NAR).

“This was not like PHH Corp. and Lighthouse Title, where the CFPB made these determinations of law that were contrary to the longstanding understanding that we had from the HUD guidance throughout the years,” Johnson said. “Here, I think these were pretty formulaic violations.”

Ken Trepeta, president and executive director of RESPRO, said that the consent orders do not make MSAs, lead agreements or other co-marketing arrangements themselves illegal, but that most of the practices listed within the agreements are clear RESPA violations.

“It’s not a violation to make a referral,” Trepeta said. “The idea that you recommend a particular lender – there’s nothing inherently wrong with doing that, especially if you believe the lender is good.”

The problem, however, is when such arrangements lead to payments based solely on referrals (and not on services rendered).

One very notable difference about this enforcement action and resulting consent order and previous consent orders is the fact that the real estate broker with whom the problematic agreements were entered also was penalized for its role in the kickback schemes.

This isn’t the first enforcement action from the CFPB against a real estate company. In May 2014, the CFPB entered into a consent order with RealtySouth, the largest real estate firm in Alabama; however, that case involved improper disclosures of affiliated businesses, not illegal payments.

“The bureau wanted to send the message that it is not just going to merely focus on the paying the referral fee part anymore, and those who receive the fee must beware,” said Francis X. Riley III (“Trip”), a partner at Saul Ewing LLP and co-chairman of its Consumer Financial Services Regulatory and Litigation Practice Group. “This is really the first [consent order] by which the CFPB came out squarely focused on a real estate brokerage company, and in so doing reminded the industry that it takes two to tango, and both partners will be subject to civil fines.

“In particular the bureau was highly critical of the component of this arrangement whereby the brokerage was an integral part of making sure that as a part of selling the ‘leads’ the brokerage was making sure those leads that were or became its customers were handed off to Prospect Mortgage in a variety of ways; this is what, in part, triggered the Section 8(a) violation,” Riley added.

There is a misconception that real estate agents do not fall under the CFPB’s jurisdiction. That is because exemptions were granted to real estate professionals during the drafting of the Dodd-Frank Act. However, as these enforcement actions show, that is not the case.

“The CFPB does have broad authority over consumer financial laws, but it only has very limited authority over real estate professionals, and that is strictly with compliance with RESPA,” Johnson said. “Since RESPA falls within the CFPB’s jurisdiction, our members and real estate professionals’ compliance with RESPA falls within the CFPB’s jurisdiction.”

Johnson added that NAR has been educating its members that they can enter into MSAs and other co-advertising agreements, as long as the services are priced based on their fair market value and not on the number of referrals made.

Settlement services industry members should be pleased with the fact that this consent order provides more details – a clearer decision.

“What is unique about this consent order is its transparency relative to the specific acts which the bureau found to be violations of RESPA Section 8(a) and turned a permissible lead generation concept into the basis for it findings. The bureau did a very good job in identifying the particular aspects of the lead generation and MSA agreements between Prospect and Re/Max that created these violations of RESPA,” Riley said.

Riley added that the CFPB likely could have pursued UDAAP violations as well. For instance, Riley believes the bureau could have found the agreements deceived consumers because the brokerage and the agents failed to inform the borrowers – their clients – of the lead agreements and MSAs with Prospect and that the brokerage was being rewarded financially for selling their information as “leads.”  The CFPB also could have concluded that the agreements were unfair  because they effectively steered their clients to Prospect without any notice of the relationship or offering other possible mortgage companies. Lastly, given the former, Riley concluded that the bureau could have found the brokerage acted abusively towards its clients by praying on the reliance most homebuyers place upon their real estate company and agent.

“I think the bureau has gotten the message that the industry wants transparency and objectivity as part of these consent orders, especially since they are to be used to inform industry-wide compliance short of actual regulations – regulations to which the current administration has put a stop. They did a fine job. This is not a Lighthouse or other consent order situation  where the industry is left guessing about much of the specifics of what the bureau found problematic within the confines of the parties’ [agreements],” Riley said.

Prospect’s lead agreements

Prospect entered into lead agreements with more than 200 different counterparties, including Re/Max and Mid-Willamette. Under these agreements, Prospect paid the counterparty for each lead that it received. However, the CFPB found that the counterparties who received lead fees “went well beyond simply transferring information about prospective buyers.”

According to the Re/Max consent order, under the terms of the lead agreement, Re/Max would share information about its clients to Prospect in exchange for a variable fee based on the number of consumers shared. When asked what he and his agents did in exchange for Prospect’s lead fees, Re/Max’s owner and principal broker described the arrangements as receiving payments for referrals.

“He described a lead as occurring when an agent ‘brought that client to one of the loan consultants.’ He further explained that Re/Max would receive a lead payment ‘if a sales associate [agent] has a client who’s looking to buy a home … they may introduce them … via telephone or set up a meeting to discuss if that person qualifies to buy a home,’ ” the Re/Max order states.

It was found that most of Prospect’s lead agreements included an exclusivity provision, prohibiting counterparties from sharing the prospective buyer’s information with Prospect’s competitors and discouraging the counterparty from promoting other lenders. Trepeta said that it has been “long-held advice” not to make affiliate arrangements exclusive.

The CFPB also determined that the real estate brokers provided incentives for their agents to steer buyers and sellers to Prospect’s loan officers.

For example, Prospect paid one broker anywhere from $25 to $500 per lead, depending on the type of lead. The broker then passed some of that money on to its agents: “During the broker’s monthly meetings with its agents, the broker would physically hand out $20 bills to their agents, one for each consumer that the agent directed to one of Prospect’s loan officers,” the Prospect consent order states.

Mid-Willamette also paid a portion of Prospect’s lead fees to its agents. Between 2012 and 2015, Mid-Willamette received at least $145,000 in lead fees from Prospect; in return, Mid-Willamette gave cash-equivalent credit to its agents for each consumer that the agent steered to Prospect. The agents could use the credit to offset the monthly fees they paid to affiliate with Mid-Willamette.

The amount Mid-Willamette paid to its brokers increased with the volume of referrals, with some agents receiving more than $500 in a given month. According to the Prospect order, the director of strategic alliances said he wanted brokers to “invest some of the listing lead fees by incentivizing agents to use us.” Also, one of Prospect’s regional sales managers sent an email to a broker Sept. 26, 2012, which included suggested language for the broker to send its agents: “In order to promote our relationship [with Prospect, broker] will pay each agent $100 for each qualified buyer lead that we send to Prospect.”

The CFPB stated that this made the lead agreements with brokers actually payments for referrals.

“If it was not clear to those involved in lead generation arrangements before, it should now be obvious that the agreement should only involve the sale of the lead for a fixed, fair market price; period. That is all you can do if you are a real estate company or a title company – selling your lead (your customer’s information) to another settlement service provider,” Riley said. “What you cannot do is to require, recommend or tell your agents, your salespeople, or your employees to take affirmative action to refer and recommend the party to whom you are selling the leads. In other words, you can’t take a step beyond simply selling the lead.”

Riley said that the CFPB seem to have a heightened sense of concern when the leads that were “being sold” already were the seller’s customers. It is one thing for a potential buyer/borrower to click on an online listing that then generates the lead; it is another thing for a real estate agent to have a client, sell their information as a lead and then take affirmative steps to hand off the customer to the party paying for the “lead.”

“One of the facts the bureau focused on was that these customers were being referred after the mortgage company got the lead and the mortgage company called them,” Riley added.

Prospect’s MSAs and other agreements

Prospect made headlines in July 2015 when it announced its exit from MSAs. Throughout its investigation, which covered activities that took place as far back as July 2011, the CFPB found that Prospect had entered into MSAs with more than 120 counterparties.

According to the Prospect order, the lender paid a fixed amount of money per month under its MSAs. These payments ranged from a few hundred dollars to over $20,000 a month. In return for these payments, the brokers purportedly performed marketing services. For instance, according to the Mid-Willamette consent order, Prospect paid $4,250 per month in exchange for Mid-Willamette’s promise to perform certain marketing activities to promote Prospect’s services.

The CFPB determined that Prospect managed its MSAs to encourage referrals by basing its payments on “capture rates.” Prospect tracked referral levels as a percentage of the brokers’ overall business. Capture rates were not mentioned in the Re/Max order, but they were in the Mid-Willamette order.

How it worked was that Mid-Willamette would send data to Prospect so Prospect could track the capture rate. If a broker had 10 clients who purchased mortgages within a month, and four of those clients used Prospect, then the capture rate would be 40 percent for that broker.

“Prospect also held monthly meetings with its MSA counterparties,” the Prospect order states. “During these meetings, according to varying versions of Prospect’s ‘MSA Monthly Review Checklist,’ Prospect would ‘review the capture rate and identify missed opportunities amongst agents and consumers.’ One of Prospect’s representatives once listed ‘boosting referrals’ as an item discussed with a counterparty at a monthly meeting.”

One noteworthy finding from the CFPB was the fact that if the capture rate dropped below a certain percentage of the counterparty’s business, Prospect either lowered the monthly amount it paid or discontinued the MSA.

This bolstered the CFPB’s conclusion that the payments Prospect made for advertising and marketing services were actually payments for referrals.

Prospect also entered desk licensing agreements with more than 100 counterparties, all of whom were real estate brokers, including Re/Max and Mid-Willamette. Under these agreements, Prospect paid the brokers to have its loan officers onsite.

“But these agreements were not just payments for renting office space,” the Prospect order states. “The brokers also promised to ‘promote Prospect as a preferred lender’ and ‘endorse the use of Prospect’[s] services to its employees, agents and the visiting public.’

“Prospect analyzed the value of these desk licensing agreements in terms of the number of referrals they produced per office, rather than whether they were paying market rates for the cost of renting office space in a particular area,” the order continues. “The payments Prospect made and that brokers such as Re/Max Gold Coast, KW Mid-Willamette, and others received for these desk licensing agreements were therefore actually, at least in part, payments for referrals.”

The CFPB found other preferential treatment from Re/Max and Mid-Willamette in the form of hosting training exercises featuring Prospect, but no other lenders.

The not-so-clear violations

Although the consent orders provide specific details in some instances, there are other sections that aren’t quite as clear. One such area was Prospect’s co-advertising agreements on third-party websites.

“One area that was new that we haven’t seen being addressed in an enforcement action, and maybe that’s because the practice is generally new, was this idea of co-marketing on third-party websites,” Johnson said. “There were only a few paragraphs that addressed it … I would have liked to see more explanation there as to how they connected the dots between the advertising and the referral.”

Loretta Salzano, a founding partner of Franzén and Salzano, P.C. who spoke about co-advertising on third-party websites at RESPRO’s fall seminar last year, agreed that in this area, the CFPB didn’t lay out the violations clearly.

“They don’t specify in the part about the co-marketing and third-party arrangements that what they did was illegal,” Salzano said. “I kept reading it. They don’t say this violated RESPA. They recite what was happening and jump to the conclusion that agents received payments for referrals. We have to read the tea leaves to figure out which parts were offensive.”

According to the Prospect order, Prospect paid a portion of a real estate agent’s advertisements on a third-party property listing website. There was an option available for prospective buyers to clink on an ad that says, “I want financing information,” which led to Prospect receiving a copy of the consumer’s information.

“In return for subsidizing a portion of these agents’ third-party website advertising, Prospect’s loan officers required them to exclusively promote Prospect in all of the agent’s advertisements on that third-party website,” the Prospect order states. “Some agents who co-market their services on that third-party website with Prospect took additional steps to convince consumers to use Prospect loan officers. For example, one agent told Prospect that he ‘was able to talk [a particular consumer] into using you guys for the financing of his purchase.’  

“The payments that Prospect made and that agents received under these third-party website co-marketing agreements were actually payments for referrals,” the Prospect order then concludes.

Based on her understanding of the facts, Salzano does not think that the CFPB’s case against Prospect co-advertising on third-party websites would have held up in a court of law, adding that this segment just seemed to be added because the CFPB had found other violations.

“Whenever you have hundreds of different arrangements, it’s going to be very difficult to demonstrate that each one was operating in compliance of the law, even if it is,” Salzano said. “And then there was damaging evidence to the contrary, in some of the things that the CFPB uncovered.”

Salzano added that the third-party platform that Prospect was using in and of itself was likely fine, as long as what Prospect was paying for was commensurate with the amount of stake they had on website.

“If the lender was not completely subsidizing that, and was getting exposure and paying on a flat-fee basis its pro rata share of the space, [that should be fine],” Salzano said, adding that it is extremely difficult to prevent referrals. “It’s human nature. The CFPB keeps stressing that you can’t have this arrangement for goods, facilities and services and expect that you are separate from referrals. Unfortunately, according to the CFPB, some agents were taking ‘additional steps to convince consumers to use Prospect so as to make this about more than co-marketing.’ ”

Another practice to monitor: Pre-approval

Another aspect of the consent orders that is relatively new is the section regarding Prospect’s preapproval process.

The CFPB determined that Prospect’s broker counterparties and their agents used a preapproval process to funnel consumers to Prospect’s loan officers. One agreement required the broker to “educate and train” its agents on the need for consumers to seek preapproval with Prospect.

According to the Prospect order, the broker would only earn lead fees for those listings “in which Prospect has been designated as the preferred lender such that the listing agent is required to have all customers who desire to submit an offer on the property receive Prospect Mortgage pre-qualification.”

Although it was found that Prospect stopped incorporating this language directly within its agreements with brokers, the CFPB found that Prospect continued to actively encourage the brokers to employ this practice to steer consumers to its loan officers. According to the order: “A Prospect senior vice president explained the change to his team: ‘Of course we desire that our loan officers prequel all buyers, but we have to manage that outside the contract and cannot contractually require it’ in the lead agreements themselves.”

In the “agents-only remarks” within the agents’ multiple listing services (MLS), where they can advertise property for sale, the CFPB found instructions requiring agents to inform the buyers that they needed to obtain preapproval specifically with one of Prospect’s loan officers.

For example, one of Re/Max’s listings said, “All buyers MUST be pre-qualified with no obligation or cost with [Prospect loan officers].” Prospect called this being “written in” to a property listing.

“This tactic steered consumers to Prospect,” the Prospect order states. “ ‘Writing in’ a Prospect loan officer into the MLS listing gave Prospect the inside track to the consumer’s eventual mortgage business. Much of the information a consumer provides during the preapproval process is also in a mortgage application. Prospect’s officials actively encouraged ‘writing in’ as one means to drive up the number of referrals for which Prospect would be willing to pay under its MSAs and lead agreements.”

One of Prospect’s regional sales managers suggested that a broker and the broker’s agents could generate more leads – and therefore receive more lead fees – if they would “add a requirement to your listing agreements and on the MLS that all buyers need to be preapproved by Prospect Mortgage.”

According to the Re/Max consent order, under the initial lead agreement with Prospect, Re/Max accepted a lead fee for each consumer who prequalified with Prospect through on of Re/Max’s listings.

“Prospect paid between $10 and $25 (depending on the home price) for each time Prospect received a prequalification from Re/Max. The agreement provided that: ‘A Listed Property’ lead shall include any property related to the lead provider’s business in which Prospect has been designated as the preferred lender such that the listing agent is required to have all customers who desire to submit an offer on the property receive a Prospect Mortgage pre-qualification,” the Re/Max order states.

Some brokers even required prospective buyers who had already obtained preapproval with another lender to also obtain preapproval with Prospect.

Additional findings

The consent orders contain additional details, including the following:

• Under Prospect’s master origination services and sale agreement with mortgage servicer Planet Home Lending, LLC, the lender paid Planet a portion of the proceeds from any referred refinances and sent the mortgage servicing rights on the refinanced mortgage to Planet.
• The agreement required Planet to market Prospect as Planet’s preferred refinance partner and to make consumer calls on Prospect’s behalf. Planet also referred to Prospect’s personnel as “our loan officers.”
• To identify candidates among its customers who were potentially interested in refinancing, Planet Home ordered consumer reports called “trigger leads” from Equifax. Section 604(f) of the Fair Credit Reporting Act (FCRA) prohibits a person from using or obtaining consumer reports without a permissible purpose. The CFPB determined that Planet Home used these reports for marketing purposes, which is impermissible under the FCRA.

The monetary penalties

Under the consent orders, Prospect mortgage will pay $3.5 million to the CFPB’s Civil Penalty Fund. Re/Max will pay $50,000 in civil money penalties, and Mid-Willamette will pay $145,000 in disgorgement and $35,000 in penalties. Planet will pay consumers $265,000 in redress.

Prospect has been prohibited from entering into any agreements with settlement service providers to endorse the use of their services. Re/Max and Mid-Willamette are prohibited from paying or accepting payments for referrals, and will not enter into any agreements with settlement service providers to endorse the use of their services.

Planet has been prohibited from paying or accepting payments for referrals and will not be able to enter into any agreements with settlement service providers to endorse the use of their services.