RESPA Section 8(a) was enacted to stop payments for referrals.

RESPA Section 8(c) provides some exceptions that allow the mortgage, title and settlement service industries to work together without committing a RESPA violation.

However, despite recent guidance on marketing services agreements (MSAs), the industry is still seeking clarity from the Consumer Financial Protection Bureau (CFPB) on how such agreements can be structured to be permissible. 

“The CFPB still has this concern that MSAs could be a disguised payment for referrals,” Katten & Temple, LLC, Of Counsel Brian Levy said during a recent panel discussion at a virtual RESPRO session. “Your frontline workers and their communications with their referral sources can always get you into trouble if they are saying the wrong thing about your relationships, particularly your MSAs.

“If you’ve got people saying, ‘This is how we pay you for referrals,’ that’s entirely wrong, because the answer should be, ‘This is how we pay you for ‘marketing’ – for needed marketing - and we don’t pay you more than reasonable value for that.”

Levy’s co-panelist was Mark Meyer, founder and CEO of MLinc Solutions, an independent provider of services agreement valuations.

Mayer Brown Senior Counsel Phil Schulman moderated the session.

“MSAs have taken off,” Schulman said. “They have always been popular. But over the last 18 months as the real estate market has gone crazy, and real estate agents and brokers are able to drive traffic to their sites, title agents and lenders have wanted to be part of that explosion. Marketing arrangements are a way for them to do that.

“And so that raises the whole issue of, how do you value these marketing agreements - especially in light of the FAQs the CFPB put out in October of 2020?”

Current MSA environment

Six months ago, the CFPB rescinded its infamous 2015 memo stating that MSAs likely violate RESPA.

The CFPB stressed that the rescission of the 2015 bulletin does not mean advertising agreements are presumptively legal, stating, “MSAs remain subject to scrutiny and the bureau remains committed to vigorous enforcement of RESPA Section 8.”

The bureau simultaneously released a set of frequently asked questions (FAQs) to provide greater clarity on topics under RESPA, including examples of when an MSA is or is not legal.

“The CFPB said whether a particular MSA is compliant or in violation of RESPA depends on specific facts of the case,” Levy said. “And a lawful MSA involves marketing services that are `actual, necessary and distinct,’ and payment is reasonably related to the value of the services.”

Levy noted the FAQs did not address new technologies and interactions among service providers with respect to social media advertisings, postings and ‘likes,’ or internet lead generation.

“And there’s been no enforcement involving these new technologies,” he added. “The CFPB had an investigation involving a top real estate marketing and information provider, but they dropped that without explanation.”

Meanwhile, the Federal Deposit Insurance Corp. (FDIC) is becoming more involved in RESPA enforcement, despite a lack of CFPB guidance.

For instance, a 2019 consent order from the FDIC found improper co-marketing and desk rental arrangements, while providing no detail in the order about what exactly was improper.

“In the current regulatory environment, we’re seeing the FDIC is still somewhat focused on MSA valuations and monitoring,” Levy said, adding, “These FAQs are only six months old, so I would be surprised to see the CFPB walk it back already, but that’s not out of the question. We do have new leadership.”

Levy noted that since the exceptions in RESPA 8(c)2 are so broad, it is important to understand how the courts and the bureau may interpret them in a case-by-case scenario. 

To stay compliant, Levy stressed first making sure you are not paying more than reasonable value for services.

“Valuation is key,” he said. “Consider a third party to avoid a claim of bias. Make sure you get what you pay for, and audit and verify. Support the narrative of necessary services for branding and marketing - no pay-to-play, no referral understanding and don’t pay for things you don’t need.”

In addition, he suggested training both sales staff and referral sources to articulate your RESPA compliant narrative for branding.

MLinc’s valuation methodology

Meyer discussed the current market and compliance from a valuation standpoint.

“With interest rates rising a bit and refinances on the decline, there is renewed emphasis on purchase business and service relationships – including MSAs, office subleases, sponsored events, lead generation and co-marketing,” he said. “And there is renewed interest in independent valuations.”

Meyer agreed a company’s involvement with such agreements must start with a compliant narrative.

“I believe settlement providers must market to grow and prosper,” he said. “And MSAs are paid advertising which allows these providers to collaborate with others, brand themselves, compete for and win business. The real estate environment is such a fertile ground for settlement providers to get these opportunities because the consumers are predisposed to need what they do.

“Regulatory pressures are leading people to underpay for the marketing, so it’s really a good deal. They’re conservative in their payments for marketing, and when expenses are decreased, consumers can certainly benefit. These relationships are great opportunities to create a better home-buying process for all parties.”

Meyer said when MLinc looks at valuing a service, it’s all about the cost of marketing exposure or impressions - with no direct relationship to what the company that’s being advertised is getting in return.

“We don’t look at profit margins of mortgage companies and title companies, nor conversion of opportunities,” he said. “That helps you stay compliant with RESPA. The key is you don’t want to overpay.”

For co-marketing through traditional media sources such as newspapers, magazines, radio, TV and billboards, Meyer suggested paying your pro rata share of an invoice, based upon your percentage share of content or use.

“Obtain new MSA values if activity levels change dramatically, if an agreement is being renewed, or a year has passed – whichever comes first,” he said. “Monitor actual services completed, verify on a monthly basis and calculate the associated value as the basis for payment.”

People often ask Meyer how the pandemic has changed the MSA valuation business, as there have been more virtual sponsored meetings and other events that used to be primarily held in person.

Meyer said, in many cases, the valuation hasn’t changed as dramatically as one might think from pre-pandemic times.  He used sponsorship of formally in-person meetings that are now virtual as an example.

“If a lot of the same marketing components are there – the same meeting length, the same number of invitees, you’re on the event calendar, emails are sent out to all active agents, an agenda is distributed listing you as the sponsor, signage is present, you are introduced as the sponsor, etc. - you’re probably approximating a similar value in a virtual setting.”

Meyer said he is seeing more clients sponsoring virtual events – including video tours of listings.

Another trend is affinity group marketing, such as marketing a mortgage business to a niche group of professionals or even hobbyists.

“One of my favorite arrangements involved an association of bikers marketing on behalf of a mortgage entity,” he said.

Meanwhile, social media co-marketing remains important to the industry.

“There’s a lot of interest right now, and people do get caught up with whether a ‘like’ or a reposting is a thing of value.  It is, but you’re talking about fractions of pennies in most cases,” Meyer said.