Marketing service agreement or something more? The CFPB targets mortgage-related companies

The 2010 Dodd-Frank Wall Street Reform And Consumer Protection Act granted the newly formed Consumer Financial Protection Bureau (CFPB) rule-making authority under RESPA.  This authority also grants the CFPB enforcement powers with respect to all entities under its jurisdiction.  In 2012, the CFPB fully assumed the role of regulating agency for any loan that is a federally related mortgage loan, and this removed the power of rule-making and enforcement from HUD who had been the responsible agency for RESPA since the act was passed in 1975. Section 8 of RESPA expressly prohibits any person from giving or receiving any fee, kickback, or other thing of value for any referrals for a settlement service.  Additionally, no person shall give or receive any portion of any charge made or received for the rendering of settlement service unless a service is actually performed. 

Violations of Section 8 could result in criminal and civil penalties.  The law permits criminal sanctions as fines and imprisonment up to one year.  Civil penalties can result in treble damages.  12 U.S.C. § 2607 (d). In September of 2014, the CFPB provided some insight into its interpretation of Section 8 limitations on marketing service agreements (MSA).  In the Matter of Lighthouse Title, Inc., the CFPB found that Lighthouse Title, a title insurance agency, had entered into or renewed MSAs with various counterparties for the provision of marketing and advertising services in violation of RESPA. The CFPB listed several shortcomings in Lighthouse's MSA that provided evidence to the CFPB that the agreement was not for actual services but rather operated as a channel for kickbacks for referral services.  The CFPB listed it concerns with the MSA as follows:

• Lighthouse failed to determine and document the fair market value of the services it allegedly received from the various counterparties;

• That the fees actually paid by Lighthouse were not representative of the fair market value for the services contracted for;

• Lighthouse set the fees to be paid pursuant to the MSA, in part, by considering how many referrals it had received from the counterparties and the revenue generated by those referrals;

• Lighthouse failed to monitor the counterparties to ensure that they were actually performing the services for which Lighthouse was paying them; and

• An agreement for marketing services is, by and through its nature, considered a thing of value.

The CFPB imposed $200,000 in civil money penalties on Lighthouse and ordered the company to terminate any existing MSAs with companies in a position to refer business to Lighthouse. The CFPB has determined that it can bring enforcement actions against any party violating this section despite the three-year statute of limitations.  Under the Dodd-Frank law, the CFPB can only bring actions up to three years after the offense has occurred.  Because the law allows the CFPB is allowed to bring enforcement actions as administrative proceedings, the CFPB has determined that the three-year limit applies only to actions brought in court and not administrative proceedings. In October, the CFPB published a bulletin on Marketing Services Agreements in an attempt to clarify their policy on MSAs. 

The CFPB believes that most MSAs are utilized as a means of skirting around Section 8 prohibitions on kickbacks and referral fees.  To determine whether a MSA violates Section 8, the CFPB will review all of the relevant facts and circumstances surrounding the creation and renewal, and implementation of each agreement.  According to the CFPB, MSAs inherently involve substantial and regulatory risk for the parties entering into the agreement.  The CFPB warns that they have grave concerns about the use of MSAs [to] evade the requirements of RESPA. . . This review is especially warranted insofar as whistleblower complaints about MSAs that violate RESPA have been increasing. Do you utilize marketing service agreements in connection with any settlement services related to mortgage loans?  Do you receive payment for providing marketing services for a settlement service?  Have you reviewed your agreement lately?  It might be worth dusting-off and taking a look at the MSA if it's been awhile, especially given the steadfast pace at which the CFPB has been working.

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.

- Jesse Johnston