A wake-up call from CFPB regarding Marketing Service Agreements

If you are an agent, broker, or mortgage lender who has been solicited by a title company to enter into a Marketing Service Agreement (MSA), you would probably be best served to avoid the temptation.

The Consumer Protection Financial Bureau (CFPB) has made it clear that they are actively probing and investigating such arrangements as one of their top priorities. Most recently, an MSA between a top Maryland real estate team and their “partner” title company resulted in a massive class-action lawsuit and, potentially, an enforcement action by the CFPB (see full story here).

Federal Title has actively taken a strong stance against both MSA’s and Affiliated Business Arrangements (ABAs), recognizing that such arrangements only enrich the referral sources at the expense of the consumer and further drive up the costs of title charges. Read our related articles on MSAs and ABAs.

Another driver of increased closing costs - Marketing Service Agreements (MSAs)

Affiliated Business Arrangements (ABAs), once known as Controlled Business Arrangements (CBAs) are becoming a focus of the Consumer Financial Protection Bureau (CFPB).

Recent efforts by the CFPB, evidenced by enforcement actions and resulting settlements, are clear indications of the CFPB’s intent to better protect the consumer against sham ABAs. Many ABAs are nothing more than an arrangement by which title companies and mortgage lenders buy business from a referral source at the expense of the homebuyer. See here and here.

As harmful as ABAs are to the consumer, a little-known but similar arrangement between referral sources and vendors known as Marketing Service Agreements (or, MSAs), may be even more harmful. This article explains the difference between ABAs and MSAs in more detail.

Unlike an ABA, the MSA does not fall under any specific statutory authority and, as such, there is no requirement by the referring party to disclose its business relationship with a participating vendor to the consumer. Rather, a MSA is broadly covered under RESPA Section 8 that states: "No person shall receive and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding – oral or otherwise – that business incident to or part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person." Therefore, fees paid through an MSA must be for actual marketing services performed by the referral source (i.e., real estate brokerage) on behalf of the mortgage or title company as vendor. In other words, the marketing services being performed by the real estate brokerage must be commensurate with the fixed monthly or annual fee paid by the mortgage or title company.

Over the course of the last year, the folks here at Federal Title & Escrow Company have been taking inventory of its competitors who participate in MSAs and their underlying fee structures. What we have learned reveals the harm to consumers. In one case, we learned that a competing title company is paying approximately $5,000 per month to a local real estate brokerage for “marketing services.” Yet, the only so-called "marketing services" being provided are "in-office access to the brokerage's sales associates to the exclusion of other competing title companies," "encouraging sales associates to write in to the sales contract the name of the participating title company," and "allowing the participating title company to set up a kiosk of brochures within the real estate brokerage office locations."

Clearly, for $5,000 per month ($60,000 per year), a title company could hire a marketing firm to provide a whole lot more in the way of marketing its services. This is just one of many instances we have discovered in which the fee being paid is clearly excessive in relation to the marketing services being performed. The truth is that the title company is buying business from a referral source – plain and simple.

So is it really the title company paying the MSA fee to the real estate brokerage? No, it’s the consumer paying the fee since the title company is simply passing on the cost to the homebuyer. Since the real estate brokerage has a vested interest in making sure the transaction is referred to the participating title company, they have little incentive in making the homebuyer aware of his right to shop and select his own title company. As industry insiders, we know for a fact that if a homebuyer shops and selects their own title company, they will pay far less than what they will pay by using the MSA-participating title company.

The homebuyer, as consumer, is also under-served by the inherent conflict of interest created by an MSA. The MSA-participating real estate brokerage is less likely to hold its partnering title company accountable for actions of malfeasance. In other words, they are more likely to “cover” for the title company since the title company is paying a handsome monthly fee to the broker. In the alternative, we are aware of several cases in which a partnering title company, without the knowledge of the homebuyer, has insured over title defects (i.e., unreleased mortgages, etc.) so as to timely complete a closing. Such a maneuver ensures the payment of the real estate brokerage commissions without delay and further solidifies the relationship between the MSA partners.

MSAs are little more than the act of buying business from referral sources – the “marketing service” being performed is only part of the ruse. At the end of the day, the MSA causes the consumer to pay more and corrupts the integrity of client advocacy. At Federal Title, we advocate for all real estate professionals to a transaction to act independently for the benefit of the consumer and not at the expense of the consumer. We don’t buy business – we earn it.

The Closing Costs Calculator Company

With the exception of Federal Title & Escrow Company, nearly all major title companies write a check to real estate brokers or mortgage companies as a "Thank You" for the referral of business. 

In some cases, the payment is made through a Marketing Service Agreement (MSA) in which, ostensibly, the referring party provides marketing services on behalf of the title company.

In other cases, the payment is made through an Affiliated Business Arrangement (ABA) in which a portion of the profits from each transaction is deposited into an entity account commonly owned by both the referring party and the title company.

In either case, such arrangements are very likely nothing more than the title company buying business from a referring party which drives up the costs for the consumer.

If you are a prospective homebuyer or refinancing homeowner and are referred to a title company by your real estate agent or mortgage lender, ask them if his or her company has a MSA or ABA with the title company.

If so, you are likely paying more for title services than if you were to shop and choose your own title company.

Federal Title & Escrow Company does not participate in MSA or ABA arrangements. As a result, we can afford to be completely transparent to our customers.

This is why we offer consumers highly sophisticated online closing costs calculators with guaranteed quotes and other tools such as our new Close It!™ mobile app.

Because we have nothing to hide, we are the only title company that invests heavily in delivering the message to consumers the importance of shopping for and choosing your own title company.

So much so that some have referred to us as the "Closing Costs Calculator Company."

A win for the consumer

We'd like to applaud Wells Fargo for announcing a move toward eliminating their role in the ABA/CBA marketplace. The bank announced last week that it would discontinue 8 joint ventures, according to a report in American Banker.

We’ve repeatedly exposed the truth behind the legal kickback known as the Affiliated Business Arrangements (also known as a Controlled Business Arrangement or CBA), so it's nice to see a big player in the game is moving away from this inherently anti-consumer model. 

A spokesman for Wells Fargo cited increased regulatory pressure by the Consumer Financial Protection Bureau (CFPB) as the reason for its decision to exit the arrangements. Recently, the CFPB has stepped up its scrutiny of these ethically and legally-challenged arrangements, recognizing that consumers are footing the bill for an arrangement that, most of the time, is nothing more than a conduit for illegal payments for the referral of business.

Perhaps Wells Fargo’s honorable and pragmatic decision to stop the kickbacks will inspire other major mortgage-related players to bow out of the kickback game as well.

Marketing Service Agreements may be more dangerous than Affiliated Business Arrangements

Federal Title is an independent title company, which means that, unlike most of our competitors, we do not enter into Affiliated Business Arrangements ("ABAs") or Marketing Service Agreements ("MSAs") with lenders and/or real estate agents. 

An ABA is an arrangement where someone who is in a position to refer settlement business has an affiliate relationship with or an ownership interest in a provider of settlement services and refers business to that provider. An example of this would be a real estate brokerage that has part ownership of a title company and refers business to the title company.

ABAs are permitted under the Real Estate Settlement Procedures Act of 1974 ("RESPA") as long as certain requirements are met.

An MSA is an arrangement under which a settlement service provider, such as a real estate broker, agrees to market and promote another provider’s services, such as that of a title company, in exchange for payment. MSAs are viewed as falling under a provision in RESPA that allows for "the payment to any person . . . for services actually performed."

MSAs are becoming more and more popular amongst real estate brokerages and title companies here in the DC area.

We think that these types of arrangements are bad for consumers. Many times homebuyers are not adequately made aware that choosing a title company is their choice. Second, when a Realtor refers their client to the "in-house" affiliate title company, chances are good the client will pay more in settlement fees, since they are not shopping for title services. Third, the affiliate title company is more likely to turn a blind eye and insure over potential title or marketability issues relating to the property, because the affiliate title company’s allegiance extends to the referral source.

We are not alone in our belief that these arrangements are bad for consumers. Consumer advocate groups, such as CAARE, have spoken out against ABAs.

Moreover, the Consumer Financial Protection Bureau ("CFPB"), the government agency that is now responsible for policing RESPA violations on behalf of consumers, has been focusing on ABAs. It recently entered into a settlement agreement with a Texas homebuilder and lender regarding the alleged violation of RESPA rules with respect to ABAs.

In many cases, ABAs are merely shams that operate to allow for payment for the referral of business, which is illegal under RESPA.

What about MSAs? How do they fit under RESPA? In some ways, they may be even more dangerous for the consumer than ABAs. One of the requirements for ABAs under RESPA is that the consumer must be informed in writing of an affiliated business arrangement. In contrast, there is no requirement under RESPA that an MSA be disclosed to the consumer. And MSAs, just like ABAs, can operate as shams that allow for the improper funneling of referral fees.

A federal class action lawsuit filed in March of this year in the U.S. District Court for the District of Maryland sheds some light on these arrangements.

In that lawsuit the plaintiffs allege that a title company paid a real estate brokerage as much as $12,000 a month in exchange for referrals under a sham MSA that was not disclosed to the plaintiffs, which resulted in depriving the plaintiffs of competition between settlement providers.

The plaintiffs were referred to the title company by their real estate agent and used the title company for their home purchase closing. The lawsuit seeks $11.2 million in damages against the real estate company, the real estate brokerage, the real estate agent, the title company and the president of the title company.

With all of the potential dangers of MSAs, you can expect that they will be reviewed by the CFPB in the near future. If you are a Realtor, would your broker’s MSA survive the CFPB’s scrutiny? If you are a homebuyer, did your Realtor just refer you to a title company with whom they have an MSA?

  • Ways to save at closing

    Title charges are the largest chunk of closing costs and can vary by hundreds of dollars.

    Learn more

  • What are closing costs?

    The real estate closing process involves loan steps, legal steps and title steps.

    Learn more

  • What's title insurance?

    Insure your legal ownership just like you'd insure the building, but for lots cheaper.

    Learn more

Connect with us

Our blog contains general information only, not intended to be relied upon as, nor a substitute for, specific professional advice. Rate tables and figures that appear on our blog are deemed reliable but not guaranteed. For current rates & policies, refer to our Quick Quote and Consumer Guide. We accept no responsibility for loss occasioned to any purpose acting on or refraining from action as a result of any material on our blog.