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?

Marketing services agreement: A kickback by another name

While Affiliated Business Arrangements (also known as a The Legal Kickback) between settlement companies and real estate brokers have been much discussed and criticized over the years as anti-consumer, they continue to permeate the market.

Here is yet another kickback scheme – the Marketing Services Agreement (MSA), which is becoming more popular among real estate brokerages (i.e., brokers) and self-described "independent" title companies, also referred to as the broker's Preferred Partner.

Here’s how it works. Example: Acme Title Co. approaches Beta Real Estate Co. and offers to pay $20,000.00 per year to Beta for the following so-called services:

  • Acme Title Co. to be designated the exclusive preferred settlement service provider by Beta
  • Acme Title Co. logo and website link to be prominently displayed on Beta’s website
  • Acme Title Co. signage and marketing materials to be placed and distributed with Beta’s sales offices and on for sale signs
  • Acme Title Co. settlement services offer to appear on all Beta’s home listings
  • Beta grants Acme Title Co. the exclusive right to make monthly presentations to its real estate agents
  • Beta to place Acme promotional materials in all buyer packets presented by Beta to its clients

These "services" would be better described as "privileges" since the truth is that Acme Title Co. is buying exclusive access to the referral sources (i.e., Beta’s sales agents). It’s an effort to gain "face-time" with those sales agents who are in the best position to refer homebuyers to the title company.

The consumer, in this case a homebuyer, is most likely to use the title company recommended by the sales agent and may never know or realize that she has a right to shop around and choose her own title company.

At the end of the day, this is little more than a kickback from a service provider to a referral source in exchange for access. Is it legal?

Most MSAs are not administered in a legal manner. RESPA Section 8 prohibits a Broker from receiving a thing of value for a referral. Thus, if the marketing fee ($20,000 per year in this example) is based on anything other than the actual value of the marketing services performed by the Beta on behalf of Acme, then the arrangement would be in violation of federal law.

In other words, would an independent consultant value Beta’s efforts to market and promote Acme’s services at $20,000. The answer is most likely "NO."

Ideally, the Consumer Financial Protection Board (CFPB), with oversight of RESPA compliance matters and its army of nearly 1,000 employees, will better scrutinize these Marketing Services Agreements and Affiliated Business Arrangements. As its name implies, the CFPB was established to protect the consumer.

Let’s hope the CFPB follows its charter.

Borrower pays $2,000 for in-office closing?

Your refinance loan application has just been approved and your lender asks if you have a preference in selecting a title company. The borrower (name redacted) in the HUD-1 you see below answered "No" to this question and was taken for a ride – so to speak.Closing Doc

In fact, by allowing his lender to select the title company, this borrower paid $5,366.50 for title charges compared to $3,338.20 had he selected Federal Title as his title company. He overpaid by $2,028.30 simply by allowing his lender to select the title company.

This is a classic example of what routinely happens to borrowers when they defer the selection of service providers to their "trusted advisor."

In this case, TRG Settlement Services, LLP, is a national settlement service provider operating through multiple affiliations (i.e., kickback arrangements) with large national lenders. Because they share their profits with your lender, the lender has incentive to steer you to them.

By offering in-home or in-office closing services, the borrower is often persuaded to use the lender’s affiliated title company.

The question for this borrower: Was it worth over $2,000 to have a notary conduct the closing at your office? Is such convenience really worth such a price?

Shop title insurance providers, save on closing costs

The Internet makes it so easy for consumers to find the best prices on all kinds of goods. Why would anyone willingly pay retail price when it's so easy to point-and-click your way to a bargain?

If we were talking about furniture or household electronics, it would seem like a no-brainer. But because it's title insurance – and title insurance is a pretty wonky subject – so many consumers seem complacent to let someone else do the shopping (or steering) even if it does wind up costing them hundreds or even thousands more at the closing table.

At Federal Title, we're trying to get the word out to consumers (shopping is easy, saving is awesome), so we partnered with our friends at the Better Business Bureau to produce a television commercial that will air on CBS for the rest of this month.

Happy birthday, REAL Credit™

This month, Federal Title & Escrow Company’s innovative REAL Credit™ will celebrate 10 years of providing substantial closing cost savings to home buyers.

Ten years ago, against the pressures of sharing our revenues with real estate firms, we bucked the trend, remained an independent settlement service provider, and decided to give the money back to the home buyer instead of the referring real estate firm. We named it the REAL Credit™.

While most of our competitors, at the expense of the home buyer, were jumping into bed with referral sources through Affiliated Business Arrangements, Federal Title got busy figuring out a way to reward the home buyer instead of the referral sources. Seems only fair – right? I mean, after all, it’s the home buyer who pays the costs, not the referring real estate firm.

The REAL Credit™ has served over 20,000 home buyers during its ten years, saving home buyers over $8 million dollars.

Let me repeat, unlike most other title companies, Federal Title has shared over $8 million of its revenue with home buyers instead of sharing that same $8 million with a referral source in exchange for the referral of business.

YES, it’s legal.

Our competition, most of who are beholden to their affiliated referral partners and, as a result, cannot compete with the costs savings realized by home buyers using the REAL Credit™, continue to spread falsehoods to real estate agents and others within the marketplace that the REAL Credit™ is somehow illegal.

It is not illegal.

The respective insurance commissions for DC, Maryland, and Virginia have all reviewed the REAL Credit™ and given it a “Thumbs UP.” Not only is it legal, it’s the right thing to do for the consumer.

Combined with Federal Title’s advanced technology and superior customer service, the REAL Credit™, after 10 years, remains the most innovative and consumer-friendly approach to improving the title insurance industry.

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