'Grave concerns' about use of Marketing Service Agreements: CFPB

'Grave concerns' about use of Marketing Service Agreements: CFPB

Having determined Marketing Service Agreements involve "substantial legal and regulatory risk," the Consumer Financial Protection Bureau issued a word of caution to the mortgage industry in a compliance bulletin published Thursday.

"We are deeply concerned about how marketing services agreements are undermining important consumer protections against kickbacks," CFPB Director Richard Cordray said in a separate statement about the bulletin. "Companies do not seem to be recognizing the extent of the risks posed by implementing and monitoring these agreements within the bounds of the law."

Marketing Service Agreements, or MSAs as they are commonly known, are usually framed as payments for advertising or promotional services, according to the bulletin, but sometimes payments are actually disguised as compensation for referrals.

"It appears that many MSAs are designed to evade RESPA's prohibition on the payment and acceptance of kickbacks and referral fees," according to the bulletin.

MSAs often involve lenders, real estate agents and third-party settlement service providers such as title companies, and they undermine the primary purpose of RESPA, which is to eliminate "kickbacks or referral fees that tend to increase unnecessarily the costs of settlement services."

Offering a thing of value in exchange for a business referral, whether it's a written or an oral agreement, is a compliance risk that leaves participants vulnerable to civil and criminal penalties, according to the bulletin.

The bulletin goes on to state RESPA violations have resulted in penalties upward of $75 million since the CFPB began taking enforcement actions.

Here at Federal Title, we've been leery of MSAs for some time. They seem to have become increasingly popular over the last couple years as the CFPB has cracked down on their not-so-distant cousin the Affiliated Business Arrangement.

CFPB proposes effective date of Oct. 1 for new mortgage disclosure rules

Title companies and lenders who are bracing for one of the biggest shake-ups of the mortgage industry in decades may have a couple more months to prepare. 

The director of the Consumer Financial Protection Bureau announced a proposed amendment to push the effective date of the new mortgage disclosure rules from August 1, 2015 to October 1, 2015

The proposed amendment is up for public comment, and a final decision will be made afterwards; however, for all intents and purposes the new effective date is now October 1, 2015.

The CFPB discovered an "administrative error" in meeting the requirements of federal law, which ultimately resulted in the effective date being pushed into the fall. 

In a statement issued yesterday regarding the Know Before You Owe mortgage disclosure rule, Director Richard Cordray said:

"The CFPB will be issuing a proposed amendment to delay the effective date of the Know Before You Owe rule until October 1, 2015. We made this decision to correct an administrative error that we just discovered in meeting the requirements under federal law, which would have delayed the effective date of the rule by two weeks. We further believe that the additional time included in the proposed effective date would better accommodate the interests of the many consumers and providers whose families will be busy with the transition to the new school year at that time." 

Implementation of the new mortgage disclosure rules is expected to cost settlement service providers $67.8 million and lenders $207 million over the next five years, bringing the total cost to $1.3 billion.

Representatives from the American Land Title Association, American Bankers Association and Finance Policy Center for the Urban Institute testified before Congress last May, asking for a "hold harmless" period through the end of this year. 

So far efforts to establish a hold harmless period have been unsuccessful, while the proposed amendment is expected to go final shortly. 

Choosing your own title company - yet another reason

Two of the largest financial institutions in the country are having their feet held to the fire over blatant violations of the Real Estate Settlement Procedure Act, according to a complaint filed in federal court last week by the Consumer Financial Protection Bureau and Maryland Attorney General.

The complaint involves employees of Wells Fargo and JPMorgan Chase who participated in a kickback scheme with a now-defunct Maryland title company Genuine Title in which loan officers received cash, marketing materials and customer information in exchange for referrals. 

"This type of quid pro quo arrangement is illegal, and it’s unfair to other businesses that play by the rules," said Maryland Attorney General Brian Frosh.

More than 100 loan officers from at least 18 Wells Fargo branches allegedly participated in the scheme as did at least six loan officers from three Chase bank branches, according to the complaint. Consequently, Wells Fargo is facing $24 million in civil penalties and $10.8 million in redress while JPMorgan Chase faces $600,000 in civil penalties and $300,000 in redress. 

The details of the complaint reveal blatant RESPA violations going back to 2009 and involving thousands of home loans and tens of thousands of dollars. Genuine Title went so far as to foot the bill for direct-mail campaigns and branded marketing materials. They even paid some loan officers cold, hard cash. 

One former Wells Fargo loan officer was singled out by name in the complaint for accepting cash payments. His then-girl friend, now-wife was also identified in the complaint for taking the payments on behalf of the loan officer to disguise the arrangement. They will pay a $30,000 penalty. 

The huge dollar figures and overt rule-breaking are not what makes this case special, though. What makes it special is the offenders got caught and will face their day in court. For those of us in the trenches – the so-called "rule abiders" of the title industry, fighting the good fight independently – we are aware that this kind of thing occurs all too frequently and we can only shake our heads. 

The truth is most consumers still don't know they can select their own settlement service provider. Nine times out of ten, the homebuyers we encounter say they just went along with whatever their agent or lender recommended because it was convenient. They have no idea about the potential for a conflict of interest and how they could be saving hundreds of dollars by choosing their own independent title company. 

The only way to combat this sad fact of the home buying experience, is to get the message out to consumers as well as the businesses who seek to take advantage of them. We fully support the CFPB and other government regulators who shine a light on these anti-consumer and, often, illegal business pursuits. 

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.

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?

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