THE NEW CFPB SCRUTINY OF MSAs

Are marketing and services agreements illegal under RESPA?

By Sue Johnson, strategic alliance consultant

Marketing and Service Agreements (MSAs), under which a company agrees to market the services of another company in return for a fee, have been common in the real estate industry for years. They long have been considered lawful under the Real Estate Settlement Procedures Act (RESPA) provided that the fees are for services actually performed and not a quid pro quo for referrals.

But today, MSAs are squarely within the sights of the Consumer Financial Protection Bureau (CFPB), and it it important to tread carefully.

The CFPB has targeted MSAs several times in the last few years, fining companies for allegedly disguising illegal referral fees under these agreements. The vagueness of this gotcha approach to rulemaking caused some in the industry to urge the CFPB to provide more guidance as to what constitutes a legal MSA.

The CFPB responded on October 8, 2015, by issuing a Compliance Bulletin, “RESPA Compliance and Marketing Services.” But, the Bulletin is a powerful reminder of the adage, “be careful what you wish for.”

The Bulletin stops short of saying that all MSAs are illegal under RESPA, but it clearly expresses the CFPB’s dislike for the arrangements. It repeatedly warns against “the substantial risks” posed by entering into MSAs and states that CFPB “intends to continue actively scrutinizing” MSAs as part of its enforcement and supervision efforts.

After having issued these warnings, the CFPB surprisingly fails to provide substantive guidance on how to properly construct an MSA or guidance as to what can and cannot be done in an MSA. Instead, it summarizes the facts of some of its past enforcement actions against MSAs and provides a few examples of activity to avoid, such as paying for services that are not performed.

So, where does that leave a company that has an MSA in place or which is approached with an MSA offer? First, it is important to examine the specific facts and circumstances surrounding any MSA with legal counsel who is familiar with the constant twists and turns of RESPA. Below are some other tips to help reduce your legal risks.

  • Don’t assume that real estate brokers can’t be a CFPB target. It is true that Congress excluded real estate brokerage as a “consumer financial product or service” that is subject to certain CFPB regulatory, supervision, and enforcement activities under Dodd-Frank. But real estate brokerages is a “settlement service” that is covered under RESPA, and the CFPB can enforce (and has enforced) RESPA against real estate brokers.
  • An MSA involving flat fees for the market value of consumer-direct advertising services (e.g., for banner ads on websites, links to websites, advertisements in email or direct mail campaigns) involves fewer risks than an MSA that could more easily lead to affirmative referrals by the company or its sales force.
  • Obtain an independent analysis of market prices for advertising and any services being promoted. Don’t assume that this review will get you off the hook if you are investigated. The CFPB made clear in its Bulletin that independently-established market rate compensation for marketing services, alone, does not ensure the legality of an MSA.
  • Develop a company-wide MSA policy and constantly monitor your operations and the operations of your partners to make sure the policy and the terms of any MSA are being followed. Regularly emphasize the importance of compliance. Conduct training sessions for the sales force. A properly-structured MSA and/or a sound MSA policy can be made irrelevant by unauthorized referrals or loose talk be sales representatives.
  • Try to use any MSA as a catalyst for creating a better consumer experience. The CFPB’s concern over MSAs is in part based on its belief that they prevent a consumer from shopping and that they involve high costs. Consider using voluntary, legitimate consumer discounts or rebates (within the applicable law) to make the price of the marketed services more competitive. Be ready to verify the consumer benefits of the MSA through documented customer feedback.
  • Use the same regulatory caution needed for MSAs with office space rentals. While HUD issued specific guidance on office rentals in 1996 (saying that the rent must be at market rate without regard for referrals), it relied on the same RESPA exemption that the CFPB appears to ignore in its MSA guidance.

RESPA violations can subject the violator to civil penalties, consumer lawsuits, disgorgement or profits and even imprisonment. Significantly, both givers and receivers are liable under RESPA. Assuring that an MSA is RESPA-compliant in the CFPB’s eyes can be costly and time-consuming, but it’s better to be too careful than to be careless and regret it later. ^

This article originally appeared in the March 2016 issue of the REAL Trends Newsletter and is reprinted with permission of REAL Trends Inc. Copyright 2016.

The Minnesota REALTORS® is the largest professional trade association in the state with more than 17,000 members who are active in all aspects of the real estate industry.

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