Analyzing complex federal law for real estate professionals. RESPA Section 8. Title Insurance Co., agreed.

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1 Analyzing complex federal law for real estate professionals Marketing agreements: Are you RESPA compliant? Marketing services agreements, or MSAs, have been around a long time and have become commonplace. Typically, it s an agreement between a real estate brokerage and a title agency where the broker performs marketing services in exchange for a fee, or it could be an agreement between a lender and a real estate brokerage where the lender will perform marketing services for a fee. The agreements are allowed under RESPA as long as certain requirements are met. The problem with MSAs is that keeping them RESPA compliant can be trickier than it may first appear. Specifically, those who have MSAs must be careful to keep the agreement to marketing and not let sales muddy the issue. Valuation of services is also crucial. Incorrect valuations can lead to some serious penalties. It s likely the Consumer Financial Protection Bureau (CFPB), which regulates RESPA, is currently considering an enforcement action surrounding MSAs. There s a significant amount of regulatory scrutiny among these things and the CFPB is actively going after mortgage companies right now for improper marketing service agreements, said Marx Sterbcow, managing partner of Sterbcow Law Group LLC, during the Louisiana Land Title Association s (LLTA) 2013 Annual Convention. Sterbcow said he believes there could be an enforcement action coming down the pipe that could change the way MSAs are done. Charles Cain, senior vice president of WFG National Title Insurance Co., agreed. Probably what will happen is that we will see somewhere, someone will be crucified on this topic as an example for others as to what not to do, Cain told the audience at the LLTA conference. Sterbcow and Cain explained that it doesn t matter how big or small a company is. The CFPB is out there. They are on the lookout for possible violations, and no one is safe. The best thing to do is make sure that your MSA doesn t violate RESPA. RESPA Section 8 RESPA Section 8(a) prohibits the giving or accepting of a fee or thing of value for a referral of real estate settlement service business. Section 8(b) states that the splitting of a fee for a settlement service is not allowed if services are not actually performed. Section 8(c)(2) contains an exception that allows payments for goods or facilities actually furnished or for services actually performed. This is the section that permits MSAs. You re paying a real estate broker for services that they are actually providing and that they are actually performing for you, Cain said. That s sort of the easy part.

2 RESPAnews.com January Keep to marketing It gets more difficult when you consider what types of services you are paying for. It is important that what you are paying for is advertising. The U.S. Department of Housing and Urban Development (HUD), the agency that used to have authority over RESPA, made it clear that joint advertising is allowed under RESPA. The important thing to remember is that both parties need to pay their own share of the advertisement. Advertising is acceptable under RESPA as long as it s done jointly, Sterbcow said. Everybody pays their pro rata share of whatever the fair market value is of the proportionate size of the advertising that is taking place. Sterbcow provided an example of a one minute radio advertisement that s paid for jointly by a title company and a real estate brokerage. If the title company is taking up 10 seconds of that one-minute ad, you basically take 10 percent of the cost for that radio ad and that would be allocated back to the title company, so long as their name is used in that 10 second frame, Sterbcow said. If their name is not mentioned at all, and they are paying money towards it, that would basically be an illegal kickback or something of value under Section 8(a) of RESPA. Or, let s say a lender and real estate agent decided to print a joint marketing brochure. The lender could not pay for 90 percent of a brochure where the entire pamphlet is an advertisement for the real estate agent with the exception of a small mention of the lender on the back page. HUD has said if one party is paying less than a pro-rata share for the brochure or advertisement, there could be a RESPA violation. Also, make sure that you don t confuse advertising with sales. The MSA should be tied to the marketing and advertising, not to sales. If McDonald s has a billboard up that says come in and buy a Big Mac and it s on sale for some special price for the holidays, that s marketing, that s advertising, said Cain. When you actually show up at McDonald s and buy it, that s sales. Sterbcow noted that he prefers to call them advertising agreements and not marketing agreements because even the word marketing has become problematic lately. MSAs used to be called by other names, like preferred provider agreements or exclusive provider agreements. Cain said you should not be involved in any agreements with those sorts of titles. We hope that all of the marketing and advertising we do does turn into sales, but linking the value of what s paid for the advertising or marketing agreement to actual conversion into sales, that s the death sentence and that s where it s difficult, because in the practical real world, that s how it works, Cain said. But, we have RESPA, which essentially says that capitalism as you know it is against the law. Essentially, RESPA says that you cannot pay people for the business they create for you. Marketing agreements are absolutely not to be used to pay for referrals. The agreements are not for rented space. They are not for exclusive access to referrers of business. They should not be used to lockout competitors. Instead, MSAs should be used to pay for advertising products and services of the title agent, providing website links or gathering data for future marketing. Exclusive access It s important to avoid having an MSA that allows for exclusive access to referrers of business or that locks out competitors. Paying for exclusivity has generally been

3 RESPAnews.com January found to be a RESPA violation. One of the most crucial parts is not to pay or receive payment for any sort of access, Sterbcow said. If you are paying to have access to a real estate agent s sales meetings, or to a weekly lunch-in or to speak at their offices, that s illegal. The regulators are looking at that. The CFPB is all over it. If you are going down that road, I will tell you now to stop going down that road and reevaluate the agreements that you have in place. Even the mere inference of exclusive access can be getting into dangerous territory. It s best to remove any part of a MSA that allows for access. Ensure what you are paying for is legitimate advertising. Lease agreements Keep lease or rental agreements separate from a MSA. You want no connectivity between those two because they are two separate and distinct agreements, Sterbcow said. By putting some sort of rental or lease terms in a MSA, it ceases to be a MSA. It s kind of a confused agreement, and the regulators don t like that. If you have a lease agreement, make sure that the fee is fair market value. If you are going to rent space from a real estate broker, what does that real estate broker pay for that space? Cain asked. That s what you can pay. They can t mark it up. You can pay them what they are paying. If they pay $25 a foot, you can pay $25 a foot for the space you actually use. The amount to pay for a lease is easier to determine than evaluating what a website link is worth. Cain and Sterbcow said that including a lease agreement in the MSA is going to make things difficult. Those things are easier to determine, so keep them out of your marketing agreement because it will just muddy the water, Cain said. Valuation Valuation, or the amount you agree to pay for the advertising services, is another critical issue. The payment must be commensurate with the value of the goods or services furnished. Here, we are essentially talking about fair market value, and it can be a tricky issue. It may be difficult to determine the fair market value of certain services. Overpayment for services could be considered a violation of RESPA. The issue is that an excess amount could be viewed as payment for a referral of business. Sterbcow and Cain agree that you don t want to do the valuation yourself. It s best to get a third-party auditing or actuarial company to provide specific values for each service provided. The regulators certainly want to see how you came up with those numbers, Sterbcow said. If you say, My secretary called around, that s not going to suffice. Or, if you say you picked some numbers out of the blue, that s not going to suffice. Unfortunately, the CFPB probably isn t going to provide guidance to help companies figure out what fair market value of certain services is. In my experience, no regulator will ever tell you what something is worth, Cain said. They won t tell you the formula. They won t give you a formula. They won t tell you if your formula works, but they will tell you if it doesn t work. They ll be happy to tell you that you are overpaying. To avoid RESPA issues, the payments need to make sense for the services being performed. For example, if a thirdparty valuation company says that a link on a website is worth $10 a month, and you are paying $1,000 a month for that service, this could be a red flag.

4 RESPAnews.com January Also make sure that you pay for the services performed and that you don t pay for the amount of referrals or money that is brought in during a given month. Keep track of services performed If you are paying for services that aren t being performed, then it s likely you are violating RESPA. It s important to know exactly what services are being done and what you are paying for. If you are paying the service provider on a monthly basis, you want to give them their check for services and receive a verification from the provider that they are actually providing the services and that the items in the MSA for that month were completed with an explanation of how they were done. Demonstrate that you are doing things, Cain said. It protects everybody because in this day and age it is not just the payor of something that may be deemed to be improper who has problems, it s also the payee. [The CFPB] comes after everybody. Be careful Be mindful of issues that could get you into trouble. Cain said that when HUD had authority over RESPA, the regulators there used to refer to the EX factor. This is where some enforcement actions are started. That is to say, the way that the bureau finds out about things is from ex-employees, ex-partners, ex-spouses, Cain said. These are people who have copies of everything and are happy to share them because they have a grievance with someone. An employee gets fired and then takes some of this stuff and mails it and says, See what my ex-boss is doing. Also be cautious with s. The e in stands for evidence, and it never goes away, Cain said. The bureau is crazy about having you provide it with all the s you have given to anybody on any given topic short of ordering Omaha Steaks over the last five years when they come in and ask you for evidence of what goes on. Cain said you might be wondering if your marketing agreement is worth it. Are you converting the advertising into sales? This isn t the sort of question you want to around. Remember, even though you are hoping to get sales from your MSA, the point, that is allowable under RESPA, is that you are paying for advertising. You are not paying for sales. Sterbcow said during October Research s Regulatory Outlook 2014 webinar that there are three specific things the bureau is likely watching out for. First, the bureau will be suspicious of an MSA that provides for exclusive access, possibly leading to lock-outs of competitors. Avoid exclusive access of any kind in an MSA. If you have in your agreement where the title company or mortgage company is allowed into a sales meeting or gets to meet with the sales agents on an exclusive basis, there s no way to compensate that, and the CFPB appears to be coming down hard on that, as are state regulators, Sterbcow said. MSAs are prolific in the industry today, Mitchel Kider, a partner with Weiner Brodsky Kider PC, said during the October Research webinar. On the mortgage side, on the real estate side, on the title side, they are just absolutely all over the place, but if you have an MSA, you should really be looking at it. You should look to see what services are being provided and if you are getting paid for access; you might want to think twice about that particular provision because that is a big deal apparently to the CFPB. Second, the bureau will be looking at how much you pay for services. It s best to have a third-party valuation company determine the value. Having a third-party value services is absolutely

5 RESPAnews.com January essential, Kider said. There are many good third parties out there that do it, but I caution you, don t just leave it at that. Take a look at their valuation. If there is value for access, strike that part out. Third, the bureau wants to know if the consumer knows about the MSA. It s a good idea to provide consumers with a disclosure notifying them that there is an MSA in place. Penalties Keep in mind that the CFPB can dole out some fairly hefty fines. If the bureau determines there is a violation, it can fine the company up to $5,000 each day. It gets worse from there, because if the CFPB decides the violation was committed recklessly, the agency can fine the company up to $25,000 per day. If the violation is found to be done knowingly, the fine can be up to $1 million per day. The CFPB doesn t just hand out a fine through a settlement agreement and then the issue is dropped. The agency could require the company to pay back all the money they received in regard to the MSA and would continue to watch the company. So if a real estate broker over the course of two years received a quarter million dollars, they would have to disgorge a quarter million dollars, Cain said. Then they ll be prohibited from doing these things for some time, and there will also no doubt be some regulatory scrutiny where that real estate broker will have to come back for some period of time to demonstrate that they are not engaging in this practice. The bureau has wide ability to levy fines, and they don t really care who they put out of business. HUD s interpretive rule In June 2010, HUD released an interpretive rule that discussed when it is acceptable under RESPA Section 8 for a home warranty company (HWC) to pay real estate brokers or agents for work performed on behalf of the HWC. The rule was specifically geared toward HWCs, but many in the industry saw it as a warning for everyone. The interpretive rule said that the goods or services provided must be actual, necessary and distinct. So, whatever the real estate broker is doing under a MSA, it has to be something they don t do in the course of their average day as a real estate broker, Cain said. HUD also said that the provider of the service cannot affirmatively influence the consumer to make a homeowner warranty selection. Marketing is fine, said HUD, but it cannot be directed to consumers. If you are going after consumers directly, that is a violation of RESPA. State regulators Be aware that states also regulate MSAs, and that states do not view these types of agreements favorably. State regulators really don t like them, and a lot of states are taking great steps to simply make them illegal, Cain said. Don t despair, but stay vigilant Marketing agreements have become more popular lately; some of the reason could be because it is getting more difficult to have affiliated relationships. They are legal and can be very useful. Just make sure to stay compliant with RESPA. As it sits right now, there are ways to legally do marketing service agreements, Cain said. So they are out there, and they are still available, but it is certainly something to monitor as we move forward here because sooner or later there will be something from the bureau. When it comes out, it will most likely be explicit and draconian in tone and it could dramatically change the future of these things.

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