Webinar Tuesday, November 18, :00 3:30 pm ET. For Audio Dial (800)

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1 Webinar Tuesday, November 18, :00 3:30 pm ET For Audio Dial (800)

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4 Webinar Tuesday, November 18, :00 3:30 pm ET For Audio Dial (800)

5 Moderator Nathan Marinchick Editor, Dodd Frank Update

6 Submit questions and comments through the instant chat box feature. Questions can be submitted at any time throughout the Webinar.

7 Handouts The following materials can be downloaded at Today s PowerPoint presentation Articles from October Research, LLC publications

8 Today s Presenters Phillip Schulman Partner K&L Gates LLP [email protected] (202) Marx Sterbcow Managing Attorney Sterbcow Law Group [email protected] (504) Charles Cain Senior Vice President, Agency Manager, Midwest WFG National Title Insurance Company [email protected] (513)

9 RESPA REVIEW OF MARKETING AND SERVICES AGREEMENTS This PowerPoint is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. DC v-1

10 INTRODUCTION Real Estate Settlement Procedures Act (RESPA) 1. Most important and most controversial statute affecting settlement service industry 2. Statute defies BUSINESS LOGIC 3. However, lenders that solicit referral fees are subject to severe penalties Criminal penalties Treble damages 4. RESPA both Consumer disclosure statute Anti-kickback statute

11 Consumer Disclosure Law 1. Idea: Give Buyers and Sellers full disclosure of costs of transaction 2. Disclosures GFE Servicing transfer information Special Information Booklets Escrow Information HUD-1 Settlement Statements Full disclosure Mortgage Broker Fees 3. RESPA disclosures will be integrated into TILA disclosures August 25, 2015 Goodbye GFE and initial TIL = Loan Estimate Goodbye HUD-1 and final TIL = Closing Disclosure

12 Anti-kickback Law 1. Idea: Eliminate abusive practices such as payment of kickback fees which drive up cost of product to consumers 2. 5 Elements of a Section 8(a) kickback Section 8(a) says it is illegal to Give or Receive any: (i) thing of value pursuant to (ii) an agreement or understanding to (iii) refer (iv) settlement services, in connection with (v) a federally related mortgage loan

13 Splitting Fees May Also Be a Problem Section 8(b) says No person shall give... No person shall accept a split or percentage in connection with a real estate settlement service other than for services rendered A referral is not required to violate Section 8(b).

14 Circuit Courts Split on Fee Splitting 1. 4 Circuit Courts (7, 4, 8 and 5) say if you don t split markup = no violation of 8(b) 2. 3 Circuit Courts (11, 2 and 3) say if you mark up a thirdparty fee without doing any service = violation of 8(b) 3. U.S. Supreme Court settles the split

15 Freeman v. Quicken Loans Supreme Court holds two or more parties must split unearned fee to violate Section 8(b) Settlement service providers may mark up third party fees, so long as provider does not split mark-up with another party If mark-up is split with another party split must be based upon services rendered

16 Exceptions - Section 8(c) Congress recognized certain exceptions where paying a referral fee is ok To an Attorney for services actually performed By a Title Company to its duly appointed Title Agent for services performed in issuance of a title policy By a Lender to its duly appointed Agent Cooperative Agreements between listing and selling agents

17 Exceptions - Section 8(c) (cont d) Congress recognized certain exceptions where paying a referral fee is ok (cont d) Payments by Employer to Employee Secondary Market Transactions Affiliated Business Arrangements Section 8(c)(2) payments for services rendered or goods/facilities actually provided

18 Elements of Section 8(c)(2) Payment for Goods Provided and/or Services Performed 2 Part Test Good/Services must be actual, necessary and distinct Payment must be commensurate with the value of goods/services

19 Interest In MSAs Has Increased 1. Significant increase in FHA net worth requirements soured many prospective AfBA members 2. New QM Rules affiliated charges counted toward 3% cap 3. Advantages to MSAs no capitalization no infrastructure payment not tied to volume

20 RESPA Interpretive Rule A. Marketing and Service Agreements 1. Been around forever 2. HUD finally weights in June 25, Claims per-transaction agreements suspect

21 RESPA Interpretive Rule (cont d) B. Two Types of Marketing Agreements 1. Flat Fee Agreements most prevalent payment not for referral of particular transaction services include signage, web banners, brochures, customer lists, co-advertising, etc. 2. Per-Transaction Agreements Market to particular customers no sale = no fee earned

22 RESPA Interpretive Rule (cont d) C. HUD Interpretive Rule June HUD stuck with 8(c)(2) Exemption 2. But HUD chips away at Exemption opposes direct consumer solicitations opposes directly handing consumer information opposes exclusivity prefers referrer be an agent prefers written agreement prefers written disclosure 3. Individual analysis required

23 MSA Best Practices Before Lighthouse 1. Flat Fee Agreements Per-transaction Agreements more difficult to defend 2. Broker must perform all services set forth in Agreement audit function should be included in MSA to verify services performed 3. Do not pay for direct customer solicitations MSA should not include payment for directly soliciting consumers 4. Avoid exclusive arrangements

24 MSA Best Practices Before Lighthouse (cont d) 5. Avoid preferential designations preferred lender, outstanding, exceptional, etc. 6. Payment for access to sales staff frowned upon access to sales meetings in particular difficult to value 7. Disclosure to consumers encouraged Similar to affiliated business disclosure Or included in affiliated business disclosure

25 MSA Best Practices Before Lighthouse (cont d) 8. Monthly fee must be commensurate with value of services fair market value lots of factors go into determining value number of offices number of agents number of listings hits on webpage circulation of advertisements etc. independent third party valuation strongly recommended

26 MSA Best Practices Before Lighthouse (cont d) 9. Changing monthly marketing fee must be for objective reasons Never based upon production/volume Changes in business model Additional offices Additional agents, etc. 10. Provide services for no compensation access to sales meetings conducting customer satisfaction surveys Providing company with monthly reports of services activity levels other data

27 The Bureau s position: Lighthouse Title Consent Order CFPB Takes Action Against Mortgage Kickback Agreements Lighthouse entered into and renewed a series of MSAs with various real estate brokerages with the agreement or understanding that in return the real estate brokerages would refer closing and title business to them. Lighthouse believed if it did not enter into the MSAs the real estate brokers would refer business to their competitors. Lighthouse did not determine a fair market value for the specific services received under the MSAs.

28 Lighthouse Title Consent Order Lighthouse set the MSA fees by considering how many referrals it had received from the real estate brokerages and the revenue generated by those referrals. Lighthouse, in at least one MSA, set the fee valuation by considering how much competitors were willing to pay the real estate brokers. Lighthouse did not diligently monitor the real estate brokerages to ensure that it received the services for which it contracted.

29 Lighthouse Title Consent Order The real estate brokerages referred significantly more transactions to Lighthouse when they had MSAs with Lighthouse than when they did not. The CFPB used statistical analysis to determine if MSAs resulted in more referrals to Lighthouse. Entering a contract is a thing of value even if the fees paid under that contract are fair market value for the goods or services provided.

30 Lighthouse Title Consent Order Entering a contract with the agreement or understanding that in exchange the counterparty [i.e. real estate brokerage] will refer settlement services violates Section 8(a). Marketing fees set by considering the amount of business received from the counterparty are connected with the volume or value of the business referred are evidence that the payments are made pursuant to an agreement or understanding for the referral of business.

31 Lighthouse Title Consent Order CFPB ordered Lighthouse to cease and desist from all MSAs. All Lighthouse officers, agents, servants, and employees must not violate Section 8(a). All exchanges of things worth more than $5.00 must be documented for a period of 5 years. Civil money penalty of $200,000 payable to CFPB.

32 Definitions in Lighthouse Title Consent Order Marketing Service Agreement and MSA mean an agreement to which Lighthouse is to provide any thing of value to a person in a position to refer business in exchange for marketing and advertising services. This includes agreements that allow Lighthouse to market or promote its services to such a person or its employees or agents, agreements that require a person or its employees or agents to endorse Lighthouse or Lighthouse s services.

33 Definitions in Lighthouse Title Consent Order An agreement for mass advertising for consumer consumption pursuant to which Lighthouse is to pay a person who does not provide real estate settlement services to place an advertisement to the public (e.g., an agreement to place an advertisement in a newspaper or magazine or on a television or radio station) is not marketing services agreement unless the person endorses Lighthouse as part of the advertisement.

34 Lighthouse Title Consent Order Marketing Services Agreement and MSA mean an agreement pursuant to which Lighthouse is to provide any Thing of Value to a person in a position to refer business incident to or Quid pro quo referral agreements for real estate referrals are illegal. Lighthouse entered into the MSAs with understanding the real estate brokerages would refer mortgage closings and title business to Lighthouse. The contract was deemed something of value.

35 MSA Best Practices AFTER Lighthouse 1. Advertising Agreements are a high ground Each advertising service must be quantified. Pay 3 rd party providers everywhere you can 2. Provide services for no compensation access to sales meetings conducting customer satisfaction surveys Providing company with monthly reports of services activity levels other data

36 More Best Practices 3. Lock that MSA down: Require and scrutinize required audits. Obtain a 3 rd party valuation and stick to it. Management manages not sales. The e in stands for evidence. Be sure everybody understands what exactly is going on.

37 Lighthouse Consent Order Takeaways 1. CFPB did not reference HUD s 2010 Home Warranty interpretative rule in the Lighthouse consent order. 2. Breadcrumbs dropped CFPB will be more aggressive. 3. Will the CFPB announce actions against Referees.

38 Other Marketing Agreement Actions

39 HUD OIG FHA Audit: Cornerstone Home Lending 1. Allegation: Audit said Cornerstone paid realtors improper marketing fees in exchange for exclusive promotion of Cornerstone s mortgage products and programs in their numerous MSAs with realtors. HUD OIG Audit focused on FHA lending guidelines Separate offices, signage and other FHA audit areas. Marketing Service Agreement issue with real estate agents was not the focus of the HUD Audit. HUD no longer enforces RESPA CFPB does. MSAs were in place & terminated prior to HUD 2010 Home Warranty Guidance This OIG audit has no binding impact other than it was announced a couple of days prior to the Lighthouse Title Consent Order.

40 HUD OIG Audit: Cornerstone Home Lending Referral Fees/MSAs/Desk Rental HUD OIG suggested exclusivity clauses might limit borrower choice. Could lock out competitors from offering promotional opportunities. MSAs could allow employees exclusive access to realtor s sales office. Could restrict consumer access to allow them to shop around. Might not be able to prove fees did not increase the consumers costs. Realtors might direct borrowers to mortgage employees who were located in the Realtors offices. MSA should be in writing. Failure to value each specific marketing service fee. Desk Rental fee valuation was left blank and part of the MSA

41 Class Actions: Baehr v. Creig Northrop Team Referral Fees/MSAs/Employment Agreement 1. Class action lawsuit in Maryland alleges Lakeview Title paid over $500k over 13 years to a real estate team through a sham marketing agreement and employment agreement. Plaintiffs seeking over $30 million in damages Marketing Agreement Designated Lakeview as their exclusive settlement & title company. Fee paid were excessive and fluctuated each month. No actual record or measure of real marketing or services. Team could not endorse any other competitor Overpaid MSA $6k in agreement but sometimes paid up to $12k a month Employment Agreement Created to disguise payment of illegal referral fees V.P. of real estate team did not: Work or maintain set hours Perform any actual work or services for Lakeview. Have an office, telephone number or address.

42 CFPB Examining Other Types of Marketing Agreements (Campus Credit Cards) 1. CFPB s focus on use of Marketing Agreements between Credit Card Companies and Colleges. Required use of students accessing student aid. Limited ability of students to shop around. Information schools share with financial institutions when they establish these relationships. Fee amounts charged to students. How campus financial products are marketed.

43 Expect Additional CFPB Enforcement Actions Several CFPB current investigations and future consent order to keep an eye on involving MSAs, Lead Generation, and Desk rentals: o o o o Lender-Real Estate Brokerage Title Company-Lender Home Warranty-Real Estate Brokerage Title Company-Real Estate Agent

44 Additional Recent CFPB Enforcement Matters

45 Stonebridge Title Services Referral Fees/Fee Splits/Employee Payments 1. Allegation: Stonebridge paid referral fees to independent salespeople in return for soliciting and referring title insurance business to Stonebridge Received commissions for each title order based on value of title insurance Salespeople paid on W-2 basis No supervision or control over salespeople; acted as independent contractors 2. Consent Order Civil money penalty of $30,000 Amount based on ability to pay

46 Fidelity Mortgage Corporation Consent Order Office Rental Agreements 1. Allegation: Fidelity Mortgage paid office space rental to Bank that were tied to loan volume. Daily rental rate of $200 plus fluctuating volume compensation Exclusivity Clause requiring Bank to only promote Fidelity Mortgage Quid Pro Quo relationship Bank referred to Fidelity customers looking for residential loans and Fidelity referred to Bank customers looking for banking services. Office Space was surrounded by bank personnel. Fidelity did not exclusively use the Bank s office to meet borrowers. CFPB used monthly rents for comparable spaces not located in the middle of a bank to determine FMV. 2. Consent Order Civil money penalty of $81,076. Also personally named President of Fidelity Mortgage.

47 Office/Desk Rental Lease Agreements HUD Statement of Policy Market value of the rental space Can include additional costs such as: o Utilities, phones, office equipment, CAM, etc. Separate lease agreement using a real lease. Avoid per use rental arrangements. A office lease is not a mechanism to lock-out the competition.

48 Office/Desk Rental Lease Agreements (cont.) 2. Attach floor plan of space leased as an exhibit. 3. Attach supporting Sq. ft. FMV rental valuation. 4. Follow FHA guidelines Four walls (partitions okay but office better) Lockable door Marked and identifiable Separate space Clear signage prevent consumer confusion Confidentiality and safety of information-glb Act

49 Lead Generation Agreements Exercise extreme caution 1. Expect CFPB Lead Gen enforcement actions 2. Very difficult to independently value Pay Per Click campaign Customer Management Systems CMS Licensing Fees Website fees 3. Subsidization of real estate agent/broker expenses

50 Lead Generation Agreements (cont.) 4. Avoid any Lead Generation company where: Company is advertised as Preferred, Recommended, etc. Virtual tours Facebook/Craigslist/etc. push Lead company solicits, contacts, or communicates with consumer. Solicits private consumer data Charges per Lead or Transaction Success Fee. Property website or listing presentations Agent states you have lowest rates or fees

51 Lead Generation Agreements (cont.) 5. Lead Generation/Lenders should be on alert 43 of the 50 states the payment of money to solicit mortgage products violates state Safe Act 8 of the 50 states even if money is not paid still illegal. UDAAP Fair Lending Telemarketing Sales Rule

52 Lead Generation Agreements (cont.) Loan Officer Comp Rule broadly written o o o Lead Gen who collect any sort of non-public data and fail to obtain consumer consent and share with 3 rd party Lead Gens who inform consumer they are Qualified for a Loan or Not Lead Gen speaks directly with consumer and then transfers the Live Handoff to Lender/Loan Officer

53 Lead Generation Agreements (cont.) The former Commissioner of the Massachusetts Department of Banks, Steven Antonakes, aggressively went after Lead Generation companies. Where is he now? Mr. Antonakes is the Deputy Director of the CFPB who is responsible for Supervision, Enforcement, and Fair Lending.

54 QUESTIONS Submit questions through the instant chat feature.

55 Thank You We welcome your feedback. Please take our survey. A CD of today s webinar can be purchased on October Research s product site at Today s PPT presentation and other handouts can be found at: