In the year 2020, the Consumer Financial Protection Bureau (referred to as “CFPB” or “Bureau”) made significant announcements regarding its revised perspective on the legality of Marketing and Services Agreements (MSAs) under the Real Estate Settlement Procedures Act (RESPA). Notably, the Bureau officially rescinded its controversial Compliance Bulletin 2015-05: RESPA Compliance and Marketing Services Agreements (Oct. 8, 2015) (“2015 MSA Bulletin”). Marketing and Services Agreements have historically served as a means for settlement service providers to expand their customer base through paid advertising and marketing services. However, the issuance of the 2015 MSA Bulletin, following a series of Bureau RESPA enforcement actions, raised concerns about the compliance of MSAs and asserted that most MSAs should be subject to rigorous scrutiny due to the high risk of RESPA violations related to paid referrals and the division of unearned fees.
Alongside the rescission of the previous guidance, the Bureau recently released a comprehensive set of “Frequently Asked Questions” (FAQs) addressing the legality of MSAs, gifts, promotional activities, and other RESPA-related matters. Collectively, these recent actions by the Bureau signify a departure from the aggressive RESPA interpretations advanced by the agency over the past decade.
The Bureau is of the opinion that its new FAQs establish “clearer rules of the road.” The framework established therein has the potential to revive the practice of engaging in MSAs. Nevertheless, even under the new rules, determining whether an Marketing and Services Agreements, gift, or promotional activity violates RESPA necessitates meticulous analysis and monitoring based on various factors highlighted in the FAQs, which are considered relevant in making a legal determination.
In the following sections, we will first emphasize the Bureau’s previous stance on MSAs, which is now seemingly disowned with the rescission of the 2015 MSA Bulletin. This bulletin had led many firms to abandon the use of MSAs. Subsequently, we will elucidate the key takeaways from the new framework for MSAs and discuss its application. Additionally, we will provide insights into the new FAQs concerning Gifts and Promotional Activity.
A Marketing and Services Agreements
Previous Approach by CFPB
The 2015 MSA Bulletin virtually prohibited the use of Marketing and Services Agreements in their entirety. The CFPB declared that “many MSAs are designed to evade RESPA’s prohibition on the payment and acceptance of kickbacks and referral fees.” The Bureau expressed “serious concerns” about the utilization of MSAs and emphasized “the substantial risks” associated with engaging in such agreements. Furthermore, the Bureau stated that it had not encountered any evidence suggesting that the use of MSAs benefits consumers or the industry. The Bulletin offered minimal guidance on legally structuring an MSA and indicated the Bureau’s intent to actively scrutinize the use of such agreements and related arrangements.
The issuance of the Bulletin concluded a series of CFPB enforcement actions that implied operating an MSA within legal boundaries was exceedingly challenging. Starting with the controversial Consent Order against Lighthouse Title, the CFPB essentially claimed that certain agreement types inherently violated RESPA. As stated in Lighthouse Title, “[e]ntering a contract is [itself] a ‘thing of value’ within the meaning of § 8, even if the fees paid under that contract are fair market value for the goods or services provided.”
This stance meant that even if the compensation under a Marketing and Services Agreement equaled the fair market value of non-referral services provided, such as general advertising services, the MSA could violate RESPA if any uncompensated referrals were made. The Bureau’s position appeared to contradict the so-called § 8(c)(2) safe harbor in RESPA, which allows compensation reasonably related to the fair market value of goods or services furnished or performed (RESPA § 8(c)(2)).
In 2016 and again in 2018, a federal appeals court categorically rejected the Bureau’s position, albeit in a RESPA case involving a non-MSA agreement. The court ruled that the § 8(c)(2) safe harbor permits referrals “as long as” the party being referred pays no more than reasonable market value for non-referral services provided. The recent actions taken by the Bureau, including the rescission of the 2015 MSA Bulletin, reflect a similar rejection of the Bureau’s previous stance but specifically with regard to MSAs.
Key Points on the New Framework
Aligned with the appeals court decision, the CFPB’s new FAQs provide clarification that a settlement service provider can compensate another firm for marketing services under an MSA only if (1) the services are actually performed, and (2) the amount of compensation paid is reasonably related to the fair market value of those specific services.
However, thorough analysis of MSAs remains necessary due to the FAQs’ indication that determining whether a particular activity constitutes an illegal referral under RESPA § 8(a) or a permissible marketing service is contingent upon specific facts. The FAQs outline numerous factors that should be considered when making a legal determination. Below, we summarize the factors now relevant for consideration:
Whether the marketing activity targets a broad audience:
Activities aimed at a wide audience, such as placing advertisements for a settlement service provider in widely circulated media (e.g., newspapers, trade publications, or websites), are considered permissible marketing services.
Referrals, on the other hand, involve actions directed at specific individuals that influence their selection of a service provider, such as directly providing contact information for another settlement service provider to clients, leading to their utilization of that provider.
Implementation of the MSA in practice:
It is crucial to recognize that the legality of an MSA extends beyond its contractual structure. Implementation plays a vital role and may lead to RESPA violations in both form and substance, including agreements indicated by a course of conduct.
For instance, an Marketing and Services Agreements can breach RESPA if it provides payments based on the number of referrals received, even if the compensation formula described in the contract differs.
Performance of marketing services by settlement service providers:
MSAs involving other real estate settlement service providers for marketing services will require additional scrutiny. The Bureau will assess whether the provider’s marketing services are actual, necessary, and distinct from their primary settlement service.
Reasonable relation of payments to market value:
The value of the referral or any additional business resulting from the referral should not influence the determination of payment reasonableness.
If the payment for permissible marketing services exceeds the reasonable market value for the services rendered, the agreement may violate the law.
Moving Forward with MSAs
The Bureau effectively summarized the new status quo in its press release announcing the recent changes, clarifying that the rescission of the 2015 MSA Bulletin does not automatically render MSAs legally permissible. The determination of whether an MSA violates RESPA Section 8 depends on specific facts and circumstances, including the structure and implementation of the MSA. MSAs will remain subject to scrutiny, and the Bureau maintains its commitment to vigorous RESPA Section 8 enforcement.
In addition to the Bureau’s enforcement commitment, parties involved must be aware of private litigation related to RESPA-governed arrangements. An example of such ongoing litigation is the Zillow lawsuit, which involves a “co-marketing program” among real estate agents and mortgage lenders. With the current developments, clearer paths forward for MSAs can be established through diligent review and ongoing compliance.
New FAQs on Gifts and Promotional Activity
In conjunction with the new MSA materials, the Bureau has also published FAQs addressing how RESPA applies to gifts and promotional activities (referred to as the “Gift FAQs”). These FAQs shed light on what RESPA’s regulations permit settlement service providers to offer in terms of gifts and promotions, namely “normal promotional and educational activities” (12 CFR § 1024.14(g)(vi)).
The Gift FAQs reiterate the government’s stance that agreements involving the provision of gifts or promotions, being things of value, can violate RESPA if they are contingent upon referrals. Notably, the Bureau does not acknowledge any de minimis exception based on the value of the gift, stating that there is no such exception under RESPA Section 8.
Regarding the permitted “normal promotional and educational activities” under RESPA, the Gift FAQs provide additional details on the two negative requirements for such activities. Specifically, the offering of an item or activity must not be conditioned on the referral of business, nor should it defray expenses that the recipient would typically incur when referring business. The “not conditioned on” requirement is often dependent on the breadth of the offering. Broader offerings, such as providing promotional items to the general public or all settlement service providers offering similar services in a specific area, are more likely to be considered “not conditioned” on referrals. On the other hand, narrow targeting of prior, ongoing, or future referral sources may indicate a violation of RESPA.
The interpretation of the “defray expenses” requirement is relatively straightforward, with the determining factor being whether the recipient would have incurred the expense in the absence of the offering. For instance, in the case of a continuing education course, it would depend on whether participation in the course was mandatory for the recipient. The Gift FAQs provide several examples of offerings by settlement service providers that are either allowed or disallowed under the provision of “normal promotional and educational activities.”
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