One of the first posts I inflicted on an unspecting public, way back in 2004, when "W" was King and the bubble had not yet burst, was a rant about bogus referral arrangements that violated the anti-kickback provisions of Section 8 of RESPA. And although HUD itself once stubbed its toe over Section 8's threshold, both HUD and state regulators have been all over various schemes that attempt an end-run around RESPA's prohibition on referral fees.
With the late-night creation of Franken-Dodd, we now have the gentle ministrations of everyone's favorite benign Grandpa of a federal regulator, the CFPB, applied to Section 8, and as a recent MoFo alert advises, CFPB promises to be (in the lyrics of Jimmy Webb) a "harsh mistress."
The CFPB entered into a Consent Order with a title company (Lighthouse) on the basis that "marketing service agreements" for "advertising" with real estate companies were, in reality, disguised referral fee arrangements. Lenders who attempt similar arrangements with real estate-related businesses, in which compensation can be related to the volume of loan business referred to the lender should take a lesson.
As evidence of the violations, the CFPB cited the following:
- Lighthouse failed to determine, or document a method for a determination of, the fair market value of the services it received under the MSAs.
- Lighthouse determined the fees it paid under the MSA, in part, based on the number and value of referrals received by the related counterparty.
- Lighthouse did not monitor whether it was receiving the services for which it contracted.
- The number of referrals provided to Lighthouse by counterparties was significantly greater if Lighthouse had entered into an MSA with the counterparty.
In sum, the CFPB asserted that Lighthouse was unable to provide a legitimate fair market basis for its pricing under the MSAs and believed that there was a strong correlation between the pricing for each counterparty and the number of referrals Lighthouse received per the subject MSA’s.
Lighthouse paid a $200,000 penalty and the CFPB imposed a $5.00 cap on the value of any consideration that the title company to "referral sources." A fiver isn't likely going to generate beaucoup business for Lighthouse, is my completely obvious conclusion.
MoFo's "takeaways" are insightful.
- As expected, the CFPB will look beyond the face of an MSA and consider the facts behind implementation, performance, and payments as between the settlement service provider and the referring party.
- The CFPB in the Consent Order created a broad definition of “marketing services agreement,” a term that is not defined in RESPA.
- The CFPB emphasized that an objective determination of “fair market value” of marketing services to be rendered must be performed with written documentation of the determination that is retained and available for review.
- In the fair market value analysis, the CFPB frowned on the settlement service provider’s consideration of what other title companies in the market were willing to pay to referral sources for marketing services.
- The necessity of monitoring MSA performance to ensure that services contracted for are actually delivered.
- MSAs that result in more business being referred to the settlement service provider than is referred by the same referral sources not pursuant to MSAs provides evidence of a violation of RESPA §8(a). How the CFPB determined these differences is not clear from the Consent Order.
Any real estate services businesses that are starting to realize that when the CFPB is on the case, there will likely be no way to ever run this dodge again get a gold star for "perception." The last takeaway asks how the CFPB could have determined how much business is referred by the same source with a "marketing services agreement" and without such an agreement. I assume the authors of the alert are displaying a dry sense of humor. As everyone knows, with the CFPB being such a self-professed "data-driven" regulator, they'll always be able to find pertinent data, even if the hiding place is an orifice on their own body.
I don't think this is the beginning of the end of these types of arrangements. I think this the end. Period.
The again, there are always those living in caves who always are the last to hear. Thus, there may be a few more Consent Orders before "marketing services agreement" as ingenuously disguised referral arrangements finally become extinct.