The Consumer Financial Protection Bureau (CFBP) on January 31, 2017 issued consent orders settling enforcement claims that a major mortgage lender violated the Real Estate Settlement Procedures Act (RESPA) in connection with its marketing, desk rental, lead purchase and other agreements with hundreds of real estate brokers and other settlement service providers (the "Consent Orders"). The CFPB alleged that the agreements were actually mechanisms for the mortgage lender to pay for the referral of business in violation of RESPA Section 8(a). The lender will pay a $3.5 million civil money penalty to settle the action. The CFPB also resolved claims against two of the real estate brokers and a mortgage servicer for allegedly accepting payments under such agreements; those three respondents together will pay $495,000 in consumer redress, disgorgement, and penalties. Moreover, as described in Point 8 below, the recordkeeping and cooperation provisions of the various consent orders suggest that the CFPB has preserved its ability to pursue other real estate brokers (and individual sales agents) who may have been involved in similar conduct.
Significantly, the Consent Orders confirm that there is no general per se RESPA prohibition on agreements among settlement service providers for advertising, marketing, office rentals, leads, and other services or goods. Although some of the conduct alleged in the orders, if true, presents fairly obvious RESPA problems — such as cash payments for referrals — the CFPB also relied on allegations about the terms of the lender's agreements, the manner in which they were carried out, and other surrounding circumstances. Troublingly, in doing so, the CFPB focused on myriad routine practices that are not prohibited under RESPA. Moreover, the CFPB again sidestepped a RESPA statutory exemption that has long been relied upon as expressly permitting payments so long as they are reasonably related to the value of the goods or services provided. Instead, the CFPB's view — as reflected in its PHH case currently pending before the D.C. Circuit Court of Appeals — appears to be that Section 8(c) is a nullity if the fees paid can be viewed as compensation for referrals, even if such fees were commensurate with fair value of services or facilities received. This CFPB stance appears to be unchanged despite an emphatic ruling from a panel of judges for the D.C. Circuit that Section 8(c)(2) of RESPA is an exemption, a ruling that the CFPB is presently challenging.
Real estate settlement service providers are scrambling to make sense of the breadth of practices reviewed and addressed in the Consent Orders and to achieve reasonable certainty in drafting and carrying out RESPA-compliant arrangements for goods and services with one another. With this in mind, we offer eight key takeaways from this CFPB action.
1. The CFPB continues to try to guide industry on RESPA compliance through settled enforcement cases, rather than by issuing clear guidelines or rules, thereby promoting uncertainty and causing confusion for settlement service providers.
CFPB Director Richard Cordray announced the Consent Orders by saying that they send a "clear message" about the illegality of referral fees and that the CFPB will go after "both sides" of such allegedly improper arrangements. The director has previously urged participants in the marketplace to use the CFPB's consent orders to guide their conduct, going so far as to insist that it would be "compliance malpractice" for executives not to carefully review the contents of these settlements.
But the Consent Orders, like other negotiated CFPB settlements, present some significant compliance challenges, particularly given that the CFPB included allegations that are overly broad and inconsistent with settled law. As noted, if the allegations are taken as true, some straightforward RESPA violations occurred in connection with the agreements at issue. For example, it is not shocking that the CFPB took action against conduct such as real estate brokers allegedly providing incentives for their sales agents to refer consumers to lender's loan officers, including paying some sales agents for each referral made.
But the CFPB appears to have taken the opportunity to also challenge other practices that are either defensible under RESPA or that the respondents had no ability or motivation to fight. For example, the CFPB took issue with lender's internal tracking of the amount of mortgage business that it earned from a given real estate broker per month compared to its total number home buyers, a common practice in the industry referred to as a "capture rate." But this, in itself, does not violate RESPA. Quite the opposite — tracking the number of business successes compared to opportunities is logical and commonplace across nearly all industries, especially when trying to discern whether particular marketing or advertising is effective. Likewise, criticizing the fact that real estate brokers allowed the lender, but not other competing lenders, access to their respective offices seems to fly in the face of previous guidance by the U.S. Department of Housing and Urban Development (guidance that the CFPB adopted when it assumed authority to interpret RESPA in 2011), which stated:
[The] rental of desk or office space to a particular settlement service provider could lead to other competing service providers being "locked-out" from access to the referrers of business or from reaching the consumer . . . [and] give rise to a question of whether a rental payment is bona fide. A lockout situation, however, without other factors, does not give rise to a RESPA violation. The RESPA statute does not provide HUD with the authority to regulate access to the offices of settlement service providers or require a company to assist another company in its marketing activity."1
The CFPB's tack-on "capture rate" and "access" allegations create confusion and are unfair to providers, who are left to wonder whether such practices are standalone issues that will be scrutinized and, if so, wherein lies the tipping point between right and wrong.
2. The CFPB finally gives us a glimpse of how it views lead sales agreements under RESPA, and implementation is key.
Although the CFPB previously has scrutinized online lead generation (such as consumer privacy issues or practices falling under the CFPB's authority to prohibit unfair, deceptive, or abusive acts or practices), to our knowledge, this is the agency's first public settlement of RESPA allegations based on lead sales.
In the Consent Orders, the CFPB alleged that the lender entered into lead agreements with hundreds of different counterparties, chiefly real estate brokers. The CFPB did not take issue with the notion of a lender buying information about prospective buyers, such as consumer name, address, email address, and phone number. But the CFPB's investigation revealed other problematic conduct that went beyond the mere transferring of consumer information. As alleged, most of the lead agreements included an exclusivity provision that prohibited the real estate brokers from sharing leads with or promoting competitor lenders, and, of far more consequence, the brokers actively referred prospective buyers to lender's loan officers, with many providing cash, cash-equivalent credits, or other incentives for their agents to make those referrals. The lender reportedly encouraged such incentive programs. The CFPB also focused on referral activity by sales agents for the two real estate brokers that settled claims in the action, Oregon-based Keller Williams Mid-Willamette (KW Mid-Willamette) and California-based ReMax Gold Coast. The CFPB noted that while the KW Mid-Willamette lead agreement only called for the sharing of consumer information, in practice, KW Mid-Willamette agents recommended the lender to their clients. Similarly, the CFPB cited testimony by a principal of ReMax Gold Coast that the brokerage and its agents earned the lead fees from the lender by introducing clients to the lender's loan officers.
Under those circumstances, the CFPB ignored RESPA's Section 8(c)(2) exemption in cataloguing its findings and conclusions, which made no mention of whether the lender's payments under the lead agreements corresponded to the fair market value of leads received. Rather, the CFPB concluded that the payments were not for leads at all, but for referrals.
The practical takeaway is that while a carefully drafted lead agreement is a good start, the risks posed by these arrangements largely relate to the way in which they are implemented. It goes without saying that a broker may not share lead revenue or give other things of value to incent sales agents to send business to the lead purchaser. In addition, the parties to a lead agreement must endeavor to distinguish between a lead and a "referral," which RESPA defines as any oral or written action directed to a person which has the effect of affirmatively influencing that person's selection of a settlement service provider to whom he or she will pay a charge. Given this broad RESPA definition of a referral and the CFPB's aggressive approach, sold leads should be cold leads. A real estate broker in a lead agreement should refrain from introducing consumers to the provider purchasing the leads; endorsing or recommending that provider to consumers; and using designations such as "preferred" for that provider. Likewise, in developing purchased leads, it would be unwise for a lender to tell prospective customers that they are being contacted at the real estate broker's suggestion. Exclusivity provisions or practices for lead agreements also apparently present risk — as they do in marketing services agreements (MSAs) — although the rationale behind the CFPB's condemnation of exclusivity remains elusive.
3. The CFPB still does not ban MSAs under RESPA, but we have new information about practices that the CFPB may use to deem a given MSA to be illegal.
Last year, Mortgage Bankers Association CEO David Stevens spoke for many others when he said, regarding MSAs, "I just want the CFPB to tell us whether they're legal or not." While the CFPB has not prohibited MSAs, it remains deeply skeptical of them. Yet the CFPB also has not been forthcoming with guidance on how to structure a RESPA-compliant MSA. The CFPB's 2015 Compliance Bulletin raised more questions than it answered. The Consent Orders also do not provide a clear framework, but they are informative insofar as they offer new insight into practices that the CFPB disfavors and may cite as part of a claim that a particular MSA was used to pay referral fees.
The CFPB alleged that the lender had MSAs with over 120 different service providers, including KW Mid-Willamette and ReMax Gold Coast. According to the CFPB's findings, although the lender paid a fixed monthly fee for marketing services, the fee was determined by projecting the average number of referrals that the lender anticipated receiving, not the value of the MSA services that would be provided. As alleged, the lender closely tracked its capture rate each month and designated loan officers to meet with the brokers to discuss how to boost the numbers; if the capture rate dropped, the lender might lower the monthly fee or discontinue the MSA. Under these circumstances, just as with its lead agreements analysis, the CFPB ignored RESPA Section 8(c)(2) and any consideration of whether the lender actually received advertising and marketing services from the brokers or whether fair value was paid for those services, instead concluding that the lender's monthly MSA payments were really "for" referrals.
Under the CFPB's approach, the traditional MSA formula — i.e., the performance of actual marketing and advertising services in exchange for a flat monthly fee that corresponds to the market value of those services — may not be enough to insulate the parties from RESPA risk. This is frustrating and confusing for industry participants who work hard to identify marketing and advertising services that provide real value, and for whom referrals are a natural part of building their business. Further, as the authors of this piece have discussed previously, the CFPB is misapplying the RESPA statute to the extent it adopts a subjective inquiry concerning the intent behind a given agreement when, in fact, there is no intent element even mentioned in the statute. However, at least until the CFPB's Section 8(c)(2) interpretation is resolved in the pending PHH case, that offers little comfort to providers, who have no desire to tangle with the CFPB.
In this regulatory environment, providers should be sensitive to the thin, ill-defined line between "marketing" and "referral" activity. The CFPB has not defined that line, but the Consent Orders show that if the CFPB believes that the MSA is geared toward having the counterparty endorse, recommend, and encourage consumers to use the party making payments under the MSA, that may infect the whole relationship. This should a consideration when drafting MSA terms; identifying the services that will be provided under the MSA; and — (perhaps most importantly) — when carrying out the agreement. For example, while it is one thing for a broker to help a lender market and promote itself to the real estate agents, it is another matter for the broker to incentivize or pressure the agents to use that lender, conduct that the CFPB alleged in its consent order with KW Mid-Willamette. Similarly, while a lender has a legitimate reason to internally track the results of its efforts, it is unwise to dialogue about capture with an MSA partner, at least in the context of trying to boost referrals.
4. Desk and office rental agreements, too, may be vulnerable to CFPB scrutiny depending on how they are carried out.
The CFPB also alleged that the lender's hundreds of desk licensing agreements, through which the lender would pay a rental fee for one of its loan officers to have a workspace at a broker's place of business, amounted to illegal payments for referrals. Traditionally, desk rental agreements have been analyzed — consistent with Section 8(c) — in terms of whether the rental payment bears a reasonable relationship to the market value for the facilities rented and services provided, with RESPA exposure flowing from a rental payment that exceeds the fair market value of the space or potentially a failure to use the rented space. Here, again, however, the CFPB focused exclusively on issues surrounding implementation, including the allegations that as part of the desk rentals, brokers promised to endorse the lender and promote it as a "preferred lender; and that the lender — apparently as an internal analysis by its board — analyzed the value of the desk agreements in terms of the referrals they produced, not whether they were paying for the cost of rental space in the area.
The CFPB's claims suggest that to for the avoidance of risk, a best practice is to ensure that office or desk rental agreements should be negotiated and prepared solely with reference to the fair market value of comparable rental space in the area. Desk and office rentals should be written to be as simple and clean as possible. While referrals may occur naturally, the rental relationship should not include broker promises to market, endorse, or recommend the provider renting the space.
5. The CFPB continues to insist that "steering" and "economic coercion" are relevant principles under RESPA Section 8
The Consent Orders do not focus on claimed kickbacks. Instead, they are littered with allegations that the lender's partners "steered" customers to the lender, sometimes using "economic coercion" to do so. These are themes that have come up in previous CFPB settlements, with the CFPB generally assuming that consumers are not savvy and are vulnerable to being exploited by referrals. In this case, the CFPB alleged that one listing agent offered a seller's discount on the sales price conditioned on using the lender for the mortgage. It alleged that other agents included per diem fees for each day a buyer need to extend the closing date, unless the lender was used.
The CFPB, however, ignores that nothing in RESPA prohibits referring, introducing, or even "steering" consumers to choose another provider unless there is consideration for doing so. Likewise, the CFPB is apparently undaunted by RESPA cases in which the courts have rejected economic coercion arguments based on incentives offered to consumers incentives. Conceivably, the CFPB's concern with the discounts or penalties formulated by certain brokers partnering with the lender may have been based on a feeling that they had been crafted and applied selectively, rather than applied across the board. If so, however, the CFPB should have been far more explicit about that concern, rather than broadly suggesting that discounts that influence purchaser choice are impermissible.
6. Requiring preapproval or similar services for all customers will raise red flags.
The CFPB alleged that the lender also had arrangements with real estate brokers whereby the brokers would require all potential buyers to obtain financing preapproval with the lender. This requirement was first contained within the lead agreements themselves but was subsequently communicated orally to brokers. To effectuate this requirement, real estate agents listing homes would allegedly include comments in the "agent-only" section of a listing stating that all potential buyers must be preapproved with the lender in order for their offer on the property to be considered. Even buyers paying all cash or who had already obtained a preapproval letter from a different lender were required to seek preapproval with the lender. The CFPB asserted that this was done to refer more customers to the lender in return for additional referral fees.
By itself, there is no RESPA violation associated with asking buyers to obtain financing preapproval. In fact, there is often even a strong rationale for requiring pre-approval, such as with regard to sales by homebuilders, who will often refrain from putting a house on the market in reliance on a buyers' stated but undemonstrated ability to obtain the requisite financing. The problem arises when preapproval is required for all buyers. Requiring preapproval for cash buyers or buyers that are already preapproved by reputable bona fide lenders appears excessive and unnecessary, and therefore may signal to the CFPB that something more could be occurring.
7. Co-marketing programs were also vulnerable based on the circumstances surrounding implementation.
The CFPB alleged that the lender's co-marketing arrangements operated as vehicles to make referral payments. Specifically, the CFPB claimed that the lender was subsidizing the real estate agents' advertisements on third party websites in exchange for referrals that might flow from such advertising or otherwise. Indeed, the CFPB pointed to anecdotal testimony of how some agents would boast to the lender how they were able to convince a particular consumer to use that lender. Nevertheless, while such additional conduct occurred only sporadically, the CFPB apparently concluded that improper subsidization occurred, without even considering the co-advertising value to the lender and whether it was commensurate with what was paid for it. This is reminiscent of the adage that bad facts produce bad law.
Many third-party co-advertising platforms currently offered in the marketplace lack any controls regarding how real estate agents and lenders should split advertising costs. Instead, they leave it up to the parties that are doing the co-advertising to work out — and to face the exposure if they misjudge. This may create a false sense of security about RESPA compliance, which could lead to serious consequences for co-marketers.
8. Real estate agents beware: these actions break new ground in terms of including you among the subjects of CFPB actions and enforcement relief provisions.
While the Consent Orders' monetary penalties applied only to the individual respondents, the CFPB broke new ground in the real estate brokers' consent orders by subjecting not only those companies, but also their hundreds of independent contractor real estate agents, to the Conduct Provisions.
Specifically, the Conduct Provisions section of the KW Mid-Willamette and ReMax Gold Coast consent orders each state that "Respondent and its ... agents ... who have actual knowledge of this Consent Order" shall not partake in certain enumerated actions related to providing referrals "now or at any time in the future."2 Importantly, those consent orders also require the brokers to deliver copies of the orders to each of their real estate agents,3 such that those agents necessarily will have knowledge of the orders and be required to abide by the Conduct Provisions. It remains to be seen whether the scope of this injunction would be upheld if valid, or how this will be enforced on the individual agent level.
Perhaps more importantly, the recordkeeping provisions require KW Mid-Willamette and ReMax Gold Coast each to create and retain, for a five year period, a set of business records that includes each real estate agent's name, telephone number, email, address, job title, dates of business relationship, and, if applicable, the reason for termination.4 The CFPB will then have access to these records on demand and could potentially use them to go after individual sales agents who had prominent roles in the alleged RESPA violation, if it so chooses.
The Consent Orders address the CFPB's views regarding a range of promotional practices in the real estate marketplace. While some guidance can be discerned, by and large the CFPB's tactics appear to be to continue to ignore Section 8(c) of RESPA and to pinpoint practices that it does not like, regardless of whether such practices are unlawful or not. This is exceedingly frustrating for an industry that has repeatedly asked for its regulator to simply lay out fair and sensible rules. In the meantime, providers' compliance focus should include not only structuring agreements properly, but implementing them cautiously.
1 1996-3 Rental of Office Space Policy Statement, 61 Fed. Reg. 29,264, 29,266 (June 7, 1996) (emphasis added).
2 See e.g., Keller Williams Consent Order at 39.
3 Id. at 57.
4 Id. at 60(a).
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