Marketing Services Agreements

Many real estate brokerages and large Realtor^® teams have Marketing Services Agreements with title companies that, in exchange for a monthly rent and/or marketing fee, allow the title companies to exclusively market their services to the brokerage’s or team’s Realtors^® and to have access to the brokerage’s or team’s offices for the title company’s closings or other meetings.  Likewise, some small mortgage lenders had similar Marketing Services Agreements in which the lender “outsourced” their residential mortgage lending to mortgage brokers and provided the mortgage brokers with offices within the lender’s office.  In exchange, the mortgage brokers paid the lender rent, and the mortgage brokers received the origination fee charged to the borrower/buyer.

While the Real Estate Settlement Procedures Act (RESPA) prohibited mortgage brokers, title insurers, or title companies from paying referral fees to mortgage lenders or Realtors^® for loans or real estate closings, Marketing Services Agreements were generally considered legal as long as the rents and/or marketing fees were not unreasonably high, were paid on a regular basis, office space was made available to the title company or mortgage broker, and, very importantly, the rents and/or fees were not based upon the value or number of the mortgage loans originated or the real estate closings handled.  This seemed to be the “understanding” of how RESPA was enforced relating to Marketing Services Agreements while the US Department of Housing and Urban Development (HUD) was in charge of RESPA enforcement.

Now, however, the governmental body responsible for the enforcement of RESPA has been changed from HUD to the Consumer Financial Protection Bureau (CFPB) under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).  At the beginning of this year, storm clouds began to gather with regard to the CFPB and its view of Marketing Services Agreements.  RESPA News Monthly published an article in which two experts warned that the CFPB was going to commence RESPA enforcement actions against parties using Marketing Services Agreements and imposing serious penalties, even if the Marketing Services Agreements may have been compliant under HUD’s interpretation of RESPA.

Then, later this year, the National Association of Realtors^® (NAR), on their website under the Q&A topic “Real Estate Settlement Procedures Act,” asked the question:  “Is there a way to structure a marketing services agreement (‘MSA’) that complies with RESPA?”  NAR ended its answer with this ominous statement:  “… CFPB has been active in initiating enforcement actions in this area and appears to take the view that these agreements are going to almost always be an improper referral fee, so anyone entering into a MSA will need to be [sic] exercise extreme caution”  [emphasis added].  The reason for this extreme caution is not only the fact that the CFPB appears to be more aggressive in its enforcement actions than HUD, but the CFPB, unlike HUD, can fine RESPA violators $5,000 for each day that a company or person is in violation of RESPA.  Even worse, if the CFPB believes the violation was committed recklessly, the fine goes up to $25,000 per day.  Worse still, if the CFPB believes the violation was committed knowingly, the fine goes up to $1,000,000 per day.  CFPB even has a monetary incentive to enforce RESPA.  What is that incentive?  CFPB gets to keep the fines it collects!

Now we have two Consent Orders from the CFPB, issued this year, justifying the concerns of the RESPA News experts and those of NAR.  (A Consent Order entered in a CFPB administrative law tribunal is like a plea bargaining agreement entered into by the prosecutor and the defendant to settle in a criminal court.)  In the first Consent Order (In the Matter of: Fidelity Mortgage Corporation and Mark Figert, File No. 2014-CFPB-0001), a mortgage broker (but this could have been a real estate broker) was the respondent and was found to have entered into a Marketing Services Agreement (1) that leased space for an illegal rental amount that was well beyond fair market value (and its prime location did not justify a higher rent than fair market rent); (2) that even though the high rent was paid, the office was not regularly used; (3) that the parties had established an exclusive relationship, which was also illegal; and (4) that the agreement wrongfully tied the payments made under it to loan volume (which is analogous to real estate closing volume).  For these violations, the mortgage broker, within ten days of the Order being entered, had to pay to the CFPB all of the origination fees (for a real estate broker, that would have meant all of the broker’s commissions before the commissions were split with the broker’s agents) the broker had earned during the time the Marketing Services Agreement was in effect.  Then, the broker had to pay an additional $54,000 fine to the CFPB.

Not just brokers are at risk.  In the second Consent Order (In the Matter of: Lighthouse Title, Inc., File No. 2014-CFPB-0015), the respondent was a title company, and the penalties were even greater.  The title company was found to have entered into a Marketing Services Agreement with a real estate brokerage in which (1) the amount of the fees were set by considering the amount of business received from the real estate brokerage; (2) the title company did not try to determine the fair market value of the real estate broker’s marketing services; (3) the title company did not monitor the real estate broker to determine if all the marketing services were received; (4) the title company set the fees by considering how much its competitors were willing to pay the real estate broker; and (5) the title company entered into the agreement with the understanding that the real estate broker would refer real estate closings to the title company.  Since entering into a contract is “a thing of value,” the CFPB even found that the title company, by signing the Marketing Services Agreement with the real estate broker, paid an illegal referral fee to the real estate broker.  Further, entering into the Marketing Services Agreement would have been illegal even if all of the services had been provided and even if the payments for them had been paid at fair market value.  What penalty did the title company have to pay to the CFPB?  $200,000 to be paid within ten days of the Order being entered! 

What is the “moral” of these two Consent Orders?  Use extreme caution prior to entering into any Marketing Services Agreements, and strongly consider abandoning any one in which you might be currently involved.

Joint Ventures or Affiliated Business Arrangements

But, you say, I am not involved with a Marketing Services Agreement – I am in a joint venture or affiliated business arrangement with a title company.  I am okay, right?

Maybe not – not after the second Consent Order from the CFPB (In the Matter of: Lighthouse Title, Inc., Respondent, File No. 2014-CFPB-0015).  RESPA Section 8(a) states:  “No person [the title company] shall give and no person [the Realtor^®] shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement [closing] service involving a federally related mortgage loan shall be referred to any person [the title company].”  [Emphasis added.]

Most joint ventures or affiliated business arrangements are set up as partnerships or limited liability companies that are taxed as partnerships.  The partner or LLC member that is the real estate brokerage refers real estate contracts to the joint venture or affiliated business arrangement to be closed.  The other partner or LLC member, the title company, provides the expertise to close the real estate transactions.

In the second Consent Order in Paragraph 3.f, the CFPB newly defines “thing of value,” as used in the above quote from RESPA Section 8(a), as “any payment, advance, funds, loan, service, or other consideration, including … distribution of partnership profits ….”  [Emphasis added.]  If you insert this definition of “thing of value” into RESPA Section 8(a), it reads:

“No person [the title company] shall give and no person [the Realtor^®] shall accept any fee, kickback, or distribution of partnership profits pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement [closing] service involving a federally related mortgage loan shall be referred to any person [the title company].”  [Emphasis added.]

With this new definition of “thing of value” to include “distribution of partnership profits,” it would seem that a real estate brokerage could be prohibited from referring closings to a joint venture or affiliated business arrangement in which the brokerage is an owner and then accepting a distribution of its partnership profits from the joint venture or affiliated business arrangement in exchange, directly or indirectly, for the closings referred.

But, you say, the real estate brokerage and the title company are both part of the joint venture or affiliated business arrangement – is not the real estate brokerage really referring to its own joint venture?  How can an entity refer to itself and be in violation of RESPA?  This issue was addressed in another Consent Order (In the Matter of: JRHBW Realty, Inc., doing business as RealtySouth; TitleSouth, LLC, File No. 2014-CFPB-0005) in which the CFPB fined RealtySouth, a real estate brokerage, and TitleSouth, a title company, $500,000 (again, to be paid within ten days of the Order being entered), jointly and severally, because their affiliated business arrangement disclosure did not meet the specific requirements of RESPA for such a disclosure.  While this Consent Order was entered prior to the Lighthouse Title Consent Order and thus before the CFPB had expanded the definition of “thing of value,” and therefore did not rule the affiliated business arrangement illegal at that time, the CFPB did rule that RealtySouth improperly referred settlement services to TitleSouth because of the defective disclosure.  So what is so shocking about that ruling?  RealtySouth and TitleSouth were both owned by the same company – they were subsidiaries of a single company!  Therefore, the CFPB has set the precedent, if the CFPB wishes to pursue it, that a referral of settlement services between or to affiliated businesses or joint venture owners is a violation of RESPA, even if the businesses are part of the same company.

So what should you do if you are involved in such a affiliated business arrangement or Marketing Services Agreement?  Consult a knowledgeable attorney as soon as possible and seek legal advice.  Our opinion should now be clear to all.  Although we disagree with the positions of the CFPB in these Consent Orders, we now recommend you exercise extreme caution prior to entering into, or continuing with, Marketing Services Agreements or affiliated business arrangements with title agents or real estate attorneys.

If you have any further questions about Marketing Services Agreements or affiliated business arrangements, please do not hesitate to call or email us at (941)741-8224 or [email protected].  As always, we will answer your questions at no charge.