CFPB Replaces Cordray-Era MSA Guidance with New RESPA Section 8 FAQs
The Real Estate Settlement Procedures Act (“RESPA”) in general, and Section 8 of RESPA in particular, are ambiguous. Compliance often turns on the facts of the arrangement. For that reason, settlement service providers have been asking the Consumer Financial Protection Bureau (“CFPB”) for guidance on Section 8 of RESPA since the CFPB took responsibility for RESPA from the US Department of Housing and Urban Development (“HUD”) nearly 10 years ago. These calls were amplified when Section 8 was an early target of the CFPB’s enforcement actions, and settlement service providers had no choice but to continue relying on formal and informal guidance from HUD to inform RESPA compliance. On October 7, 2020, the CFPB released a series of Frequently Asked Questions (“FAQs”) designed to address the elements of Section 8 of RESPA, as well as to answer specific questions regarding the permissibility of gifts, promotional activities, and marketing services agreements (“MSAs”).1 With regard to the latter, the CFPB effectively affirms that MSAs are permissible under RESPA as long as the agreements are carefully structured to meet the requirements of Section 8(c)(2).
Also on October 7, 2020, the CFPB rescinded Compliance Bulletin 2015-15, RESPA Compliance and Marketing Services Agreements,2 which had been issued under Director Richard Cordray and long criticized for its mere recitation of past enforcement actions, only some of which related to MSAs, and its lack of real guidance as to the structuring of compliant MSAs. The FAQs are welcomed guidance, particularly because the CFPB generally reinforces how Section 8 is currently interpreted and implemented by settlement service providers. This Legal Update highlights the RESPA FAQs and identifies certain issues that may need further clarification.
A. Section 8 Overview
The first several FAQs recite the provisions of Section 8. Notably, Section 8(a) of RESPA prohibits a person from giving or receiving any fee, kickback, or thing of value in exchange for the referral of settlement service business in connection with a federally related mortgage loan. Section 8(b) of RESPA prohibits fee splitting arrangements unless for services actually performed. The FAQs also highlight RESPA Section 8(c), which provides a list of payments that are not prohibited by RESPA. For anyone new to Section 8 of RESPA, these initial FAQs provide a good high-level summary of what is permitted and not permitted under RESPA, as well as the scope of those transactions covered by the law. It is the subsequent FAQs, however, that provide useful guidance for settlement service providers and others on whether discounts, gifts, promotional activities, and MSAs comply with Section 8 of RESPA.
B. Definition of Referral
One FAQ seeks to simply answer “what activities are prohibited under RESPA Section 8(a)?” The CFPB breaks down Section 8(a) into four elements: (1) a fee, kickback, or thing of value; (2) pursuant to an agreement or understanding, oral or otherwise; (3) for referrals of business; and (4) incident to or part of a real estate settlement service involving a federally related mortgage loan. While the FAQ goes on to cite the statutory and regulatory definitions for these elements, as it relates to referrals, the CFPB follows up its summary of the Regulation X referral definition by stating: “…note that prohibited referrals are not limited to those directed to consumers. They might be directed to a number of sources, such as appraisers, real estate agents, title companies and agents, lenders, mortgage brokers, or companies that provide information in connection with settlements, such as credit reports and flood determinations.”3
This statement, however, does not indicate how activity that affirmatively influences another company’s selection of a settlement service provider falls under Regulation X’s definition of “referral” when that definition states that the person that is affirmatively influenced to select a particular settlement service provider is a person that “will pay for such settlement service or business incident thereto or pay a charge attributable in whole or in part to such settlement service or business."4 Unless the company that is affirmatively influenced will pay the settlement service fee usually paid by the consumer, such referral activity would appear to fall outside the RESPA definition of “referral.” This is one area where additional clarification from the CFPB may be needed.
C. Discounts, Gifts, and Promotions
The FAQs also address whether lenders or settlement service providers are generally permitted under RESPA to give a gift, refund, or discount to a consumer for using the lender or settlement service provider. Specifically, the CFPB notes that Section 8 of RESPA does not prohibit such companies from giving a consumer “a gift or incentive (e.g., a discount, refund of fees, chance to win a price, etc.)” to encourage that consumer to do business with the company offering the incentive.5 However, RESPA does prohibit such companies from providing an incentive to a consumer “in exchange for the consumer referring other business to that lender or other settlement service provider.”6 The CFPB’s interpretation is consistent with informal guidance provided by HUD when it was responsible for administering RESPA. HUD previously indicated that a consumer can receive a discount, refund, or incentive in connection with his or her own transaction but cannot receive a thing of value for referring another person to the settlement service provider.
The CFPB also answers the question of whether gifts and promotions are allowed under Section 8 of RESPA. Like most arrangements under RESPA, the answer depends on the facts. The CFPB notes that Section 8(a) of RESPA generally prohibits gifts and promotions if they are given or accepted as part of an agreement or understanding (i.e., a pattern or practice) for the referral of business incident to or part of a real estate settlement service involving a federally related mortgage loan. The FAQ provides examples of prohibited gifts and promotions if given or accepted in return for referrals: tickets to professional sporting events, trips, restaurant meals, sponsorship of events, or the opportunity to win any of these items in a drawing or contest. The CFPB also emphasizes that no exception to this rule exists for gifts below a certain value.7
However, the CFPB indicates that gifts and promotions directed to a referral source are allowed if they are a “normal promotional or educational activity.”8 RESPA does not prohibit “normal promotional and educational activities” if two factors are met. First, the activities must not be conditioned on the referral of business. In determining whether activities are conditioned on the referral of business, the FAQ suggests that entities should review whether the item or activity is targeted narrowly toward prior, ongoing, or future referral sources. For instance, the FAQ states that, if a settlement service provider targets a promotion to a small group of companies or individuals that have made referrals in the past, rather than to all settlement service providers offering similar services in a particular locality, this could indicate that the promotion is conditioned on referrals. Entities also should review how often the item or activity is given to the referral source, with routine and frequent promotions suggesting the item or activity could be conditioned on referrals.
Second, the activities must not involve defraying expenses that otherwise would be incurred by the referral source. For instance, the CFPB indicates that entities should determine whether the item or activity involves a good or a service that referral sources would otherwise have to pay for themselves, such as continuing education expenses, certification and license fees, and office supplies. Office supplies featuring the name and logo of the entity providing the supplies are less likely to be viewed as defraying expenses, as a referral source is unlikely to use its own funds to purchase office supplies with another company’s name on them.9
The CFPB provides examples of how one particular activity, depending on the facts and circumstances, could be a compliant “normal promotional or educational expense” or prohibited activity defraying expenses in return for the referral of settlement service business. One such example describes a title company that routinely hosts free seminars on recent real estate market developments. The seminars are open to the public, and they are advertised to all real estate agents in a particular area, regardless of whether referrals have or will be made. The CFPB indicates that those seminars are more likely to meet the conditions of a permissible “normal promotional and educational activity” under Regulation X, because: (1) admission to the courses is not conditioned on referrals and (2) the courses are not defraying expenses that otherwise would be incurred by persons in a position to make referrals, as the courses are routinely provided free of charge for everyone. However, if the same courses were provided to the general public for a fee, and the course provider waived the fee only for real estate agents (who may or may not make referrals), the FAQ indicates the activity is not likely to be a “normal promotional and educational activity” and would be prohibited by Section 8 of RESPA. This is because the course fee waiver would defray the real estate agents’ expenses, as they would otherwise need to pay for required continuing education classes.10
D. Marketing Services Agreements
The FAQs also tackle MSAs, which former Director Cordray had suggested were risky arrangements in the now-rescinded Compliance Bulletin 2015-05. The CFPB noted that rescission of the Bulletin does not mean the arrangements are "per se or presumptively legal," but that whether a particular MSA violates Section 8 of RESPA will depend on specific facts and circumstances.11 The MSA FAQs begin by defining MSAs as “agreements that commonly involve an arrangement where one person (or entity) agrees to market or promote the services of another and receives compensation in return.”12
The FAQs reinforce certain standards articulated in Regulation X and in HUD’s 2010 Home Warranty Companies’ Payments to Real Estate Brokers and Agents Interpretive Rule (“Interpretive Rule”) as they relate to MSAs.13 The Interpretive Rule noted that marketing services performed by real estate brokers and agents on behalf of home warranty companies could be compensated under RESPA only if the services rendered are “actual, necessary and distinct” from the primary services rendered by the real estate broker or agent and not referrals.14 The FAQs similarly note that, when a person performing settlement services receives payment for performing marketing services as part of a real estate transaction, a lawful MSA involves marketing services that are “actual, necessary, and distinct” from the primary services performed by the person.15 The services also must not be nominal. In addition, the payments under the MSA must be reasonably related to the value of the services actually performed and not be a duplicative charge or a fee for referrals.16
The FAQs note distinctions between referrals and marketing services for purposes of RESPA. Referrals include “any oral or written action directed to a person where the action has the effect of affirmatively influencing the selection of a particular provider of settlement services or [related] business by a person paying a charge attributable to the service or business.”17 The CFPB’s example of a referral in the context of an MSA includes “directly handing clients the contact information of another settlement service provider that happens to result in the client using that other settlement service provider.”18 By contrast, marketing services are not directed to a person and are generally targeted at a wide audience. The CFPB’s example of a marketing service is placing advertisements for a settlement service provider in “widely circulated media (e.g., newspaper, a trade publication, or a website).”19
As a comparison, in follow-up Questions and Answers to the Interpretive Rule, HUD indicated that “a reasonable payment for an advertisement by a home warranty company in a real estate broker’s or agent’s publication or on the broker’s or agent’s website would not, in and of itself, be a payment for a referral under RESPA.”20 It is unclear whether the CFPB’s reference to “widely circulated media” is meant to be different than the example provided by HUD; after all, the service is merely noted as an example. Like most RESPA analyses, the answer will be fact-specific, and, in this case, it seems the CFPB may seek to determine whether the media source, regardless of who owns it, is widely circulated. There is no indication in the FAQs of what it means to be “widely circulated.”
Nevertheless, the FAQs state that “entering into, performing services under, and making payments under MSAs are not, by themselves, prohibited acts under RESPA or Regulation X.”21 Rather, MSAs involving an agreement or understanding to refer business incident to or part of a settlement service in exchange for a fee, kickback, or other thing of value are prohibited (e.g., agreements that provide for payments based on the number of referrals received). Likewise, MSAs that include above-market-rate payments for marketing services, that involve payment for nominal services or services not actually rendered, or that are designed or implemented in a way to disguise the payment for kickbacks or split charges are prohibited. The CFPB notes that its Office of Enforcement has identified violations of RESPA with MSAs that were structured or implemented, in form or substance, including as a matter of course of conduct, to compensate parties for referrals.22
As an example, the FAQs ask us to assume that a lender enters into an MSA with a real estate agent that makes referrals to the lender. Under the MSA, the real estate agent is required to perform marketing services, including deciding on and coordinating direct mail campaigns and media advertising for the lender, but the agent either does not perform the services or is paid marketing fees that exceed the reasonable market value of those marketing services. In this scenario, the FAQ indicates the MSA does not comply with RESPA. (As an aside, while this example is not offered in the context of identifying marketing services for which a party can be compensated, it would seem reasonable to assume the CFPB views “the design and coordinating of direct mail campaigns and media advertising” to be a compensable service under an otherwise-compliant MSA.)23
Alternatively, payment of a bona fide salary or compensation for marketing services actually rendered through an MSA would be allowed. The FAQs state “RESPA Section 8 does not prohibit payments under MSAs if the purported marketing services are actually provided, and if the payments are reasonably related to the market value of the provided services only,” which cannot include the value of any referrals.24 This echoes the standard under Section8(c)(2) with which settlement service providers are well acquainted and which they use to structure services arrangements, including MSAs, in compliance with Section 8 of RESPA.
Ultimately, it is useful to see the CFPB directly apply Section 8(c)(2) to indicate that properly structured MSAs are legal under RESPA. That said, the CFPB states that “MSAs remain subject to scrutiny, and we remain committed to vigorous enforcement of RESPA Section 8.”25 While the CFPB may have softened the tone of its guidance related to MSAs, settlement service providers must be careful to structure these arrangements in accordance with RESPA.
1 Real Estate Settlement Procedures Act FAQs, CFPB (Oct. 7, 2020), https://www.consumerfinance.gov/policy-compliance/guidance/mortgage-resources/real-estate-settlement-procedures-act/real-estate-settlement-procedures-act-faqs/ (hereafter, FAQs).
2 Bulletin re: RESPA compliance and marketing services agreements, CFPB (Oct. 8, 2015), https://www.consumerfinance.gov/policy-compliance/guidance/supervisory-guidance/bulletin-respa-compliance-marketing-services-agreements/.
3 FAQs, RESPA Section 8(a), No. 1.
5 See FAQs, RESPA Section 8 General, No. 6; RESPA Section 8: Gifts and Promotional Activity, No. 1.
6 FAQs, RESPA Section 8 General, No. 6.
7 FAQs, RESPA Section 8: Gifts and Promotional Activity, No. 1.
11 Bryan A. Schneider, CFPB provides clearer rules of the road for RESPA marketing service agreements, CFPB (Oct. 7, 2020), https://www.consumerfinance.gov/about-us/blog/cfpb-provides-clearer-rules-road-respa-marketing-service-agreements/.
12 FAQs, RESPA Section 8: Marketing Services Agreements (MSAs), No. 1.
13 Real Estate Settlement Procedures Act (RESPA): Home Warranty Companies’ Payments to Real Estate Brokers and Agents Interpretive Rule, HUD, 75 Fed. Reg. 36,271 (June 25, 2010).
15 FAQs, RESPA Section 8: Marketing Services Agreements (MSAs), No. 1.
20 Real Estate Settlement Procedures Act (RESPA): Home Warranty Companies’ Payments to Real Estate Brokers and Agents Interpretive Rule: Response to Public Comments, HUD, 75 Fed. Reg. 74,620, 74,621 (Dec. 1, 2010).
21 FAQs, RESPA Section 8: Marketing Services Agreements (MSAs), No. 3.
25 Bryan A. Schneider, CFPB provides clearer rules of the road for RESPA marketing service agreements, CFPB (Oct. 7, 2020), https://www.consumerfinance.gov/about-us/blog/cfpb-provides-clearer-rules-road-respa-marketing-service-agreements/.
