MSAs, Desk Rentals, CFPB, PHH, RESPA, And NAR - Who Can Keep Track?

Title companies, as well as real estate agents, find themselves in the middle of the MSA discussion. Marketing and Services Agreements (MSAs) where real estate brokers are paid a fee to advertise the products and services of lenders and title companies, and Affiliated Business Arrangements (ABAs) where brokers and agents own an interest in a lender or title company, have been a staple of the real estate industry for years. Enforcement of the Real Estate Settlement Procedures Act (RESPA) by the CFPB has been on the rise and MSAs and ABAs are squarely within the CFPB's sights. While both arrangements are lawful under RESPA, brokers and agents, now more than ever, need to be sure their practices are RESPA compliant.

Sometimes LOs wonder about a space rental within a Realtor's office where it is strictly a square footage rental of an office and no furniture or services are provided. Attorney Brian S. Levy with Katten & Temple, LLP reminds us that, "The analysis on desk rentals/office leases is similar to the MSA analysis since both rely on the 8 (c) (2) exception to the referral fees prohibition (goods, services or facilities provided). Many believe the office lease idea is less risky than MSAs because HUD issued specific guidance on the topic in 1996 (rent must be at market rate without regard to referrals), but the CFPB showed in the PHH case that it is not shy about ignoring prior HUD interpretations on 8 (c)(2). It is always best to examine the specific facts and circumstances with your legal counsel. Of course, you will want to make sure that you are paying no more than actual market rate for the space and that you are actually using the space too.  A third party valuation can be helpful on the market rate question."

Yes, on October 8 the CFPB issued its Compliance Bulletin 2015-05 addressing RESPA Compliance and Marketing Services.  By its terms the bulletin "provides an overview of RESPA's prohibitions against kickback and unearned fees and general information on MSAs, describes examples of market behavior gleaned from CFPB's enforcement experience in this area, and describes the legal and compliance risks (it has) observed from such arrangements."

Experts felt that the Bulletin offered little additional guidance from the CFPB'S previous enforcement actions, and is as notable for what it does not say as for what it does. It describes arrangements that violate Section 8(a) of RESPA because compensation for referrals is paid to or from a settlement service provider under the guise of payment for marketing services where the compensation is closely and directly dependent on referrals made.  

The CFPB also contended that "independently established market-rate compensation for marketing services, alone, does not suffice to ensure the legality of an MSA," [which is the position taken in the recent CFPB enforcement action against PHH].  Notably, the CFPB does not hold explicitly that MSAs may not be established and conducted lawfully under RESPA, nor does it broadly condemn such agreements, as some in the industry urge. With the PHH matter on appeal, the Bulletin, unsurprisingly, does not offer any guidance regarding the facts and circumstances of a lawful arrangement nor describe expressly those factors that would distinguish a lawful MSA from one that is unlawful.  The final word on whether the CFPB's position that market-rate service agreements are lawful without more, or if other factors apply, and if so what those factors might be, is presently in the hands of the appeals court addressing the PHH matter.

So the Bulletin merely offers the unremarkable perspective that given the uncertainties about the contours of lawful MSAs, concerns remain about whether MSAs can be used in ways that would "evade" the requirements of RESPA, and simply recommends that parties carefully consider the legal and compliance risks, and weigh those against the benefits, arising from MSAs.

The CFPB filed its reply brief in the PHH matter, responding to PHH's arguments and those offered by numerous amici who have filed briefs opposing the CFPB's position. After that the Court will rule, likely to be sometime in 2016. Yes the CFPB filed its reply brief in the PHH case, responding to PHH's arguments and the numerous amicus briefs opposing the CFPB's decision. NAR reported that, "Contrary to some media and other commentary about the CFPB's intent to outlaw all MSAs, the CFPB acknowledges in its brief that not all MSAs are inherently unlawful. The Court is expected to rule in 2016."

As one would expect the CFPB is pushing back against a lawsuit from PHH Corp. that claims the agency erred in overturning an administrative law judge's recommendation to limit the amount of penalties it could face. Remember that an administrative judge ruled this summer that PHH had to pay $6.4 million for its involvement in an alleged reinsurance kickback scheme. But CFPB Director Richard Cordray overruled the recommendation, claiming it was too lenient for violations of the Real Estate Settlement Procedures Act.

Now the CFPB said a disgorgement that low ($6.4 million) would not effectively penalize the lender. It is seeking to force the company to disgorge $109 million, the total amount of money the agency claims lenders received from the kickback scheme. "Although the order requires PHH to disgorge $109 million, that amount is a small fraction of the kickbacks PHH received...and is merely a disgorgement of funds PHH should never have received in the first place," according to the CFPB brief.

Much of the industry is watching this case since at some level it involves the legality of marketing services agreements (MSAs) between lenders and other vendors. For example, in an amicus brief filed with the D.C. Circuit Court on Oct. 5, the National Association of Realtors said it was concerned with the CFPB's position, arguing it could disrupt MSAs between lenders and real estate brokers. "In light of RESPA penalties, the director's decision in this case represents an unfair and unprecedented departure from substantial, uniform precedent and agency guidance. On behalf of its members, NAR respectfully requests that the decision be reversed and vacated," NAR wrote.

One New Jersey broker wrote to me echoing the sentiment of many: "I think most in the industry have little issue with the CFPB going after MSAs. Sure those making money off the move them but the rest view them as anti-competitive. Making an example out of one company seems to be the CFPB s modus operandi to send a message. But I have a major issue with the CFPB's thinking that they have the ability to ignore a judge's order. Dodd Frank established the CFPB as an independent agency with independence far beyond what has ever been established before. In reality, with no congressional or White House oversight, only the judiciary is afforded any oversight and that comes with massive financial monetary restrictions. If the CFPB is beyond judicial oversight they will be viewed by some extremists as an independent nation with access to our FRB budget."

In general NAR is concerned with the topic. For example in a recent convention it had a special education session on MSAs ("Marketing Services Agreements (MSA's) and Affiliated Business Arrangements") where RESPA attorney Phil Schulman, a partner at K & L Gates, discussed the latest developments in CFPB enforcement of rules related to MSAs and affiliated business arrangements.

Prior to that, back in July, NAR wrote, "NAR will continue to defend properly drawn and implemented MSA's. NAR will continue to press CFPB for specific guidance on what forms of advertising are allowable and under what conditions."

Turning briefly to the markets, the Federal Home Loan Bank of San Francisco reported that the Cost of Funds Index for September reached 0.651 percent. This is up slightly from the August index of 0.639 percent. There were 11 institutions that reported COFI data for September. Changes in interest rates on ARM loans offered by financial institutions are tied to changes in the COFI.

Monday was more proof that the stock and bond markets don't always move in the same direction. The S&P dropped 21 and the Dow dropped 180 points yet bonds barely budged. Our $26 billion 3-year note auction was poorly received, drawing the lowest bid-to-cover ratio in years. Besides that there was no news aside from some jawboning in Europe about deposit rate cuts and a selloff in Portugal for political reasons.

There isn't much in the way of scheduled news today either. We've had the October Export Prices ex-ag. and Import Prices ex-oil (-.5% - inflation continues to be subdued), and coming up is a $24 billion 10-year note auction. By the time the MBS traders hit the subways and trains Monday the 10-year sat at 2.34% and this morning we're at 2.34% with agency MBS prices practically unchanged. Don't forget that the bond markets are closed tomorrow for Veteran's Day. Speaking of which...

Jobs and Announcements

In company personnel news Valuation Partners, a leading National AMC, has recently made two strategic hires to prepare for future growth. Jim Davis, Loan Servicing Executive, and Dave Raskin, Chief Valuation Officer, have joined the firm effective November 1. Both individuals are seasoned professionals in their respective fields. Bill Fall, CEO, observed, "Both individuals reflect positively on our continued commitment to Legendary Quality in Valuation products and services." Jim Davis has over 25 years of Servicing experience which including leadership activities in administration, operations and government affairs/industry relations. He has had experience in residential mortgage lending firms with portfolios ranging from 20,000 to over 2 million loans and staff sizes to over 1,000. Dave Raskin has over 30 years of experience in the valuation industry. He is licensed as a certified residential appraiser in CA and AZ and has extensive experience in product management, quality assurance, and process flows. For additional information, please contact Clint Reinhardt- SVP- National Sales and Marketing Manager.

On the retail side of things Frost Mortgage seeks a Branch Partner in the San Diego area. "Frost's entrepreneurial operating platform and revenue sharing business model is worth your serious evaluation. Click here to schedule a confidential interview with Greg Frost."

The California MBA is partnering with the California Land Title Association on a follow up TRID webinar. The webinar is 90 minutes and starts today at 1:30PM PST - California MBA members receive a discounted registration fee. The webinar covers topics such as "Implementation Challenges and Solutions in Issuing the Loan Estimate and Processing the Loan" and "Implementation Challenges and Solutions in Issuing the Closing Disclosure and Closing the Transaction". Contact Dustin Hobbs with any questions!

The American Land Title Association (ALTA) is now offering a health insurance program that brings innovative employee benefit solutions to firms in the land title industry through its partnership with Arthur J. Gallagher & Co. "The program has been developed to offer benefit solutions with cost-saving opportunities that incorporate unique offerings designed exclusively for ALTA members. Many participating companies will have the opportunity to achieve cost savings on their health and welfare benefit coverage...The program will also provide ALTA members with insurance options and pricing typically available only to large companies. By leveraging the collective buying power of ALTA's more than 6,000 member companies and the strength of Gallagher's expertise and relationships, ALTA will be able to offer custom solutions to small-to-mid-market firms, which describes the vast majority of the nation's title agencies. Any questions should go to Cornelia Horner, ALTA's chief operating officer, at 202-261-2941.

Don't forget that ALTA also recently created a Best Practices Assessment Guide and FAQ resource. The Title Insurance and Settlement Company Best Practices are intended to help companies highlight practices the industry exercises to protect lenders and consumers. The resources should also help the industry meet the demands of lenders by providing thorough guidance about how to prepare for and undergo a best practice assessment.