Attorneys Weigh in on MSAs, Builder Incentives, The CFPB, and RESPA
Welcome to Q2! I am attending the NYMBA conference for a few days, but 1,300 miles south, in Florida (aka "God's waiting room"), folks are talking "real estate boom." Tampa now takes the title of the nation's healthiest housing market, at least according to TenX, a real-estate auction and analytics company which rates locations based on a number of key factors, including population and job growth, unemployment rate and wage growth, as well as industry-specific indicators like inventory and construction.
Builder Incentives, RESPA, and
MSAs
Following the Prospect Mortgage Consent Orders there has been a lot of RESPA chatter, including questions about builder incentives. I received this note from Chicago-based attorney Brian Levy (Katten & Temple, LLP) about it.
"The Prospect Orders did not directly address RESPA issues with builder incentives, but many of the same concerns raised in Prospect regarding coupling payments with referral type obligations could be extended to builder/lender relationships as well. At the same time, builders, who are in the business of selling their own homes, are very differently situated than the Realtors in Prospect.
"The Prospect Orders pose a challenge for anyone who couples MSA's or similar arrangements with offering incentives to consumers to use the providers making the payments. The CFPB's conclusion in Prospect was that the payments made by Prospect to the Realtors was in return for referrals, not something else like leads, marketing services, or web advertising etc. The Orders did not analyze whether the payments were for 'services rendered' as would be expected under Section 8 (c) (2) of RESPA and CFPB probably contends that 8 (c)(2) analysis needs to wait for certainty from the PHH appeal. Rather, CFPB simply looked at what else was going on in Prospect's relationships (i.e., payments made by Realtors to their agents, statements made about the relationship, endorsements, exclusivity, incentives etc.) and concluded that the relationships were really just about paying for referrals. Specifically, of concern to the builder incentive question, the Prospect Order suggests that even a prequalification requirement in a Realtor's form agreements (allegedly based on having confidence in only certain lenders' approvals), was likely a subterfuge for a paid referral arrangement. CFPB took the position that any lender's approval is as good as another and even argued that offering a consumer discount by the Realtor was another example of referral activity in return for payment.
"Yet, whether a pre-qual requirement or financial incentive, standing alone, is the same thing as a 'referral' under RESPA remains an open legal question. CFPB staked out a position in Prospect much different from where HUD came down on that issue. The Eghbali Consent Order from last May only adds to the confusion on when a consumer discount can be a RESPA violation. On the other hand, not all incentives to use a provider are coupled with any MSA type payments or relationships. Further, as home sellers, builders have a much stronger argument that it is truly in their best interests to offer incentives to consumers to use preferred lenders, and that is what drives the desire to have an incentive, rather than as an effort to drive referrals for payment. Meanwhile, Affiliated Business Arrangements have a special RESPA exemption that is technically a safe harbor if the 3 requirements are met. For AfBA's, the critical test on incentives is whether the consumer is 'required' to use the affiliated lender. Courts have found that reasonable incentives not to be a 'required use,' so it seems unlikely that the Prospect reasoning would be extended to builders offering reasonable incentives to use an affiliated lender."
Mr. Levy wrapped up with, "Ultimately, a builder (or any referral source) who offers reasonable incentives to consumers to use preferred lenders based solely on confidence in service levels should have nothing to fear under RESPA. Coupling such an incentive, however, with an MSA or similar arrangement, could raise similar issues to Prospect for the CFPB if your narrative isn't strong enough to overcome CFPB skepticism. At that, builders have a much better story to tell than Realtors, but it is imperative that the parties to strategic alliance arrangements understand and can articulate that any incentives are unconnected to any payments." Thanks Brian!
And Shumaker Williams, P.C.'s J. Steven Lovejoy, Esq., writes, "Recently you posted yet another piece on Zillow advertising and, generally, Marketing Services Agreements in the context of possible RESPA issues. You included a 'Top 10 things you need to know before you buy a lead or participate with a referral source in lead generation.' I subscribe to most of those, but have a caveat about 'thing' number 7, which read: 'Paying for a Referral Partners ad to generate leads on any platform, such as print or Internet, is a RESPA Section 8 violation unless you have shared space equal to the percentage you are contributing. For instance, if you pay for 50% of the ad, then you must have 50% of the size of the ad.'
"It's not that simple. If the cost is split 50-50, the size allocation is not the only factor. One must consider the overall content of the ad, its component parts and the respective benefits received from the ad. For example, assume a mortgage company and a realtor get together to sponsor one of those magazines you find at the grocery store with pages and pages of property listings. You might think the realtor gets more bang from the listing ad than the mortgage company. But the mortgage company is unlikely to get business from the ad unless the recipient is firstly interested in the property. So, the portion of the ad that talks about the property benefits BOTH the realtor and the mortgage company. We also need to look, however, at whether the space use, prominence and content of the copy identifying the realtor and the mortgage company are 50-50. Is there roughly equal contact information for both parties?
"In our joint marketing agreements, we also include a monitoring and adjustment clause such that, if, over time, the mortgage company gets little business from the ad in comparison to the realtor, the 'split' of the cost is adjusted accordingly. Even a fair 50-50 split described above in 'thing' #7 could violate RESPA if the mortgage company received little or no business from the ad, in comparison to business received by the Realtor.
"The upshot is that any proposed joint advertising should be vetted with a RESPA-knowledgeable attorney to determine whether there is any significant risk that the arrangement could be considered payment of a referral fee. Moreover, the joint marketing arrangement should be spelled out in a contract that applies these RESPA-derived principles. True joint advertising to the public has not been declared violative of RESPA so long as each party pays a fair portion of the cost, each side gets benefit from the ad, and the benefit is not tied to referrals.
Rob also indicated that the MSA/Zillow discussion has triggered renewed questions about builder incentives to new home buyers for using a preferred, or even related, lender or mortgage broker. I refer you to my January 16, 2016 piece on Rob's blog that analyzes this issue in depth. Nothing has changed on that front since then. RESPA does not prohibit offering a financial incentive to a borrower. That is not a kickback or referral fee, UNLESS the lender directly or indirectly funds the incentive offered to the buyer by the builder." Thank you, Steve!
Capital Markets
One person's opinion is just as good as someone else's, right? Certainly, Fed presidents have been talking about "reducing the balance sheet," e.g., the trillions of dollars of MBS on its books. The Federal Reserve is likely to begin reducing its $4.5 trillion balance sheet in early 2018, JPMorgan economist Michael Feroli wrote in a research note. He expects the Fed to stop reinvesting in mortgage-backed securities next year and to reach its target by early 2024. Projecting things 7 years out? Wow.
Looking at rates, on Friday they stayed in the range we've been for a while despite the Chicago PMI topping expectations for March. And MBS prices held their own. The 10-year note closed nearly .250 better to yield 2.40% while the 5-year note and agency MBS prices improved about .125 by the end of the day.
Looking ahead to this week we have a lot of scheduled news cumulating with Friday's employment figures. Today, besides another spate of Fed speakers, we'll have Markit PMI, whatever that is, along with the March Institute of Supply Management PMI, and February Construction Spending. Tomorrow is February's Trade Balance and February Factory Orders. Wednesday is the usual MBA's survey of last week's apps, but also the March ADP Employment Change, March ISM Services, and March FOMC Minutes. Thursday things continue with March Challenger Job Cuts, and Initial Jobless Claims. Friday is the big kahuna with the March employment numbers. With all that coming up we commence the week with rates not much different than Friday afternoon: the 10-year is yielding 2.39% and agency MBS prices are "unched a bunch."
Jobs and Announcements
For business opportunities, an independent mortgage banker seeks an equity partner to expand its current platform. The Company is licensed in several Western States (including Arizona, Colorado, Hawaii, Idaho, Oregon, and Washington) with a full operations center in California. Approvals include Fannie-Mae, FHA full Eagle, VA and Reverse, and current channels include retail and consumer direct. Ideal candidates include real estate brokerage firms looking to establish an in-house lending division, a mortgage banker looking to increase its footprint in California, or investment firms looking to add a mortgage banker into its portfolio of investments. For a confidential discussion, please e-mail Rob Chrisman; principals only please; specify opportunity.
A retail mortgage banker, based in the Los Angeles area, is seeking a motivated DE underwriter for an Underwriting Manger position. The candidate must have at least 7 years of continuous experience in conventional and government underwriting and guidelines, and their responsibilities will include but are not limited to managing underwriting pipeline and the team, underwriting files sales scenarios, and escalations. Great benefits and positive work environment. The Lender is currently licensed in California but has pending approvals in several other Western states. It is a direct lender/correspondent and a HUD DE and VA Approved office with over 30 LOs. Confidential resumes can be submitted to me for forwarding; please specify opportunity.
"Would you like the opportunity to sell the most disruptive technology in the mortgage industry space? If you are self-motivated, a team player, able to communicate clearly, and have sales and mortgage experience Indecomm Global Services wants you. Indecomm is looking to hire a dynamic Sales Director to represent Indecomm's SaaS technology platforms. If this sounds like something you are interested, please email your resume to Linda Bomar."
The Mortgage Bankers of the Carolina's Executive Director Rhonda Marcum (who was partially responsible for naming my cat Myrtle) is retiring, and MBAC is searching for an Executive Director. "The next Executive Director must have drive, determination, and passion for our industry and our members deserve the best of the best. This person, who should reside in N or S Carolina, must possess or be willing to master strategic planning, budgets, team building, data gathering, growth strategies, assessment, communication, bookkeeping, sales, the website, operations plans goals and objectives for the organization just to name a few. Travel and overnight stays will be required. The salary will be determined by The Board and the job will be very rewarding to the right individual." Contact Candy Nicodin (843-958-1092).
Evergreen Home Loans is growing and looking for a Director of Information Technology. "The qualified candidate will have strong leadership & strategic skills and a passion for supporting a sales culture and promoting a family atmosphere grounded in mutual respect as we continue to grow organically and support the addition of new branches. Must have proven track record with leading the Help Desk, Network Infrastructure, Business Applications Development, Business Intelligence department and with Loan Origination Systems. A moving allowance for qualified candidates to relocate to Bellevue/ Seattle, WA area will be provided. Since 1987, Evergreen's focus has been on providing a WOW full service home buying experience. We originate, fund, and service home loans and have approvals with Fannie Mae, Freddie Mac and Ginnie Mae, and have been one of Washington's 100 Best Companies to work for by Seattle Business Magazine in 2016, 2015 and 2014. Fortune Magazine ranked Evergreen no. 12 in their national survey of best workplaces in finance and insurance and Fortune named Evergreen a 2016 'Great Place to Work for Women.'" Please contact Arlene Evans, Talent Acquisition, or apply online.