As businesses grow and seek to add new sources of revenue, they naturally tend to form beneficial relationships with other companies — and these relationships are often regulated by the state or federal government.

Real estate settlement service providers are governed by the Real Estate Settlement Procedures Act (RESPA), which is in turn regulated and sometimes enforced by the Consumer Financial Protection Bureau (CFPB). However, be aware that other parties may sue for violations of RESPA.

Before delving into the issues under RESPA, a definition will be useful.

Settlement services are provided in relation to a real estate settlement, which includes title searches and examinations, providing title insurance and legal services, certain inspections, loan originations, and the provision of credit reports, to name a non-exclusive few. These services must relate to a federal mortgage loan. [1] Clearly, many types of businesses can fall under the scope of this definition.

For the sake of this article, assume a real estate company exists called Rook Realty, and its owners would like to do business with a title insurance company called Bishop Insurance. Before it engages in any contractual relationships, it must be aware that the CFPB and RESPA impose decidedly strict guidelines on the nature of those relationships, under the guise of protecting consumers.

A common contract between Rook and Bishop, or similar companies, is a Marketing Services Agreement (MSA). A typical MSA provides that a real estate broker market the services of a title company (or other settlement service provider) for a fee. However, the CFPB has taken action and issued warnings against referral fees and kickbacks, which are illegal under RESPA. [2]

For example, Rook’s MSA with Bishop might provide for customer referrals in exchange for a fee based on the number of referrals — this referral fee is not allowed. Or the MSA might allow Bishop to make a presentation to Rook’s customers — this is also not allowed.

Despite the CFPB’s scrutiny of referrals, MSAs can still be compliant with RESPA, and Rook and Bishop can avoid lawsuits. To be safe, the Rook-Bishop MSA should adhere to the following guidelines:

1. The MSA should say there is no agreement or understanding regarding referrals. Rook and Bishop’s MSA cannot say, “Rook hereby agrees to refer its clients to Bishop in exchange for 6 percent of any profits resulting from such referral.”
2. It should avoid terms like “exclusive” and “preferred.” The MSA must not say, “Signing this MSA indicates Bishop’s intent to be listed as one of Rook’s preferred vendors, with exclusive access to Rook’s customer lists.”
3. It should not allow for direct sales pitches to customers. “Rook hereby agrees to allow Bishop to offer a 15-minute presentation to Rook’s customers.” Statements like this cannot be used.
4. The MSA should avoid language that implies payment for access. See the example under guideline 2 above.
5. Service providers can’t pay for endorsements.
6. General informational emails regarding service providers are acceptable if they’re not direct pitches to single customers. In other words, it would be unwise for Rook to send to a client an email with the subject, “Check out Bishop’s title services.”
7. Social media advertisements and website banners are generally acceptable. Rook’s website may include Rook’s logo, in addition to any other logos of settlement service providers.
8. Kiosks or video displays are safe as long as they’re publicly posted, and if a video is posted online, it must be available to all site visitors. Similarly, printed materials like signs and marketing pamphlets should be in public locations. Various service providers’ fliers in Rook Realty’s lobby won’t cause any issues with the CFPB.
9. The majority of a company’s marketing cannot be directed toward other service providers with the goal to establish more MSAs. In other words, Rook should not advertise its marketing services to a greater degree than its realty work.
10. Bishop must not pay above fair market value for the services that Rook provides. Overpayments will be treated as illegal kickbacks.
11. In the same vein as guideline 10, it may be beneficial to hire an independent third party to appraise the value of the services provided. In the event that either party is sued for violating RESPA, they’ll be able to demonstrate that the fees are at or below fair market value.
12. Disclose the existence of the MSA between Rook and Bishop to all customers.

In short, Rook may market Bishop to customers, but it must be careful about the form that the marketing takes. One source suggested that realtors use a script when making a referral. It could sound something like: “Our in-house lender does a good job and has good rates; however, you’re not required to use them, and I encourage customers to shop around.” [3]

Note that MSAs with non-settlement service provider companies would not fall under the purview of RESPA. For example, Rook should be reasonably safe when it refers customers to a landscaping company, Kings Exteriors.

Also, be aware that RESPA violators can be fined up to $10,000 and/or imprisoned for up to a year. The statute provides for damages in the amount of three times what a person was charged for settlement services. [4] In order to best avoid these unpleasant repercussions, companies like Rook and Bishop should strive to follow the 12 non-exclusive guidelines above. And as always, have an attorney review any MSAs before you sign.

Sources

1. https://www.inman.com/2015/11/03/why-the-marketing-service-agreement-is-modern-day-extortion/
2. https://www.upcounsel.com/marketing-services-agreement
3. http://www.mortgagecompliancemagazine.com/marketing/marketing-services-agreements-make-sense/
4. https://www.realtrends.com/blog/the-dos-and-dont-of-marketing-service-agreements/
5. 12 U.S.C. § 2601, et seq.
6. CFPB logo, WikiMedia Commons
7. House vector image, GoodFreePhotos
8. Checklist image, Flickr

Footnotes

[1]          12 U.S.C. § 2602(3).

[2]          12 U.S.C. § 2607.

[3]          https://www.inman.com/2015/11/03/why-the-marketing-service-agreement-is-modern-day-extortion/

[4]          12 U.S.C. § 2607(d).