Marketing Service Agreements & RESPA Section 8 In Depth

Moderator: Felicia Bowers, Compliance Manager, CRCM, Homeowners Financial Group

Panelists: Troy Garris, Esq., Partner Garris Horn

Raymond Snytsheuvel, Esq., COO Firstline Compliance

Michael J. Wallace, Esq., President AcuClix

Troy GarrisTroy Garris is a founder and managing member of Garris Horn PLLC. Troy is a business owner’s lawyer, priding himself on a results-oriented, pragmatic approach to addressing legal issues in the financial services world.

Troy deals with federal and state compliance, loan originator compensation, RESPA, regulatory defense, and mergers and acquisitions. In these areas, Troy represents mortgage lenders, mortgage servicers, independent mortgage bankers, banks, homebuilders, and others.

Troy is active in the industry, including being significantly involved with a number of industry associations and currently is a board member of the Texas Mortgage Bankers Association. In 2007, the National Mortgage Bankers Association named him to the Future Leader’s program.

RESPA § 8

RESPA § 8(a)No person shall give/accept any TOV pursuant to agtthat business incident to/part of settlement service involving a FRM shall be referred to any person.

RESPA § 8(c)(2)Section 8 does not prohibit payment for goods or facilities actually furnished, or services actually performed

UDAAP

Unfair1. Act/practice causes/likely to cause substantial injuryto consumers,

2. Injury not reasonably avoidable, AND

3. Injury not outweighed by countervailing benefits to consumers/competition.

Deceptive1. Act/practice/rep/omission misleads/likely to mislead consumers,

2. Consumer’s interp reasonable, AND

3. Act/practice/rep/omission is material (presumed material: explicit claim, cost, purpose, quality, etc.)

Abusive1. Act/practice materially interferes with ability of consumer to understand term or cond of cons financial prod or svc, OR

2. Act/practice takes unreas advantage of: (a) cons lack of understanding of material risks/costs/conditions, (b) inability of cons to protect own interests in selecting/using prod or svc, or (c) cons reas reliance on covered person to act in cons’ int.

MAP Rule

MAP RuleViolation for any person to make any material misrep, expressly or by implication, in any commercial communication, regarding any term of any mortgage credit product, incl, e.g.:

Int/APRFeesVariability of intComparison of rate/payment avail < ½ of time vs actual or hypothetical rate/payment Amount of oblig/credit availAmount, number, timing, etc. of paymentsAssoc with other personSource of communicationOthers

REFERRAL BY ANOTHER NAME IS STILL A REFERRAL

Raymond Snytsheuvel

Affiliated Business Arrangement• Title agent and title underwriter were affiliated

• No Affiliated Business Arrangement disclosure

• Title agent referred business to title underwriter

• Neither entity provided ABA to consumer

• Alleged that because of affiliated arrangement, which was not disclosed to consumers, title agent sometimes collected more than contractually permitted commission when using affiliated title underwriter.

• Key Point: Disclosure your ABA notice and ensure the referring party is paid more than permitted.

Direct Lead Buying• Paid real estate brokers for referring business to

lender• Was EXCLUSIVE deal (could not refer to other

lenders)• Real estate broker companies paid incentives to

their employees for referral to lender• “invest some of the listing lead fees by incentivizing

agents to use us.” – Lender• Key Takeaway: Do not pay for referrals

Marketing Services Agreement• Lender paid real estate brokers for marketing services

• This was allegedly used instead to encourage referral of business to lender

• There was use of “capture rate” – How many loans funded for each real estate broker (like Pull Through rate).

• Capture Rate was monitored and managed monthly to encourage increasing the capture rate

• Payment for MSA was dependent on the capture rate (the lower the rate, the lower the payment).

• Therefore payment for marketing services really was for lead referrals (alleged the CFPB).

• Key Takeaway: MSAs must be closely enforced and monitored to ensure all MSA requirements are met and not a defacto referral payment scheme. NOTE: Where there is a potential for referral, there is high potential for scrutiny of MSA agreement, true practices, and if referrals are occurring (even if technically compliant).

Desk Rentals

• Beyond just “desk rental agreements”

• Requirement included “promote [lender] as preferred lender” and endorse lender

• Value of rental was based on amount of referrals received, and not market rate.

• Key Takeaway: Desk Rental Agreements must be closely enforced and monitored to ensure all agreement requirements are met and not a defacto referral payment scheme. NOTE: Where there is a potential for referral, there is high potential for scrutiny of desk rental agreements, true practices, and if referrals are occurring (even if technically compliant).

Selling Agent Requiring Preapproval by Lender

• Real estate brokers and their agents devised a method whereby listings would require preapproval by lender before offer could be submitted

• Key Takeaway: Do not create environment where there is steering and consumer is discouraged to shop around. Referral and thing of value will be unearthed.

Loan Servicing – Portfolio Retention

• Lender was preferred source lender to refinance out servicer’s borrowers. Servicer would steer borrowers to lender or otherwise indicated they were the preferred partner.

• Lender would refinance those loans out

• Lender would split fee with servicer after closing, plus sell the servicing rights to servicer.

• Key Takeway: Just because you own the loan does not mean you can direct where the consumer goes, or that you can gain fees in the retention refinancing.

Co-Marketing Agreements

• Paid for a portion of the website advertising

• Link to the real estate agent info would include an opportunity for the consumer to inquire about financing, which would direct them to the lender’s loan officer.

• Payment by lender for real estate agent’s website advertisement is a thing of value in return for the referral.

• Key Takeaway: Co-marketing Agreements must be closely enforced and monitored to ensure all agreement requirements are met and not a defacto referral payment scheme. NOTE: Where there is a potential for referral, there is high potential for scrutiny of co-marketing rental agreements, true practices, and if referrals are occurring (even if technically compliant).

Use of Economic Incentives

• Use the lender and get a seller credit or be free of penalty for late closings

• This caused real estate agents to steer borrowers to use lender

• Key Takeaway: Do not create environment where there is steering and consumer is discouraged to shop around. Here it’s not even a requirement, like preapproval, above, and it was actionable. Referral and thing of value will be unearthed.

A Thing of Value

• Loan officer controlled the amount of settlement fees charged to borrowers at the transaction level.

• Some borrowers were charged no fees

• Other borrowers were charged higher fees to cover for the no charge fee transactions

• This made loan officer more successful

• Key Takeaway: A thing of value does not need a direct cash equivalent. Granting discretion in controlling prices for settlement services is transformed to success, which translates to greater income.

FAQ

Question: Are MSAs legal?Answer: They are not illegal per se. CFPB did not like “referrals” even if the underlying relationship looked and was legitimate.

Question: Are co-marketing agreements legal?Answer: See above.

FAQ

Question: Is it ok for a lender to invite real estate agent to provide homebuying seminar to consumers about the home-buying process?

Answer: Depends if lender is paying for the cost of the seminar, and if this is a sales opportunity for the real estate agent.

FAQQuestion: What is the best way to engage in these relationships and ensure compliance?Answer: 1. Don’t engage in them2. If you engage,

1. Partner with an attorney, marketing, sales, and compliance

2. Use 3rd party market valuation company3. Compliance should monitor activity; ensure

everyone is playing by the rules4. Accept scrutiny will come; where there is a

referral, there may be fire (even if you do it right).

MSA Valuation: Policy & Procedures

Independent

Market Rate

Value vs. Price

Not Based Upon Results

Compliance Requirement for MSAs: Valuation & Monitoring

1. Required Staff

2. Marketing Components

3. Verification Protocols

4. Review Process

5. Reporting

MSA Monitoring: Policy & Procedures

Verifiers

Reviewers

Managers

C-Suite

-

1. Required Staff

2. Marketing Components Meet with Real Estate Company/plan marketing: 3 Hours/month

Displays: Outside Main Office and Inside 5 Sales Office

Email: 15% Content, 5,000 Monthly

Direct Mail: 25% Content, 10,000 Monthly

Banner Ads/links on Sites: 10 Websites, 10% of Site

Open House Flyers: 50% content 50 open houses monthly

Meetings with Real Estate Agents: 4 hours monthly

Yes/No

Copies of Marketing Pieces

Pictures of Open Houses

Spreadsheets of Data

Salted Email/Direct Mail

Snap-shot of Website

-

3. Verification Protocols

Yes/No

Objective vs. Subjective

Valuation/Price

Within Total Parameters of Agreement

-

4. Review Process

Management

C-Suite

Regulator

-

5. Reporting

Panel Discussion

Felicia Bowers, Compliance Manager, CRCM, Homeowners Financial Groupfbowers@homeownersfg.com (480) 305-8509

Michael J. Wallace, Esq., President AcuClixmwallace@acuclix.com (813) 933-2200

Troy Garris, Esq., PartnerTroy@garrishorn.com (301) 461-8952

Raymond Snytsheuvel, Esq., COO Firstline ComplianceRaymond@firstlinecompliance.com (949) 683-7500

Thank you, Questions?

Michael J. Wallace, Esq., President AcuClixmwallace@acuclix.com (813) 933-2200

Troy Garris, Esq., PartnerTroy@garrishorn.com (301) 461-8952

Raymond Snytsheuvel, Esq., COO Firstline ComplianceRaymond@firstlinecompliance.com (949) 683-7500