WBK Industry News - Federal Regulatory Developments

CFPB Issues RESPA Consent Orders Against Mortgage Company and Real Estate Company over Event Tickets, MSAs, and Online Subscriptions

The CFPB has turned its sights back to Section 8 of the Real Estate Settlement Procedures Act (RESPA), issuing a pair of consent orders on August 17, 2023, against a large independent mortgage banker and a real estate brokerage firm, over alleged kickbacks for mortgage referrals.  The Consent Orders provide for civil money penalties of $1.75 million against the mortgage company and $200,000 against the real estate brokerage firm, along with other compliance obligations.

Section 8(a) of RESPA generally prohibits giving or accepting a kickback or any “thing of value” in exchange for the referral of real estate settlement service business.  Settlement services are defined by statute to include, among other things, the origination of a federally related mortgage loan, services rendered by a real estate agent or broker, various title and closing-related services, credit reports, document preparation, appraisals, and loan processing.  Section 8(c)(2) of RESPA provides that “[n]othing in this section shall be construed as prohibiting . . . the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.”

The Consent Orders arose from the mortgage company’s former “Traditional Retail Unit,” which ceased operations in August 2022.  In the case of the lender, the CFPB found (and the lender neither admits nor denies) that the lender engaged in the following violations:

  • Paid for several subscription services and gave free access to those services to real estate agents and brokers (many of whom made referrals to the company).
    • One of these services provided information concerning property reports, sales comparables, and foreclosure data
    • Real estate agents and brokers were sometimes required to be “paired” with a loan officer in order to access these subscriptions
  • Hosted and subsidized events for real estate agents and brokers
    • Paid for food, beverages, and alcohol
    • Some included entertainment
    • Provided free tickets to sporting events, charity galas, other events
    • Events were targeted at new or existing referral sources
      • The company denied requests for event sponsorships from real estate brokerages that did not refer it business
  • Maintained Marketing Services Agreements (MSAs) with more than forty real estate brokerages, among which the CFPB found that there were RESPA violations
    • The CFPB called out in particular MSAs for business-to-business (B2B) marketing (though the CFPB did not use this terminology), where a lender pays a real estate company either to provide access to its own agents or to market the lender to those agents itself.
      • The CFPB contrasts this to paying a real estate company to market to the general public
    • The CFPB also found that the lender encouraged its MSA partners to use a third-party smartphone app that the agents would share with consumers, featuring the lender’s loan officer’s headshot and the lender’s logo, and which included buttons to contact the loan officer directly.
      • Although the Consent Order does not specify why this violated RESPA, it appears that the CFPB considers paying a real estate company to provide this app to its own customers to be a referral of those consumers to the lender (in line with HUD’s 2010 Home Warranty Interpretive Rule, which considered marketing by a real estate agent to the agent’s own individual clients to be a referral, rather than advertising).
    • The CFPB found that the lender “performed most of the actual marketing services covered under the MSAs,” because the lender’s own professional design team and licensed software created the marketing copy, and the lender’s own print shop created the hard copies of co-marketing materials. 
      • The Consent Order does not specify whether the MSA provided for the MSA partners to create and distribute, or merely distribute, the marketing materials.  But it is possible that the CFPB considers the distribution of the marketing materials to be insubstantial in comparison to the compensation paid.
    • The CFPB found that the MSAs “were both structured and implemented to generate mortgage referrals, rather than compensate the brokerages for any marketing services they actually performed.”
      • This reflects a focus on the purpose and commercial reality of the MSAs.
    • The CFPB also found that the payments “bore no reasonable relationship to the net market value of any marketing services the brokerages may have actually performed or provided.”
      • This mostly tracks the legal standard for whether a payment for services is permitted by Section 8(c)(2).
      • But the CFPB does not explain its insertion of the word “net” before “market value.”
        • It is possible that the CFPB is simply misusing an accounting term that is not part of the RESPA analysis.  Nothing in Section 8(c)(2) supports subtraction of costs from a valuation in order to arrive at the fair market value of marketing services.
        • Alternatively, it is possible that the CFPB is inartfully suggesting that the value of the lender’s inputs be subtracted from the value of the co-marketing discussed above.
  • The CFPB also held, as it often does in similar consent orders, that the RESPA/Regulation X violations described above also constituted violations of Section 1036 of the Consumer Financial Protection Act (CFPA), which is Title X of the Dodd Frank Act.

The findings with respect to the real estate company were very similar, and in some aspects more pointed.

The CFPB under Director Chopra, as it did previously under former Director Cordray, uses consent orders like these to signal to the industry what conduct it believes violates the law, instead of going through notice and comment rulemaking or asking Congress to amend the relevant statutes.  This is known as regulation by enforcement.  While consent orders have no formal precedential effect, companies should pay careful attention to them in order to mitigate compliance risk.

In that context, it is noteworthy that although RESPA itself and Regulation X both prohibit giving or accepting a thing of value “pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a real estate settlement service . . . shall be referred,” the CFPB uses different language:  “to create, maintain, and strengthen mortgage referral relationships, in violation of RESPA Section 8(a).”  That is a very broad view of Section 8(a)—and appears to reflect the CFPB attempting to expand the prohibition from requiring an “agreement or understanding” that referrals would be made, to exchanges of value that merely “strengthen mortgage referral relationships.”

These Consent Orders follow the CFPB’s Advisory Opinion earlier this year on Digital Mortgage Comparison-Shopping Platforms and Related Payments to Operators and indicate a renewed and aggressive focus on RESPA Section 8 (an area where the CFPB had been relatively inactive since the D.C. Circuit’s rejection of its understanding of Section 8(c)(2) in the PHH case).  They also indicate a willingness to bring enforcement actions against real estate brokers and others alleged to be on the receiving end of what the CFPB believes are kickbacks.

Mortgage lenders and brokers (both depository and non-depository), real estate brokers, title companies, and other industry participants should take these Consent Orders as an opportunity to examine their own practices and RESPA compliance programs, in particular with respect to MSAs, event sponsorships, and entertainment.