Who are your bedfellows, and why? The CFPB wants to know

Last week, Bricker & Eckler had the opportunity to speak at the annual conference of the American Association of Residential Mortgage Regulators (AARMR). Most of the regulators and many mortgage lenders were in attendance. The subject was intended to be compliance standards in digital marketing; however, during the question and answer session, the subject quickly changed to questions about the legality of marketing service agreements (MSAs).

Several companies made a big splash last week when they publicly announced that they would no longer allow MSAs, given the Consumer Financial Protection Bureau’s (CFPB) recent actions related to the Real Estate Settlement Procedures Act (RESPA). Thus, the issue of how to craft a lawful MSA that can withstand regulatory scrutiny is on everyone’s mind.

MSAs are often forced upon lenders by unscrupulous real estate agents and brokers, as MSAs are the key to making more money without having to even sell a house. It goes something like this: “Pay me money, and I will refer business to you. I know there is a law that prevents this, but let’s create a way to get around that law. If not, I’ll do business with a lender that will....”

This point was brought home by the National Association of Realtors’ D.A.N.G.E.R Report. The report speaks to “marginal agents destroy[ing] reputations” through unethical conduct and poor training. How perceptive? Real estate brokers putting lenders in situations where they are forced to “pay to play” is one of those unethical issues that create headaches for all lenders, large and small. Real estate agents insisting on expedited closings and ignoring RESPA and Truth in Lending Act (TILA) timing requirements are other issue that plagues lenders.

A lender’s compliance management program is supposed to provide oversight of these issues. But, it is virtually impossible for a financial institution to know everything that may be a factor in its employees’ efforts to obtain business or close a loan. These dangers will be even more problematic after October 3, 2015, when the TILA-RESPA Integrated Disclosure (TRID) becomes effective.

Back to the question: Is a mass exodus from MSAs necessary in order to be RESPA-compliant? Probably not. Is it time for lenders to review the rationale behind MSAs and update policies, procedures, agreements and codes of conduct? Absolutely. The time is now, and there truly is urgency to perform an immediate and thorough evaluation of marketing agreements. For some companies, the risk analysis and review may help determine that MSAs should be forbidden. For other companies, the facts and methods of documenting marketing services may be found to be compliant and safe.

The evaluation of these issues reside in the need for robust compliance efforts for RESPA, TILA, licensing and vendor management and control. So, the answer to the uncertainties of MSAs really resides in the details about how and why a financial institution may find itself “in bed” with a real estate firm. Now is the time to think and to act.

Consumer Financial Protection Bureau, Depository Institutions, Federal Regulatory