October 8, 2020|CFPB, Mortgage Industry, Regulation by Enforcement, RESPA
News flash! MSAs are legal.
On October 7, 2020, almost exactly 5 years to the date after the Richard Cordray-led CFPB issued it, the CFPB officially withdrew Compliance Memo 2015-5 (MSA Memo). In other “news”, Generalissimo Francisco Franco is still dead, you grill fish first on the side that will be displayed (not usually the skin side) and the state of Wisconsin finally gave up its claims to the Upper Peninsula of Michigan[1].
The 2015 MSA Memo was a poorly reasoned and hastily prepared memo[2]that lambasted marketing services agreements (MSAs) for violating RESPA. It caused tremendous distress for the industry in its mischaracterization of these legal arrangements. People are tired of hearing me say how the CFPB was way out over its skis in its RESPA interpretations during the Cordray era[3], but the MSA Memo was Exhibit A in my diatribes. Through the PHH case, however, the DC Circuit thoroughly discredited the Cordray era RESPA interpretations, so rescission of the MSA Memo was, at least in my mind, a fait accompli.[4]Still, flying a plane isn’t the same as riding a bicycle,[5]and it’s nice that CFPB officially recognized that.
FAQs means what again?
Meanwhile, the CFPB took it a step further and acknowledged in updated FAQs that MSAs are in fact legal (if done properly) and identified what is needed to have a compliant MSA. I generally like to provide new insights in this blog, but these FAQs seem designed to mostly just change the tone against MSAs caused by the MSA Memo and to confirm that MSA compliance (under the Section 8 (c)(2)/services-rendered exception) is the same as was identified by the PHH case and HUD’s pronouncements on it years ago. That is, you can pay for actual, necessary and distinct services provided by a referral source as long as you pay no more than the reasonable value of the services. So, Nothing to see here folks, please disperse.[6]
Not so fast Levy. We want insights.
Of course. How could I not have thoughts on the first RESPA guidance from the CFPB in 5 years? Yes, there’s (avoidable) mischief in these FAQs and some of my RESPA-nerd peers are already beginning to identify some of that.[7] It seems that the CFPB was reluctant to go so far as current SCOTUS Justice Kavanaugh stated in his DC Circuit opinion in PHH that when it comes to paying for services rendered, “Nothing means nothing”.
CFPB’s FAQs, while inferior to the law as stated by the DC Circuit still cryptically[8]hold out that if the MSA is really a disguised agreement about referrals[9]that it won’t be compliant. While the CFPB under a Director like Richard Cordray could potentially drive a truck through that “disguised referral agreement” hole, for now, it’s a relatively minor point and one that I actually think is good for holding MSAs accountable to the goals of RESPA. But, remember your narrative….
Be careful what you wish for…,
While I have found it is rarely professionally or personally endearing to point out when your good advice was not taken, I must say that getting “guidance” from a regulator can sometimes be worse than living with ambiguity, especially when the case law is strong like PHH. Speaking of worse, however, while I think CFPB adequately solved the MSA confusion created by the MSA Memo with the new FAQs, wholesalers and mortgage brokers might want to take a deep breath, read on carefully and then run to Washington with your lobbyists in tow. What I describe below is an ambiguity that must be fixed.
The problem I see is that these FAQs could break wide open the issue I posed in these Musings back in February with RESPA and the mortgage broker business model as practiced today. How so, you ask? Well, unlike the MSA Memo which never defined what an MSA was, these FAQs are explicit,
“Marketing services agreements, or “MSAs,” are agreements that commonly involve an arrangement where one person (or entity) agrees to market or promote the services of another and receives compensation in return. MSAs may involve only settlement service providers or may also involve third parties who are not settlement service providers.”
A definition of MSA was needed, but that’s a really broad definition. In fact, mortgage brokering activities could fall squarely within the definition of an MSA. The FAQs, however, didn’t really mention mortgage brokering and, surely[10], CFPB never intended to include those activities in the scope of its guidance. But the RESPA FAQs took it a step further with the following:
“Whether a particular activity is a referral or a marketing service is a fact-specific question for purposes of the analysis under RESPA Section 8(a). …., referrals include any oral or written action directed to a person where the action has the effect of affirmatively influencing the selection of a particular provider of settlement services or business incident thereto by a person paying a charge attributable to the service or business. 12 CFR § 1024.14(f)(1). …
In contrast, a marketing service is not directed to a person; rather, it is generally targeted at a wide audience. For example, placing advertisements for a settlement service provider in widely circulated media (e.g., a newspaper, a trade publication, or a website) is a marketing service.
MSAs that involve payments for referrals are prohibited under RESPA Section 8(a), whereas MSAs that involve payments for marketing services may be permitted under RESPA Section 8(c)(2), based on the facts and circumstances of the structure and implementation.”
Throwing brokers out with MSA bathwater
So, if mortgage brokers are an MSA, they better not get payments for referrals or get paid for marketing to individuals. Good luck with that. Keep in mind that there is no lender to lender RESPA exception like realtors have[11]. Further, there’s no “except for mortgage brokers” statement in these FAQs, or even a mention of HUD’s (party like it’s) 1999 Policy Statement or the 5 out 12 services requirement etc., which enabled mortgage brokering to exist under 8 (c)(2) as a payment for services rendered. Instead, CFPB flat out says MSA compliance is a fact specific question so long as someone is doing marketing to a broad audience. If you’re getting paid for referrals, however, the FAQs say all bets are off and it can’t be compliant. Yet, wholesalers only pay the broker if the broker refers a closed loan. That sure sounds like getting paid for the referral and not for services. Would a wholesaler pay a broker to market for it if loans went to another lender?
Avoiding unintended consequences.
These FAQs apparently came as a complete surprise to those who follow the CFPB closely. So, it’s unclear if there was any input from industry, trade associations, consumer groups or any of the other “usual suspects” before publication. Perhaps if CFPB had vetted these FAQs publicly before issuing them, and issue such as this mortgage broker concern could have been avoided. Still, FAQs are not legally enforceable rules or subject to notice and comment and are just to be used as interpretative guides. That said, I think it is reasonable to worry about plaintiff attorneys and perhaps a new CFPB Director (or a former one) looking to put the wholesale/broker channel under the RESPA microscope again using these FAQs as fodder.
[1]Michigan was given the UP out of the Wisconsin Territory as recompense for losing Toledo in a citizen fought battle with Ohio in 1836. Had Michigan won that battle, the UP would probably still be part of Wisconsin and Toledo would be in Michigan. Seems like Ohio got an even shorter stick than Wisconsin in that deal. To my Toledo based readers, I apologize, I get Toledo mixed up all the time with Cleveland. OK, now that I’ve insulted a good chunk of the state of Ohio (Cincinnati you’re next), let me please remind you that Ohio gave us Richard Cordray, the ultimate source of the MSA Memo in the first place.
[2] The CFPB is typically much more professional, measured and analytical in its work than reflected in the MSA Memo.
[3]You can hear me yack on further about the latest in RESPA with some other RESPA-fluent folks at RESPRO’s Virtual Fall Conference on November 5 or at the MBA’s virtual Regulatory Conference on November 9.
[4]The reason I took French in high school was so I would know what words like this meant- see also, raison d’etre and soupe du jour.
[5]The actual quote from the 1990 movie Airplane! is, “Striker, listen, and you listen close: flying a plane is no different than riding a bicycle, just a lot harder to put baseball cards in the spokes.”
[6] I realize this was a Naked Gun reference, but you got to love the Leslie Nielson character in both movies.
[7]See e.g., https://www.consumerfinancemonitor.com/2020/10/08/cfpb-issues-respa-section-8-faqs-and-rescinds-2015-marketing-services-agreement-bulletin/and https://www.garrishorn.com/blog/2020/10/7/cfpbs-new-faqs-on-respa-section-8-and-msas-is-everything-old-new-againnbsp
[8] Hat tip to fellow RESPA-nerd attorney Rich Horn for his extensive use of the word “cryptic” in his article supra.
[9] This is how CFPB keeps RESPA a crime of intent where narrative is critical.
[11]My February 2020 Musing on this topic specifically suggested getting CFPB to create a licensed lender to lender exclusion as a durable solution to the problem. At a minimum, a clarification on the applicability to mortgage brokers is needed.