Admittedly, I can occasionally get a little off-brand Musing about things like duties, deference, or ducks. Yet, I know many of you subscribed for my more focused mortgage regulatory content delivered with snarky, cynical, yet insightful analysis.[1]In particular, my RESPA takes have been known to be delivered with an extremely sarcastic tone, but CFPB overreach on RESPA is dead serious and, unfortunately seems to be becoming a recurring problem, so here we go again.
With that in mind, by now you’ve probably heard about last week’s Freedom Mortgage’s RESPA Consent Order with the CFPB and might be looking for my take on it. RESPA is a two-way violation,[2]so I should also note that a real estate company involved in marketing services agreements (MSAs) with Freedom Mortgage also entered into a similar RESPA consent order with CFPB.
Anyone who has attended the Mortgage Bankers Association Annual Conference in recent years knows that Freedom Mortgage has sponsored some great free concerts with notable artists. Freedom typically offers wristbands that permit entry to the concert to friends of Freedom Mortgage or anyone else who asks nicely at their booth. Knowing that, it is important to highlight that in addition to MSA and other violations, CFPB’s recent Consent Order took Freedom to task for giving settlement service professionals tickets to sponsored entertainment events for free. “Uh oh”, you say, “Are wristbands to free concerts the same as tickets?!!” That is, do thousands of mortgage people need to be worried that these Consent Orders put them in RESPA jeopardy for attending one of Freedom’s sponsored concerts at industry conferences, like the 2021 Pitbull concert I attended in San Diego?
This paragraph is 99% sarcasm
Settle down people. First of all, everyone knows there’s no RESPA violation without giving or receiving a thing of value[3]and a Pitbull concert isn’t a thing of value.[4] Free tickets to Taylor Swift, Beyonce or even Yuja Wang might get you in trouble with the CFPB, but Pitbull?; I doubt it.[5]This year, Freedom is sponsoring Maroon 5 at the MBA Annual in Philadelphia (home of the Liberty Bell and symbol of freedom-thus my photo choice-were you hoping for a Pitbull picture?) so you might want to get a legal opinion before putting on that wristband again.[6]
But seriously-some RESPA takes
Fortunately, and in all seriousness, most MBA convention attendees can still feel free to show off their “moves like Jagger” because Freedom’s Consent Order did not criminalize[7]attending Freedom’s free sponsored concert at the MBA Annual.[8] Moreover, MBA’s Conference Code of Conduct doesn’t prohibit giving or accepting free stuff from other members either[9].
The Consent Orders did, however, identify many issues with the RESPA compliance[10]of Freedom’s “Traditional Retail”[11]marketing efforts to obtain referrals from realtors.[12]Yet, most of the concerns raised in the Consent Order should be self-explanatory. For example, it shouldn’t be RESPA rocket science to know that giving realtors free access to a subscription service providing property data they would otherwise have to pay for is going to be seen as a thing of value offered in return for referrals. That is especially true when you couple that access with requirements to be “paired” with a retail loan originator from your company to gain such access. Perhaps even more obviously problematic is when you deny access to sponsorships based on whether referrals have been made. This is RESPA 101 stuff that most compliance folks would recognize immediately.
Off the RESPA rails (again)
One key take-away from the Consent Orders is that while CFPB still can’t seem to find the 8 (c)(2) exception for services rendered (it can also be found at § 1024.14 (g) of Reg. X) in its consent orders[13], there is an express acknowledgement that an MSA can be compliant if it involves payment to realtors for “marketing to consumers.” But the Consent Order’s acknowledgement being limited to “marketing to consumers” is also where the CFPB begins to go off the rails (again) in its RESPA interpretations, listing multiple things as problematic without any connection to the RESPA anti-kickback law they claim to be enforcing.
Marketing to referral sources
For example, CFPB identifies the following in the Freedom Consent Order’s list of “findings and conclusions” that its MSAs were used to pay for referrals,
“…, some of the MSAs also required the real estate broker to promote Freedom to the broker’s own agents. For example, certain agreements required the brokerage to “conduct E-mail marketing campaigns” and “conduct direct mail marketing campaigns” directed at the broker’s agents, in addition to the home buying public.”
This particular “finding and conclusion” is baffling to me[14]. Many retail mortgage companies get the bulk of their business from referral sources like realtors (as opposed to seeking consumers directly), so there is a legitimate business need to market to those referral sources. Is CFPB now saying in this Consent Order that any marketing to realtors (or other referral sources) seeking referrals is a RESPA violation? What is the thing of value to a realtor in getting an email or letter solicitation from a lender? CFPB states the noted fact as if it were a violation, but there is simply no requirement in RESPA that marketing expense be directed only to consumers.
CFPB expressly defined Freedom’s Traditional Retail business as seeking referrals from realtors (see footnote #11), yet then seeks to suggest that marketing to those referral sources violates RESPA. Does CFPB think that realtor broker owners (who are getting squeezed on profitability by the commission split demands of their 1099 independent contractor brokers) are just supposed to give away their valuable mailing lists and access to their brokers for nothing? As I have said time and time again, how one compliantly markets to referral sources is all about narrative, but CFPB’s effort at changing RESPA interpretation through regulation by enforcement about marketing to referral sources being illegal is without a leg to stand on.
Tracking marketing results and use of smartphone app
Similarly, CFPB totally fails to connect the RESPA violation dots on the following findings that, taken alone, seem totally legal:
1. “Freedom’s Traditional Retail Unit sometimes documented the number of referrals that had been made when tracking performance under the MSAs.”
RESPA does not make it illegal for a business to assess the return on investment of its advertising. A compliant MSA pays for advertising and marketing services just as any other company would pay for a newspaper ad or billboard. If the ad spend doesn’t generate business, why keep paying for it? Varying the payments based on referrals, however, could be problematic under RESPA, but that wasn’t alleged by CFPB in the Freedom Consent Order and tracking advertising success alone can’t possibly be illegal.
2. Freedom also encouraged its MSA partners to use a third-party smartphone app, which Freedom’s Traditional Retail Unit loan officers would share with the MSA brokerage’s agents. The agents would then share the app with their clients. The app, as shared with the clients, featured the Freedom loan officer’s headshot and Freedom logo at the top, and included buttons where the client could directly contact the Freedom loan officer for assistance.”
There is no allegation here that the smartphone app is somehow a thing of value to the real estate agents, and seems more like a benefit to Freedom to facilitate customer communication. So again, I fail to see the RESPA problem with this, and I can’t even think of a way to change the CFPB’s narrative to make it sound bad.
Still, clear violations alleged
Regardless of the Consent Order’s RESPA overreach, CFPB claims to have unearthed problematic facts for Freedom and its MSAs summarized by the following basic finding that, if true, are problematic:
“Freedom’s payments made to the real estate brokerages through MSAs were both structured and implemented to generate mortgage referrals, rather than compensate the brokerages for any marketing services they actually performed. Freedom’s payments that it gave to the brokerages and that the brokerages accepted bore no reasonable relationship to the net market value of any marketing services performed or provided.”
Likewise, CFPB found that Freedom “provided subscription services, meals, beverages, and entertainment under an agreement or understanding to receive referrals.” Again, these are RESPA 101 type claims. So, despite its overreach and while damning to Freedom[15](and failing to mention 8 (c)(2))[16], the Consent Order ultimately offers the same roadmap to MSA compliance that I and other knowledgeable RESPA attorneys[17]have been encouraging since the CFPB took an interest in RESPA upon its inception in 2012. Namely, pay no more than reasonable value for actual, necessary[18]and distinct services (and make sure you get what you pay for).
Maui fires
On an unrelated, but important note… After personally having just been to Hawaii two months ago to speak at the annual meeting of the Mortgage Bankers Association of Hawaii, I was saddened and horrified by the terrible fires on Maui. My heartfelt thoughts and prayers go out to everyone on the islands impacted by this tragedy and especially for anyone with loved ones or homes lost. If you are similarly moved, please consider giving to any Hawaiian charity, but in particular consider:
https://www.hawaiicommunityfoundation.org/make-a-gift (select Maui County Strong) or Red Cross (Select Hawaii Wildfires)
RESPA nerd finale
Finally, just to prove I took the time to read the whole thing, can anyone explain why Par. 50 (g) in the “Recordkeeping” section of the Freedom Consent Order provides a parenthetical carve-out from the Traditional Retail unit’s recordkeeping requirements that “(exclude[es] independent mortgage brokers that partner with [Freedom’s] wholesale channel)”. It would seem that exclusion would be unnecessary given how the Traditional Retail Unit was defined, but I’m hoping for some “wisdom of the crowd” to help me out here.
[1]Many of you signed up a long time ago, but just now have been added to subscriber list. This may be because you failed to confirm the subscription with a reply email, but I have, nevertheless, terminated all of my IT staff due to my distress over the delay.
[2] It is a RESPA violation to give or to receive a thing of value in return for a referral of settlement services.
[3] Unfortunately, RESPA has no wristband exception to the free ticket concern, but it’s still ok for other reasons. (See fn. #8 below)
[4] Of course, I’m kidding here. I do not intend to offend Mr. Worldwide or his fans. He just happened to fit nicely with the joke here.
[5]Hat tip on this timeless RESPA joke to two retired RESPA gurus: Phil Schulman who used to always use tickets to the Washington Wizards as his “not a thing of value” go to example (sub-footnote, it was the Washington Bullets at the time) and Don Lampe, who recently informed me in light of these consent orders that Duke football tickets similarly have no value. Miss you guys. How’s your golf game?
[6] Still kidding.
[7]RESPA has criminal penalties. As a reminder, defendants will want to consider the rule of lenity as a defense to any RESPA claim that CFPB brings based on its arbitrary or unsupported interpretations.
[8]RESPA does not apply to true secondary market transactions, so correspondents, vendors and other professionals, (including lawyers like me) attending Freedom’s concerts have nothing to worry about in terms of violating RESPA. Mortgage brokers who “provide services” to Freedom’s wholesale division, however, might want to seek counsel lest CFPB suggest those services are overcompensated with the excess being in return for referrals. See also, Edition #2: RESPA, a whole(sale) lot of trouble (mortgagemusings.com)
[9] Thank goodness because why else would you talk to all those vendors if they weren’t giving away some free swag? To learn about their products and services?
[10] There may be ways to do similar types of marketing without violating RESPA if your program and narrative are compliant. This is something I often provide guidance on with a legal engagement.
[11] Per Freedom’s Consent Order, “Traditional Retail” means the mortgage origination market segment where loan officers attempt to obtain mortgage origination business directly from real estate brokers and agents.” The Consent Order also indicates that Freedom shut down its Traditional Retail division in 2022, so much of the Consent Order’s remedial provisions are meaningless.
[12]Getting referrals is not illegal. Paying for them, however, is.
[13]CFPB never seems to recognize or even mention the RESPA Section 8 (c)(2) services rendered exception in its RESPA consent orders (see also Prospect Mortgage’s RESPA Consent Order), but controlling DC Circuit precedent most certainly does.
[14]More detail on this finding can apparently be found in the simultaneously issued Realty Connect Consent Order in which it was noted, “The MSA also included an entire section of “SALES AGENT-FACING ADVERTISING ACTIVITIES,” which allowed Freedom’s loan officers to promote themselves at Realty Connect internal meetings, permitted Freedom to directly send emails to Realty Connect agents—including emails where Freedom described Realty Connect as a “referral partner”—and provided that Freedom would host at least one training event per quarter for Realty Connect’s agents. The purpose and effect of Realty Connect giving Freedom privileged access to its agents under the MSA was to maintain or increase the agents’ mortgage referrals.”
[15]Freedom Mortgage. I have previously expressed concerns about CFPB being a threat to our Constitutional freedoms generally, but that is not the topic of this Musing.
[16]Or even the October 2020 RESPA FAQ
[17] You can hear me speak on RESPA at the MBA Compliance and Risk Conference in Washington DC on Sept 10, but you can also hear some great RESPA attorneys at the RESPRO fall conference around the same time (I wish I could be two places at once).
[18]This is where the narrative is critical.