On October 7, 2020, the CFPB announced that it was "provid[ing] clearer rules of the road for RESPA marketing service agreements" in the mortgage industry by rescinding its 2015 guidance regarding marketing services agreements (MSAs) and issuing Frequently Asked Questions(FAQs) on Real Estate Settlement Procedures Act (RESPA) Section 8 topics, including FAQs addressing how RESPA Section 8 and the corresponding provisions of Regulation X apply to MSAs.
While this and other recent CFPB actions may indicate a general softened approach toward RESPA Section 8 and MSAs in particular, the FAQs likely will not change how industry participants structure MSAs to ensure RESPA compliance.
How Did We Get Here?
The risk profile of mortgage industry MSAs dramatically changed after the CFPB inherited responsibility for administering RESPA and Regulation X from the Department of Housing and Urban Development (HUD) in 2010. Under the leadership of former Director Cordray, the CFPB brought a slew of enforcement actions alleging RESPA Section 8 anti-kickback and referral fee violations, many of them in connection with MSAs.
This enforcement activity culminated in the issuance of Compliance Bulletin 2015-05, RESPA Compliance and Marketing Services Agreements (2015 Bulletin), which appeared to characterize MSAs as almost categorically engaged in prohibited referral fee activity. The CFPB's aggressive approach appeared to depart from what had long been the industry's interpretation of HUD's standing guidance—that if a mortgage industry participant paid reasonable market value for non-referral services that were actually provided, including marketing services, that payment would not be considered an illegal payment for a referral.
Because the 2015 Bulletin raised alarms about MSA RESPA compliance but provided no actionable guidance for structuring compliant MSAs, the industry responded by largely abandoning MSAs that had previously been presumed to be low-risk, given the 2015 Bulletin's conclusion that "the risks and complexity of designing and monitoring MSAs for RESPA compliance outweigh the benefits of entering the agreements."1
CFPB's Recent Actions Signal Stance Toward RESPA Section 8 Is Changing Again
The CFPB's declaration that it rescinded the 2015 Bulletin because it "does not provide the regulatory clarity needed on how to comply with RESPA and Regulation X" in the context of MSAs is part of a more general trend of RESPA Section 8 enforcement softening.
In January of 2018, the U.S. Court of Appeals for the D.C. Circuit upheld the CFPB's structure as constitutional in PHH Corporation v. Consumer Financial Protection Bureau, but reaffirmed that PHH's captive mortgage reinsurance program did not violate RESPA Section 8 if the mortgage insurers at issue paid reasonable market value, and no more, for captive reinsurance (consistent with previous HUD guidance). Though the D.C. Circuit remanded the case to determine the issue of reasonable market value, the parties sought, and were granted by then-Acting Director Mick Mulvaney, dismissal.
Then, in September of last year, the CFPB issued its first-ever No-Action Letter (NAL) Template to HUD in connection with a RESPA Section 8 issue. (We discuss the CFPB's revamped NAL and NAL template policy here.) HUD had sought a No-Action Letter on behalf of HUD-approved counseling agencies, and a corresponding NAL Template for mortgage lenders, in connection with funding agreements whereby mortgage lenders would pay housing counseling agencies based on whether a borrower made contact with or closed a loan with the lender.
NALs based on the NAL Template provide that the Bureau "will not make supervisory findings or bring a supervisory or enforcement action against the mortgage lender under" RESPA Section 8 and Regulation X §1024.14, or under its UDAAP authority, even though these sorts of funding arrangements could "be construed as a referral" under RESPA, so long as the payments do not exceed what is "reasonable and customary." Two mortgage lenders have already received NALs using the HUD NAL Template.
By addressing some of the regulatory uncertainty that remained around the interpretation and application of RESPA Section 8 in the housing counseling agency funding agreement context, the HUD NAL and NAL Template was another indicator of the CFPB's shifting position with respect to the prohibition against kickbacks and referral fee schemes.
Though Softer in Tone Than the 2015 Bulletin, FAQs Still Provide Little Actionable Guidance for MSA RESPA Compliance
Although the CFPB may have determined that the 2015 Bulletin "does not provide the regulatory clarity needed on how to comply with RESPA and Regulation X" in connection with MSAs, the FAQs do not ultimately provide much clarity either.
The Gifts and Promotional FAQs do provide several concrete, relevant, real-world examples of permissible "normal promotional and educational activities" such as a settlement agent broadly advertising and hosting a prize drawing for previous customers and all local loan originators. But the MSA FAQs do not contain similar detailed concrete examples of permissible MSA structures. Rather, by contrast, MSA FAQ 4 provides examples of MSAs that are prohibited, similar to the 2015 Bulletin.
MSA FAQ 2 does attempt to explain the distinction between referrals (prohibited) and marketing services (permissible "based on the facts and circumstances of the structure and implementation") by using "real" examples—but the examples seem wildly outdated in the age of sophisticated digital marketing. MSA FAQ 2 states that "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."
That example, which is derived from pre-existing HUD guidance, provides little value in terms of evaluating whether marketing services provided by companies that use advanced web-based marketing tools are providing referrals rather than marketing services. The example perhaps creates ambiguity for those who use Artificial Intelligence-based tools specifically designed to target potentially receptive populations of consumers based on complex algorithms. These tools are valuable marketing services—yet they are valuable because they target advertising to a select subset of a "wide audience."
Overall, the FAQs highlight the absence of much-needed official Bureau interpretations of Regulation X's provisions dealing with the prohibition on referral fees and kickbacks. While the CFPB has adopted commentary to a handful of provisions (e.g., escrow accounts; mortgage servicing transfers), commentary to §1024.14 is glaringly missing.
The new FAQs coupled with rescission of the 2015 Bulletin is certainly a step in the right direction, but the industry would benefit from the level of guidance provided by the process of adopting official interpretations to regulations implementing RESPA Section 8.
Make No Mistake, Enforcement Is Still on the Table
The CFPB has made it clear that, despite its rescission of the 2015 Bulletin, "MSAs remain subject to scrutiny," and that it "remain[s] committed to vigorous enforcement of RESPA Section 8." Although Director Kraninger may have rolled back certain regulations, enforcement actions under her leadership have gradually increased over the years and, most recently, have surged. Since she became Director in December 2018, the CFPB has brought a total of 54 public civil and administrative actions, 19 of which were brought in this last fiscal quarter alone.
Further, for financial institutions subject to its jurisdiction, the FDIC has recently aggressively enforced RESPA in connection with MSAs, though in doing so did acknowledge that MSAs can be permissible if the "fees paid bear a reasonable relationship to the fair market value of marketing . . . costs."
Notwithstanding the CFPB's uptick in enforcement activity, none of the recent actions have involved RESPA Section 8. In fact, the CFPB has not filed a RESPA kickback action since 2017, and we have not seen any indicators that this trend is expected to change. Yet, given that MSA compliance with RESPA Section 8 remains a facts-and-circumstances analysis subject to regulatory interpretation, enforcement risk remains a concern.
1 2015 Bulletin at 4.