Window to the Law: CFPB Consent Orders for RESPA Violations

Earlier this year, two real estate brokerage firms entered into consent orders with the CFPB and paid fines totaling almost $200k for RESPA violations. In both cases, the firms received payments from a mortgage lender that the CFPB found to be unlawful disguised payments for referrals.  In this month’s Window to the Law, we are going to review the conduct that led to these fines and discuss how you can avoid similar allegations.  I am Finley Maxson, NAR Senior Counsel.

The Consumer Financial Protection Bureau, or CFPB, is the agency charged with enforcing the Real Estate Settlement Procedures Act, or RESPA. In February, the CFPB announced four separate consent orders centering around mortgage lender Prospect Mortgage.  Prospect agreed to pay a civil monetary penalty of $3.5 million.  As mentioned above, two real estate brokerages also agreed to consent orders arising from their interactions with Prospect as well as a mortgage servicer.

Here’s what happened.  First, Prospect entered into marketing service agreements, or MSAs, with the real estate brokerages.  While RESPA generally prohibits payments between service providers, an exception in RESPA permits these payments so long as the payments are for the fair market value of the services. Propsect’s MSAs purportedly paid the brokerages a fixed monthly fee in return for the brokerages providing marketing services on behalf of the lender.  However, the CFPB found that Prospect based the amount it paid to the brokers on the capture rate each broker achieved.  For example, if the broker had ten clients who obtained mortgages during a monthmand three used Prospect, then the firm’s capture rate was 30%.  The higher the broker’s capture rate, the higher the payment made to the broker.

Using capture rates to set MSA payments is not the proper way to structure a MSA.  Instead, a MSA should be based on the fair market value of marketing services provided by the broker.  The agreement should not require the broker to market the lender directly to consumers but instead should involve indirect marketing, such as having promotional materials available at the broker’s office or a sign with the lender’s information on it. 

Next, Prospect paid the brokers for consumer leads.  While it appeared that the brokers were simply providing a list of names and addresses to Prospect, the CFPB found that in reality the brokers were actively referring consumers to Prospect’s loan officers.  Additionally, the brokers required all buyers who made offers for the broker’s listings to receive pre-approval from Prospect, even if the buyer was a cash buyer. That requirement was set forth in the MLS remarks. In some cases, the brokers received payments based on the amount of pre-approvals generated by the broker.

Lead agreements are permitted under RESPA if the lead is simply contact information for potential customers.  However, when the party providing the lead affirmatively influences the selection of a particular service provider, it becomes more likely that the lead payments will violate RESPA.  In this instance, the brokers were either referring consumers directly to Prospect loan officers or requiring consumers obtain a pre-approval from the lender and so these were more than simple payments for leads.

Finally, Prospect made desk rental payments for space in the brokers’ offices.  Desk rental arrangements are lawful so long as the payments reflect the fair market value for renting the space.  Here, however, Prospect’s desk rental payments were based on the broker’s promise to endorse Prospect as its preferred lender and also have its licensees promote Prospect’s services to consumers.  In addition, the desk rental agreements allowed Prospect loan officers to attend the broker’s meetings with its salespeople.  Since the payments made by Prospect were not related to the fair market value of the space, these arrangements violated RESPA.

As stated at the beginning, the two brokerage firms paid almost $200k to the CFPB in penalties.  In addition, both consent orders impose compliance requirements on the broker’s salespeople and require the brokers to keep records about their salespeople over the next five years.  Prospect was also sanctioned for paying a portion of the brokers’ salespeople costs for advertising on third-party websites, but the order simply states that the conduct violated RESPA because the salespeople agreed to exclusively promote Prospect in exchange for the advertising cost payments.

NAR has many RESPA resources available to its members. The lesson from these enforcement actions is that you need to comply with RESPA not only in your agreements with other settlement service providers but also in your conduct.

Thank you for watching this edition of Window to the Law.