CFPB Takes Aim at Referral Fees

The long-standing practice of banks and mortgage lenders paying real estate brokers and homebuilders for referrals could soon be coming to an end.

Lenders are scaling back, making bold changes to or simply eliminating marketing services agreements after the Consumer Financial Protection Bureau essentially banned contracts that involve any referrals for mortgage products. Doing so, the CFPB said in a consent order last year, is a violation of anti-kickback provisions under the Real Estate Settlement Procedures Act.

At issue is the CFPB's interpretation of a law that has been in place for 40 years.

Section 8(a) of Respa bans the charging or payment of fees in exchange for referrals of real estate services. For years, the industry got around it because of an exception in Respa that allows the payment or compensation for goods or services actually performed, even if there is a referral involved. For example, a real estate firm could refer homebuyers to a lender if the lender provided something of value in return, such as paying for advertising on a real estate firm's website or in its office.

In 2010, the Department of Housing and Urban Development essentially confirmed that interpretation when it published a rule that said as long as the payment is a reasonable value for the services provided, then referrals are legal.

But a September consent order the CFPB issued against a Michigan title agent, Lighthouse Title, has upended the status quo. The CFPB essentially concluded that referrals Lighthouse received are illegal even if they are part of broader marketing contracts. The agency fined Lighthouse $200,000.

That in itself seems like a perfectly valid consent order. But lawyers have parsed the 17-page consent order, and found two sentences that appear on their face to ban marketing agreements altogether.

The CFPB wrote that simply entering a marketing agreement "is a 'thing of value,'" even if the fees paid under the contract are fair market value for goods or services provided. If there is an "understanding that in exchange the counterparty will refer settlement services," it is therefore a violation of Respa, the CFPB wrote.

As a result of the CFPB's reinterpretation of Respa, some lenders have modified the agreements to eliminate any mention of referrals while at the same time clearly documenting the value of other services.

Even the National Association of Realtors, one of the most powerful lobbying groups in Washington, has taken note, crafting a list of "dos and don'ts" for real estate brokers and agents to comply with Respa.

Some experts now think it is only a matter of time before marketing services agreements are eliminated entirely, pointing to the CFPB ruling as well as recent comments from the agency's top officials regarding marketing agreements.

The CFPB's Director, Richard Cordray, said of the Lighthouse case that "quid pro quo agreements for real estate referrals are illegal."

Others argue that the agreements can be legal, but the upshot will be a radical reworking of how lenders, real estate brokerages and others do business with one another

"Clearly in the eyes of the CFPB, marketing services agreements are suspect," said Mitch Kider, chairman and managing partner at the law firm Weiner Brodsky Kider. "The CFPB is maintaining a new position, contrary to the way Respa has been interpreted for years, which could create problems for lenders."

Experts also point to a class-action lawsuit that was certified in January by a Maryland district court as evidence that marketing agreements could soon be toast. That case alleges that a title agent paid $500,000 to real estate agents working for Long & Foster Real Estate over a period of 13 years in exchange for referrals.

Phillip Schulman, a partner at K&L Gates, said marketing agreements can be structured properly as long as any payments are made specifically for advertising, not referrals. He added that if a lender or settlement service provider cannot determine the fair market value for the services it receives, it is likely a violation.

"It's safe to say the CFPB is not a fan of marketing agreements, but that doesn't make them illegal," Schulman said.

The problem, of course, is that lenders will not see much value in marketing agreements if their partners are unable to refer business to them. Some contracts that previously paid real estate brokerages up to $35,000 a month have been canceled altogether. Others with small homebuilders that had been worth $5,000 a month are now being valued at just $500 a month.

Kirk Jaffe, a branch manager in Calabasas, Calif., at RPM Mortgage said the Alamo, Calif., said the Salt Lake City lender is now using a third-party law firm to determine the market value for services received.

"Many of these agreements are in fact legitimate where the Realtor or builder will provide advertisements or space on their web site, and money changes hands for that," Jaffe said.

But he expects pushback from real estate brokerages that for years have relied on payments from so-called in-house lenders in exchange for referrals of homebuyers.

"You're now talking about a lot of revenue to real estate offices with no guarantee of a result," Jaffe said. "Lenders are questioning why they would pay $20,000 a month for a relationship that only closes two deals a month and is valued at much less."

Lawyers who have spent their careers defending banks' and lenders' actions under Respa are lamenting the CFPB's pattern of regulating by enforcement. They say the rules of the game haven't changed but rather are being interpreted differently.

"It's a dangerous area when you have enforcement at the CFPB pressing forward with a policy that is contrary to what the regulations say, and it puts people in the industry in a very difficult position, and it renders (marketing services agreements) a little risky," Kider said.