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The End Of The MSA Stranglehold Is Underway

This article is more than 8 years old.

Marketing Services Agreements (MSAs) have been part of the mortgage landscape for two decades, they are financial arrangements between compensated real estate (or real estate universe) entities and compensating mortgage lenders. The lenders pay monthly fees to the real estate entities and the real estate entities refer mortgage business to the lenders. That is how it works, although participating lenders and real estate entities will tell you otherwise and argue how it is all about joint marketing initiatives.  Yeah.

MSAs have risen unchecked and absent any RESPA enforcement to become a mortgage industry norm, to the extent that the acronym MSA really means Mortgage Steering Activities.

This past Thursday, Wells Fargo , the biggest Marketing Services Agreements (MSA) lender in the mortgage lending universe, and Prospect Mortgage (one of the biggest MSA lenders), both announced that they are pulling the plug on all of their existing compensated, in-house real estate and builder referral relationship agreements.

According to Wells Fargo; “The decision was made as a result of increasing uncertainty surrounding regulatory oversight of these types of arrangements and as part of Wells Fargo’s ongoing efforts to simplify the process that customers experience as they weigh all of their choices when shopping for a mortgage.”

Prospect Mortgage said that; “Recent interpretations of Real Estate Settlement Procedures Act (RESPA) requirements introduce substantial uncertainty as to the rules and requirements applicable to MSAs. Prospect has taken every precaution to ensure that it is complying with the rules and guidance under applicable law. However, in light of these recent rulings, Prospect believes that MSAs are no longer a viable marketing tool for the industry”.

“Increasing uncertainty surrounding regulatory oversight of these types of arrangements,” and “uncertainty as to the rules and requirements applicable to MSAs,” sounds like code for potential RESPA violators getting out before the hammer drops.

Here is a fun fact; there have been no recent regulatory changes to RESPA except that the Consumer Financial Protection Bureau (CFPB) now exists to enforce long standing and previously ignored regulations that should have prevented the existence of MSAs in the first place. Prospect is right that they are no longer viable; they were never viable in the existing RESPA regulatory framework in the first place.

In practice, MSAs restrict consumer access to the lender universe in favor of the on-site, in-house lender.  This arrangement is based on a loosely negotiated monthly fee granting quasi-exclusive, first dibs access to agent referral sources and home buying mortgage consumers.  Free market economy dynamics absent unfettered competition does not make for a level playing field.  Lender legal pundits have no doubt considered the structure of MSAs to be RESPA compliant and have blessed them with scholarly legal opinion.  Fact is, structure and practice is not the same thing.

As the result of MSA relationships, home buyers and mortgage consumers have been corralled, cajoled, herded, steered and otherwise referred to the exclusion of other lender alternatives that may have offered better financing packages.

I have had the privilege of contributing to Forbes.com since March of 2012 and have at times railed from this bully pulpit denouncing the practice of MSAs; Play By The Rules Or The CFPB Is Coming For You, Home Buyer Alert: Pay-To-Play Is The Industry Norm, Home Buyer Alert: Vet That Mortgage Referral and just last month; More On Why Marketing Services Agreements Have Gone Wrong. As a 25 year veteran of the mortgage originations industry, I have long considered MSAs (as actually practiced) to be in direct violation of the spirit of RESPA, existing only because there is no threat of enforcement.  It would appear that the threat of enforcement is now a topic of conversation in lender management circles.

Since the RESPA regulatory framework regarding MSAs is not new, why now is there suddenly “oversight” recognition and “uncertainty?”  There must be a compelling reason for lenders to be exiting what has for a long time, been a substantial conduit of purchase referral business.

CFPB Spokesperson Sam Gilford issued this statement last Thursday:

“Wells Fargo’s decision to exit all marketing services agreements is an important step for the mortgage industry towards ensuring compliance with the RESPA statute and freeing up more choices for consumers.  We are concerned that such agreements can carry significant legal risk for companies and undermine transparency for consumers.  Companies should take note of today's action and consider carefully whether their own business practices comply with the consumer protections provided under the law, which bars kickbacks for customer referrals.”

That sounds like fair warning to me and perhaps that is what Wells Fargo and Prospect heard.  It will be interesting to see who is next and who rolls the dice on whether the CFPB will enforce.

If you listen close, you can hear the sound of CFPB drums beating.