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Ending Marketing Agreements Between Lenders and Brokerages
Marketing agreements between mortgage lenders and real estate brokerages have been commonplace for years. But federal regulators are cracking down on some of these arrangements as violations of anti-kickback laws, and two major lenders have taken steps to end the practice.
In July, Wells Fargo and Prospect Mortgage announced they were doing away with what are known as marketing services agreements, or MSAs, with real estate firms, builders and other referral partners, citing uncertainty about regulatory tolerance for these agreements.
The decision by Wells in particular, as one of the country’s largest mortgage lenders, is reverberating throughout the industry, said Marc Israel, the president and chief counsel of MIT National Land Services in New York and a continuing education instructor for real estate lawyers. “There’s a clear recognition by Wells and Prospect that these MSAs are very hard to reconcile with the anti-kickback provisions,” he said. “I am personally of the opinion that it was a smart decision on their part, and I fully expect to see their competitors and others follow suit.”
The about-face on MSAs comes after the Consumer Financial Protection Bureau issued major enforcement actions against companies accused of violating the anti-kickback provisions of the Real Estate Settlement Procedures Act, known as Respa. The most recent action, in June, against the PHH Corporation, a major mortgage lender, included a $109 million penalty.
The bureau concluded that PHH referred borrowers to certain mortgage insurers in exchange for kickbacks. In a statement, PHH called the finding “inconsistent with the facts” and said it would appeal. Respa prohibits professionals from accepting anything of value in return for referring mortgage or settlement service business to certain entities.
MSAs are structured in different ways, and the Consumer Financial Protection Bureau has not prohibited them outright, noted R. Colgate Selden, a regulatory compliance lawyer in Washington who used to work at the bureau. Lenders may pay real estate brokerages to, say, hang banners in their offices, advertise on their website or rent a desk in their offices.
Where those arrangements may cross into illegality is when payment to the brokerage is based on how much business comes the lender’s way, as that creates an incentive for the brokerage to steer customers toward the lender, Mr. Selden said.
“The bureau’s enforcement actions so far have tended to be more obvious violations,” he said, citing an action last year against Lighthouse Title of Holland, Mich., for allegedly entering into MSAs that set fees according to the volume of business referred. Under the settlement agreement, Lighthouse neither admitted nor denied wrongdoing.
Chris Polychron, the president of the National Association of Realtors, has called on the Consumer Financial Protection Bureau to clarify “that there are acceptable ways” to structure MSAs. Last year, the association put out its own best practices guidelines for marketing agreements.
But Mr. Israel says he doesn’t think it’s possible to structure these agreements without running afoul of the intent of Respa. “We all would like to get business referrals,” he said. “The question is how to get those referrals without giving back something of value.”
John Councilman, the president of NAMB, the Association of Mortgage Professionals, said he believes “there was always too much of a quid pro quo” with MSAs. Most mortgage brokers will welcome the end of these arrangements, since it will help level the playing field, forcing larger players to compete on pricing and service, he said.
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