The CFPB has rescinded Compliance Bulletin 2015-05, a bulletin on Real Estate Settlement Procedures Act (RESPA) compliance with marketing services agreements (MSAs) – that produced uncertainty in the mortgage market due to the CFPB's position. The CFPB simultaneously released a Frequently Asked Questions (FAQs) guide that provides an overview of RESPA Section 8 and Regulation X, and addresses, among other things, gifts and promotional activities, and the compliant use of MSAs. The CFPB's action is a significant move in an area of regulation that is subject to a high degree of potential risk and industry uncertainty, but it remains to be seen whether the CFPB's FAQs will add clarity and certainty to compliance with Section 8 and best practices around the use of MSAs between settlement service providers.
What does the rescission of Bulletin 2015-05 mean?
According the CFPB, the bulletin "[did] not provide the regulatory clarity needed on how to comply with RESPA and Regulation X." While lacking in specific guidance, the tone of the 2015 guidance and subsequent enforcement activities made clear that the CFPB viewed MSAs between service providers as high risk under RESPA because of their ability to disguise payments for referrals as payments for marketing services. The bulletin's message and the CFPB's use of RESPA as an enforcement tool were viewed as a presumption of noncompliance by the Bureau around MSAs, and thus had a chilling effect on the use of MSAs between settlement service providers even where such MSAs were legally defensible and had been used without drawing scrutiny prior to the bulletin's release.
Although industry participants may prefer more specific guidance regarding MSAs and Section 8 than is provided in the new FAQs, the rescission of Bulletin 2015-05 does appear to signal a shift in the Bureau's underlying policy towards MSAs. The extent of this shift is somewhat obscure. Rescinding the bulletin and replacing it with FAQs signals a change in position by current CFPB leadership away from a presumption that MSAs may inherently violate RESPA but, according to the CFPB's press release, "[r]escission of the Bulletin does not mean that MSAs are per se or presumptively legal. And, the press release reiterates the CFPB's position that "[w]hether a particular MSA violates RESPA Section 8 will depend on specific facts and circumstances, including the details of how the MSA is structured and implemented. MSAs remain subject to scrutiny, and we remain committed to vigorous enforcement of RESPA Section 8."
What do the new RESPA FAQs cover?
The CFPB's new RESPA FAQs largely track the regulatory language and Official Commentary of Section 8 and address the following topics:
- RESPA Section 8 General
- RESPA Section 8(a)
- RESPA Section 8: Gifts and Promotional Activity
- RESPA Section 8: Marketing Services Agreements (MSAs)
The CFPB's discussion of the "normal promotional and educational activity" is noteworthy. Regulation X allows "normal promotional and educational activities" directed to a referral source if the activities meet two conditions:
- The activities are not conditioned on referral of business; and
- The activities do not involve defraying expenses that otherwise would be incurred by the referral source.
The RESPA FAQs provide three pairs of examples of when an activity qualifies for the exception. In these examples, the FAQs focus on a party conditioning participation in a drawing or eligibility for a fee waiver or other cost reduction on the recipient providing referrals. Looking to one example, routinely hosting a free seminar that anyone may attend creates fewer RESPA risks than if the party offers to waive the admission fee for attendees who provide referrals.
The RESPA FAQs also address the definition of a "referral" and indicate the "referrals include a settlement service provider directly handing clients the contact information of another settlement service provider that happens to result in the client using that other settlement service provider." This appears to go beyond common understandings in the industry regarding the requirement that a referral "affirmatively influence" the selection of a service provider.
The FAQs also indicate that advertising and marketing directed at "a person" should not be consider a marketing service. Rather, marketing services are "generally targeted at a wider audience," such as "placing advertisements for a settlement service provider in widely circulated media.
Regarding MSAs, the FAQs explain that an MSA may violate Section 8 if the "form or substance" of the MSA represents:
- An agreement to pay for referrals.
- An agreement to pay for marketing services, but the payment is in excess of the reasonable market value for the services performed.
- An agreement to pay for marketing services, but either as structured or when implemented, the services are not actually performed, the services are nominal, or the payments are duplicative.
- An agreement designed or implemented in a way to disguise the payment for kickbacks or split charges.
What is the outcome of the CFPB's action?
The CFPB's 2015-05 Bulletin summarized a number of RESPA Section 8 enforcement actions, and—without categorically prohibiting MSAs—warned the industry that MSAs present compliance challenges under Section 8. The rescission of Bulletin 2015-05 does not eliminate the Bureau's prior RESPA enforcement actions, but it does indicate a wider acceptance by the Bureau of MSAs. The FAQs, however, do not replace the bulletin, which may ultimately leave more ambiguity around MSAs than before. Industry participants will need to review the CFPB's guidance and their MSA policies to determine if updates are needed. Finally, while the CFPB's shift in focus from a strong, presumptive warning to compliance guideposts around the compliant use of MSAs is helpful for industry participants looking to leverage marketing capabilities and contacts of other service providers without drawing a CFPB investigation, the long-term effects remain unclear. This is especially so given that this guidance was issued a month before a presidential election that could shake up CFPB leadership once again.