One of the main areas the Consumer Financial Protection Bureau (CFPB) has focused on enforcing in real estate has been RESPA Section 8 — otherwise known as the “kickbacks and illegal fees” section.
This rule was first enforced last September, ending with the title agency in question paying $200,000 in fines to the CFPB. The incident became somewhat of a warning for the real estate industry to check their marketing and advertising service agreements (MSAs or ASAs) for illegal fees and kickbacks.
The rule established that when a company enters into a contract with the agreement or understanding that in exchange the counterparty will refer services, it violates RESPA Section 8(a).
It is important to understand not only the rule but also the reasoning behind the rule. Kickbacks and referral fees are illegal in most cases because the customer is supposed to find mortgage professionals who work in their best interest, not the companies’ best interest.
Steering the customer to a professional because that professional will provide something of value in return is not valuing the customer or acting in their best interest. Referrals aren’t supposed to happen for financial gain.
Most of those in the real estate or mortgage industry are not consciously violating regulations. However, many might not be aware of the various red flags that regulators look for.
Red flags for regulators:
1. Having a marketing and advertising service agreement
MSAs and ASAs are like smoke. If a real estate business has one, then regulators will probably check for a fire.
2. Sharing office space
If a real estate agent shares office space with any other type of business, then both the real estate agent and the business are a target for regulators.
They’ll want to know why the real estate agent is there and what kind of work they are doing. If the real estate agent is legitimately providing service and not referring business, they are fine.
Many times, however, regulators find this type of arrangement is a cover-up for a kickback agreement. It’s all in the intent.
3. Not “showing the work”
Marx Sterbcow, one of the nation’s premiere RESPA attorneys, was the featured speaker with ATS Secured on a webinar titled “RESPA Section 8: Understanding marketing and advertising regulation.”
One of his pieces of advice to avoid a legal action against your business was each advertising and marketing service needs to be quantified. Each fee needs to be broken down to illustrate where the money came from, and that proof has to be shown in ASAs or MSAs. Even if you know that you are above board, the regulators don’t know that.
“As two of the former heads with HUD who ran the RESPA division once told me,” Sterbcow said, “‘If you can’t show your homework, then we have a problem with it.'”
It’s important to be aware of these red flags to avoid catching regulatory attention. And if your real estate, mortgage or financial organization is undergoing a regulatory audit, having the ability to “show the homework” will significantly decrease the chance of a legal action against your business.
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If you have more questions on marketing and advertising regulations, please check out ATS Secured’s Ask the Expert page.
Wes Miller is the CEO and co-founder of ATS Secured, a new technology category for the real estate closing industry.
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