- In the last two years, several large, national mortgage lenders have publicly announced their exit from marketing service agreements (MSAs) with real estate brokers, title companies and others.
- Recent U.S. Securities and Exchange Commission (SEC) filings indicate that Realogy and PHH, which entered into a joint venture in 2005, have removed certain provisions from their strategic relationship agreement.
- Those provisions referred to Realogy as PHH’s “exclusive recommended real estate broker.”
- The joint venture provides mortgage origination services to about 790 real estate offices within NRT LLC, a subsidiary of Realogy, and gives PHH the exclusive right to use the Century 21, Coldwell Banker and ERA brand names in marketing PHH mortgage loan products.
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A longstanding relationship between real estate brokerage franchisor Realogy and embattled mortgage lender PHH Home Loans might be the latest casualty of the murky regulatory environment.
In the last two years, as the Consumer Financial Protection Bureau (CFPB) has put the real estate, mortgage and settlement services industries’ co-marketing activities under its regulatory microscope, several large, national mortgage lenders have publicly announced their exit from marketing service agreements (MSAs) with real estate brokers, title companies and others.
Provisions removed from SEC filings
Recent U.S. Securities and Exchange Commission (SEC) filings indicate that Realogy and PHH, which entered into a joint venture in 2005, have removed certain provisions from their strategic relationship agreement. Those provisions referred to Realogy (formerly known as Cendant Real Estate) as PHH’s “exclusive recommended real estate broker.”
The filing comes while PHH is embroiled in a federal court battle with the CFPB over allegations that its agreements with mortgage insurance companies violated the Real Estate Settlement Procedures Act (RESPA).
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The SEC filing, made Oct. 21, deletes Article VI of the companies’ joint-venture agreement, which states in part that “PHH shall, and shall cause its subsidiaries to, adopt such internal policies and procedures as shall be reasonably necessary so that Cendant Real Estate shall be the exclusive recommended real estate firm for employees of PHH or any of its subsidiaries, and for all customers of PHH or any of its subsidiaries other than any such customers who are subject to any other venture agreement with a third party.”
The filing also revises Section 10.3 (A) of the companies’ agreement to provide that “Neither PHH nor any of its subsidiaries shall directly solicit any customer or any Cendant customer to purchase any product or service without the prior written consent of the Cendant member.”
The amended agreement does not alter the financial terms of the joint venture, of which PHH has a 50.1-percent controlling share, and Realogy has a 49.9-percent share.
Mortgage origination services and brand name use
The joint venture provides mortgage origination services to about 790 real estate offices within NRT LLC, a subsidiary of Realogy and one of the nation’s largest real estate brokerage companies. It also gives PHH the exclusive right to use the Century 21, Coldwell Banker and ERA brand names in marketing PHH mortgage loan products through PHH Home Loans and other arrangements that PHH has with Realogy.
The 50-year agreement is subject to early termination in 2017.
The companies have maintained throughout their 10-year partnership that their agreement is a legal joint venture, and not an MSA, a business model that the CFPB recently proclaimed “designed to evade RESPA’s prohibition on the payment and acceptance of kickbacks and referral fees.”
Not an MSA — a separate entity
During PHH’s second-quarter earnings call this year, CEO and President Glen Messina was asked to clarify whether PHH’s relationship with Realogy is similar to the relationships it had with the companies named in the CFPB’s lawsuit. “So MSAs, marketing services arrangements, are basically a contractual agreement whereby somebody agrees to market your brand and such in accordance with what is required or what it permissible by law,” Messina replied.
“The Realogy joint venture is, in fact, a true separate legal entity separately capitalized, owned 50.1 percent by PHH and 49.9 percent by Realogy Corp. It has its separate advisory board, its own people, its own licensing. It is, in fact, a separate company, a separate entity that has been established in accordance with all required laws and regulations. It is not an MSA.”
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However, the recent SEC filing seems to indicate that the companies are taking steps to remove any question from the minds of regulators that their agreement may not pass the CFPB’s RESPA smell test.
So far, PHH and Realogy aren’t saying much about the SEC filing or how the current regulatory climate may impact their joint venture in the future.
Mark Panus, senior vice president for Realogy’s corporate communications, issued this statement: “We have joint ventures that we believe comply fully with RESPA. Apart from our joint ventures, we — like most settlement services providers — have reviewed all of our practices to assure they comply with the law and all regulations.”
PHH did not respond to a request for comment on this story
CFPB’s widening interpretation of RESPA
The bureau has been publicly criticized by the industry, legal and compliance experts — and even other regulators and lawmakers — for applying an overly broad interpretation of RESPA to its consent orders and enforcement actions against companies’ marketing practices.
In its October 2014 consent order with Michigan title company Lighthouse Title, the CFPB made waves when it proclaimed that “Entering a contract with the agreement or understanding that in exchange the counterparty will refer settlement services related to federally related mortgage loans” constitutes a “thing of value” under RESPA Section 8(a), and is a clear violation of the federal statute, “even if the fees paid under that contract are fair market value for the goods or services provided.”
The notion that an MSA contract itself could be considered a thing of value stunned many, as RESPA’s traditional definition of that term is “any payment, advance, funds, loan, service or other consideration…based in whole or in part on the amount of business referred, trips and payments of another person’s expenses or reduction in credit against an existing obligation.”
“We have joint ventures that we believe comply fully with RESPA.” – Mark Panus, senior vice president of corporate communications, Realogy
Not backing down from criticism over its application of RESPA in the Lighthouse Title case, the CFPB again surprised many in February of this year, when it announced a $2-million settlement with New Day Financial LLC in which the bureau alleged that the mortgage lender “deceived consumers about a veterans’ organization’s endorsement of NewDay products and participated in a scheme to pay kickbacks for customer referrals.”
According to the CFPB, NewDay paid lead generation fees to the veterans’ organization in exchange for being named its “exclusive lender.” That agreement, the CFPB said, could be construed as a thing of value and ran afoul of RESPA in the bureau’s mind.
PHH’s regulatory troubles
The CFPB initiated an administrative proceeding against the New Jersey-based lender in January 2014, alleging that over a 15-year period, PHH used mortgage reinsurance arrangements to solicit and collect illegal kickback payments and unearned fees through its affiliates Atrium Insurance and Atrium Reinsurance in exchange for the referral of private mortgage insurance business.
According to the bureau, PHH allegedly set up a system whereby it received up to 40 percent of the premiums consumers paid to mortgage insurers, “collecting hundreds of millions of dollars in kickbacks,” and overcharged consumers for loans if they did not buy mortgage insurance from one of its reinsurance partners — violating RESPA as well as the Consumer Financial Protection Act.
The companies appealed, denying the CFPB’s allegations and asserting that their reinsurance agreements met all statutory requirements.
In November 2015, Administrative Law Judge Cameron Elliot issued a decision recommending that, as the companies accepted reinsurance premiums in violation of RESPA Sections 8(a) and 8(b), the CFPB should impose an injunction and disgorgement of almost $6.5 million.
Richard Cordray
Both PHH and the CFPB appealed different aspects of that decision to CFPB Director Richard Cordray, who overturned some of the administrative law judge’s rulings and countered with an order calling for PHH to pay more than $109 million in disgorgement.
PHH then asked the D.C. Circuit Court to overturn Cordray’s order, calling it an abuse of discretion — marking the first time a company has fought back against a CFPB order. The court granted a stay on Cordray’s order in August. Final briefs are due before Christmas, and arguments are expected to take place next spring.
In PHH’s third-quarter earnings call, Messina said although the outcome of the court action is uncertain, “we continue to believe that our appeal will be successful.”
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