Marx Sterbcow, managing attorney with the Sterbcow Law Group, will moderate a RESPRO Marketing Service Agreement webinar with Phil Schulman, partner at K&L Gates on October 22, 2015. The RESPA webinar titled “To Agree to Market or Not Agree to Market” will discuss how MSAs have been around for 20 years and in June of 2010 HUD’s RESPA Division issued an interpretative rule. Now however, after the CFPB’s RESPA consent order in Lighthouse Title, the PHH decision, and the recent CFPB Bulletin 2015-05, Marketing Service Agreements a/k/a MSAs have become a controversial and hot topic. Learn what you can do and what you can’t do based on the latest CFPB guidance.
Marx Sterbcow, managing attorney, of the Sterbcow Law Group, has been invited to speak at the Louisiana Bankers Association 2015 Bank Counsel Conference on the topic of “Who’s Your Vendor? Secondary Market Compliance & Title Agent Vendor Management.” The session will provide insight into how banks should be managing their vendors and what requirements they should be requiring their title agent vendors to have in place. The presentation will also focus on managing the third party vendor management risks in a Post-TRID world and the expectations the secondary market will be playing in this new changing regulatory landscape.
The 2015 Bank Counsel Conference will be held on December 10-11, 2015 at the Ritz Carlton Hotel in New Orleans.
The Consumer Financial Protection Bureau “CFPB” announced another Consent Order with NewDay Financial, LLC on February 10, 2015 where they agreed to settle allegations that NewDay engaged in deceptive acts or practices by failing to disclose payments to a veteran’s organization that endorsed NewDay for reasons other than for NewDay’s consumer service. The CFPB also said NewDay made payments to third parties in connection with the marketing of home loans that constituted illegal payments for referrals of mortgage origination business under section 1053 and 1055 of the Consumer Financial Protection Act of 2010 (CFPA).
This CFPB Consent Order opens up new compliance territory with respect to consumer disclosure involving agreements between settlement service providers because it expands UDAAP into RESPA for the first time. However, this consent order is not the model of clarity that we were hoping for because it raises a number of new compliance issues outside of this particular arrangement.
The CFPB alleged that NewDay contracted with a third party marketing and lead generation company (i.e. “broker company”) whose business services included licensing the use of a Veterans’ Organization mailing list, logo, and other proprietary marks and managed the relationship between NewDay and the Veteran’s Organization. The members of the Veterans’ Organization learned about NewDay because of its contractual relationship with the marketing and lead generation company and Veterans’ Organization. NewDay purchased the Veterans’ Organization mailing list via the broker company and sent advertisements to the members of the Veterans’ Organization who in turn contacted NewDay for mortgage products.
NewDay according to the Consent Order is a mortgage lender who is in the business of originating refinance home loans through a program where the VA guarantees a portion of home loans taken out by service members, veterans, and eligible surviving spouses. NewDay also originated government insured reverse mortgage products to seniors.
The CFPB said NewDay advertised its mortgage products to consumers primarily through direct mail campaigns. NewDay sent over 50 million solicitations by postal and electronic mail to consumers offering reverse and forward mortgages. These advertising communications were typically sent to a pre-screened list of consumers, generally veterans and older Americans, selected due to various characteristics that NewDay believed made them more likely to be potential customers for NewDay’s offerings. Consumer members who were interested in learning more were invited by these mailings to call NewDay’s call center, during which calls NewDay’s Account Executives would answer questions, provide information, and take applications.
NewDay’s relationship with the Veterans’ Organization was arranged and coordinated by marketing and lead generation company, which contracted directly with NewDay on behalf of Veterans’ Organization and which paid Veterans’ Organization a portion of the fees it received from NewDay. Pursuant to agreements and understandings between and among NewDay, Veterans’ Organization, and the marketing and lead generation company, NewDay was designated as the exclusive lender of Veterans’ Organization, and NewDay drafted and sent advertising communications by postal and electronic mail to Veterans’ Organization members, with Veterans’ Organization’s approval, that were identified as being from Veterans’ Organization. These advertising communications promoted the relationship between NewDay and Veterans’ Organization, and encouraged and recommended the use of NewDay’s mortgage products to Veterans’ Organization members.
The fees paid pursuant to agreements and understandings between and among NewDay, Veterans’ Organization, and the marketing and lead generation company included:
(1) NewDay paid marketing and lead generation company a monthly “licensing fee” of $15,000;
(2) For each referred consumer member who contacted NewDay to inquire about a reverse mortgage and who completed mandatory counseling, NewDay paid Veterans’ Organization $75 as a “lead generation fee” and NewDay paid the marketing and lead generation company $100 as a “lead generation fee.”
(3) For each referred consumer member who contacted NewDay to inquire about a 100% loan-to-value (LTV) mortgage refinancing and had his/her credit report pulled, NewDay paid Veterans’ Organization $15 as a “lead generation fee” and NewDay paid the marketing and lead generation company $20 as a “lead generation fee.”
The CFPB stated that at no point were the Veterans’ Organization members made aware of the payments by NewDay to Veterans’ Organization and the marketing and lead generation company nor has this information been available publically.
Section 1036(a)(1)(B) of the CFPA prohibits “unfair, deceptive, or abusive” acts or practices. 12 U.S.C. § 5536(a)(1)(B). A practice is “deceptive” when there is a representation or omission of information that is likely to mislead consumers acting reasonably under the circumstances, and that information is material to consumers.
“NewDay mailed advertising communications to Veterans’ Organization members, with Veterans’ Organization’s approval and that were identified as being from Veterans’ Organization, endorsing NewDay’s products. These advertising communications articulated reasons why Veterans’ Organization selected NewDay as its lender-of-choice. NewDay also made similar statements to Veterans’ Organization members during phone conversations. The affirmative reasons offered to members created the impression that there were no other connections between NewDay and Veteran’s Organization, when, in fact, NewDay was making regular undisclosed payments, both directly and indirectly, for these endorsements.”
The paid endorsements included language such as:
1. “Veterans’ Organization chose NewDay to be our exclusive Reverse Mortgage provider after spending significant time with the company’s management team and watching its loan professionals in action.”
2. “NewDay USA is [Veterans’ Organization’s] exclusive provider of home loan programs based on their high standards for service and the excellent value of their programs. If you need money, we recommend you give them a call at 1-800-995-4193. Even easier, click here and find out more!”
3. “NewDay is the EXCLUSIVE lender for [Veterans’ Organization]. We earned this because of our focus on helping veteran’s [sic] payoff their debt, lower their interest rates and payments, or get additional cash out as well.”
The CFPB consent order state the failure to disclose material connections between NewDay and Veterans’ Organization while making affirmative statements concerning a substantive basis for the endorsements likely would have been material to consumers evaluating the weight or credibility of Veterans’ Organization’s endorsement and whether to obtain a mortgage loan from NewDay, and likely would have been misleading to reasonable consumers. Thus, these communications constitute deceptive acts or practices in violation of sections 1031(a) and 1036(a)(1)(B) of the CFPA, 12 U.S.C. §§ 5531(a), 5536(a)(1)(B).
The Bureau alleged that the paid endorsements or recommendations violated the Real Estate Settlement Procedures Act “RESPA”, 12 USC. 2607(a) which provides that no person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreements and understandings, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.
The CFPB said there was an agreement and understanding between and among NewDay, Veterans’ Organization, and the marketing and lead generation company, NewDay mailed advertising communications to individual members of Veterans’ Organization, with Veterans’ Organization’s approval, that were identified as being from Veterans’ Organization which was in violation of RESPA. These communications typically were sent to pre-screened members of Veterans’ Organization and referred recipients to NewDay by encouraging and recommending that members use NewDay for mortgage lending services.
The consent order say the agreements and understandings between and among NewDay, Veterans’ Organization, and the marketing and lead generation company, consumer members who called Veterans’ Organization’s call center for information on mortgage products were referred to NewDay. The CFPB also pointed out that the marketing and lead generation company (i.e. the “Broker Company”) maintained a website for Veterans’ Organization members (the marketing and lead generation website) which were linked to from the Veterans’ Organization website and that was identified as being part of the Veterans’ Organization website. Consumer Members who visited the marketing and lead generation website were referred to NewDay by text “recommend[ing]” NewDay as a source for home loans, along with hyperlinks to NewDay’s website and the phone number for the Veterans’ Organization’s call center.
The Consumer Financial Protection Bureau stated they found more than 3,900 payments to the Veterans’ Organization and the marketing and lead generation company (in the form of both monthly payments and “lead generation fees”) for these referral activities. The referral mechanism set up resulted in close to 400 loans being originated.
The CFPB’s consent order prohibits NewDay from engaging any payment schemes where part of the compensation is for an endorsement. The CFPB also ordered NewDay to cease entering into any business relationship that would involve third party endorsements which might be inconsistent with the Federal Trade Commission’s guidance on endorsements which can be found in 16 C.F.R. part 255. NewDay is also prohibited from violating any aspect of Section 8 of RESPA and must submit a Compliance Plan to the CFPB.
NewDay was fined $2,000,000.00 for participating in this arrangement.
October Research has scheduled a webinar for Tuesday, November 18, 2014 from 2:00-3:30 PM EST in which Marx Sterbcow of the Sterbcow Law Group; Charles Cain who is the Senior Vice President Midwest Agency Manager of WFG National Title Insurance Company; and Phil Schulman who is a Partner with K&L Gates, will discuss the latest developments involving the use of Marketing Services Agreements (MSAs).
The webinar will provide insights into the latest Consumer Financial Protection Bureau CFPB enforcement action involving Lighthouse Title, HUD Audit of Cornerstone Mortgage, and litigation cases revolving around the use of MSAs. A review of RESPA Sections 8(a) and 8(c)(2) and HUD’s 2010 RESPA Interpretive Rule, language terminology Do’s & Don’ts for MSAs, and the likelihood of additional CFPB investigations and enforcement activity will be addressed in this 90 minute webinar.
The Consumer Financial Protection Bureau (CFPB) announced today, September 30, 2014, that they had entered into a Consent Order with Lighthouse Title, a Michigan title insurance agency, for entering into Marketing Service Agreements (MSAs) with various real estate brokers with the understanding that the companies would refer mortgage closing and title insurance business to Lighthouse Title.
The CFPB found that Lighthouse Title violated the Real Estate Settlement Procedures Act (RESPA) which prohibits providing something of value to any person with an agreement or understanding that the person will refer real estate settlement services.
The CFPB noted that Lighthouse’s MSA agreements made it appear as if the payments would be based on marketing services the companies were supposed to provide to Lighthouse Title. “Lighthouse actually set the fees it would pay under the MSAs, in part, by considering the number of referrals it received or expected to receive from each company.” The Consumer Financial Protection Bureau’s investigation found that the companies on average referred significantly more business to Lighthouse Title when they entered into MSAs than when they did not enter into them.
The CFPB issued a civil money penalty against Lighthouse Title in the amount of $200,000.00; prohibited Lighthouse Title from entering into any Marketing Service Agreements in the future; ordered Lighthouse to terminate all existing MSAs; and Lighthouse must document for a period of five years all exchanges of things of value worth $5.00 or more with persons in a position to refer business.
The Consumer Financial Protection Bureau often provides subtle clues as to where they may be headed on the enforcement front and on November 6, 2013 they addressed the topic on their website about online Lead Generation and consumer safety involving payday loans. The topic “Is applying for a payday loan online safe?”
The CFPB stated that anytime a consumer gives out sensitive personal and financial information on the Internet there are risks involved to the consumer. They warned consumers that if a consumer applies online for a payday loan online, the consumer could be increasing their risk significantly. The CFPB stated the reason for this is because many websites that advertise payday loans are not lenders. They are businesses known as “lead generators” which make money primarily by finding customers for lenders.
The Bureau expressed concern that the online application or form that consumers filled out could be sold to a lender who offers to make the consumer a loan. The Bureau also indicated they have concerns as well that multiple lenders or other service providers could pay for this information causing the them to contact or email the consumer.
The Federal Deposit Insurance Corporation entered into a consent order with New Frontier Bank in St. Charles, Missouri on May 5, 2014 which was recently made public. (FDIC-14-0084b and FDIC-13-151k) The FDIC ordered New Frontier Bank to cease and desist from the violating the Real Estate Settlement Procedures Act “RESPA” Section 8, 12 U.S.C. §2607 and its implementing regulation, Regulation X, 12 C.F.R. §1024.14, which is the prohibition against kickbacks and unearned fees.
The FDIC’s consent order did not mention the facts surrounding this consent order only that “the Bank shall cease all acts or practices in violation of RESPA and take all necessary steps to effect and maintain future compliance with RESPA.”
The consent agreement also ordered New Frontier Bank to reimburse all consumers who were affected by the undisclosed RESPA violations to pay an amount not less than $400 per consumer as restitution for the RESPA violations the FDIC said New Frontier Bank may have violated. The consent agreement did not state how many consumers may have been impacted. In addition to the consumer restitution New Frontier Bank was ordered to pay a $70,000 dollar penalty to the Treasury of the United States.
Sterbcow Law Group’s Marx Sterbcow was quoted in a New York Times article titled “Cracking Down on Illegal Mortgage Referrals” written by NY Times Mortgage Columnist Lisa Prevost. The article published June 5, 2014, discusses the recent RESPA regulatory enforcement actions by the Consumer Financial Protection Bureau (CFPB) against mortgage, title, real estate brokerages. The CFPB has now been involved in 12 RESPA enforcement actions since taking over from HUD in July of 2011.
Mr. Sterbcow was quoted in his description of the RealtySouth consent order: “That’s Respa 101 of what not to do,” said Marx David Sterbcow, a New Orleans lawyer specializing in Respa issues. “You don’t write it into the contracts and basically steer customers to your affiliated company.”
“Respa is intended to protect consumers from having to pay inflated costs for mortgage and closing services. In looking for violators, the bureau has shown that “they don’t care how big your company is,” Mr. Sterbcow said. “Nor do they care how small your company is.” ”
The RealtySouth consent order was an enforcement action which was triggered against RealtySouth because it inserted into it’s pre-printed contract sale form that consumers were required to use TitleSouth (RealtySouth’s affiliated title company). The language in the pre-printed contract which was only in operation for a year stated in Paragraph 5, “Title Insurance. Seller agrees to furnish Buyer a standard form owner’s title insurance policy issued by TitleSouth, LLC in the amount of the purchase price.”
This was the crux of the RESPA enforcement action although the CFPB also added a seemingly trivial charge against RealtySouth’s for not strictly adhering to the exact font and language specifications required in an affiliated business disclosure form. The CFPB argued the disclosure was modified because fonts, word capitalization requirements, and marketing slogans were either not allowed or out of compliance and deviated from the required format.
While CFPB did not identify how many consumers actually opted out of that provision in the pre-printed contract and used a third party title company it didn’t matter as the language spoke for itself which is why the RealtySouth action was commenced by federal regulators.
The Consumer Financial Protection Bureau announced today another consent order involving violations of Section 8 of the Real Estate Settlement Procedures Act “RESPA”. Administrative Proceeding File No. 2014-CFPB-0006 “In the Matter of Stonebridge Title Services, Inc.” The CFPB reviewed the business practices of Stonebridge Title Services, Inc. of Parsippany, New Jersey and its two owners Bruce Dostal and Cesare Stefanelli operated the title agency to determine if Stonebridge Title was violating RESPA Section 8(a) “illegal kickbacks” and 8(b) “unearned fees”. Stonebridge Title is an appointed title agent for several national title insurance underwriters who paid referral commissions of up to 40% of the title insurance premiums they received from consumers to Independent Salespeople for the referral of title insurance work to Stonebridge Title.
The CFPB stated the Independent Salespeople had or developed relationships with entities, typically law firms, and referred these entities to Stonebridge for title insurance and related services on behalf of consumers. The commission agreements Stonebridge utilized with the Independent Salespeople were structured in a way that commissions were paid on each title order placed by a firm that the Independent Sales person referred to Stonebridge. The commission payment amounts for title insurance orders were determined solely based on the value of the title insurance premiums multiplied by a previously agreed-to commission percentage according to the CFPB consent order.
The Independent Salespeople did not perform any title services for the consumers who paid the title insurance premiums to Stonebridge. The Independent Salespeople did not provide any non-referral services for Stonebridge for which they were to receive compensation according to the order.
A RESPA class action lawsuit filed in the U.S. District Court for the Central District of California ruled that overnight delivery fees constituted settlement services under the Real Estate Settlement and Procedures Act “RESPA”. The case Henson v. Fidelity National Financial Inc., 2014 WL 1246222 (C.D. Cal. March 21, 2014) alleges that Fidelity has agreements with various overnight delivery companies (i.e. UPS, Federal Express, and OnTrac) which violate RESPA when Fidelity receives “marketing” fees in exchange for referring overnight delivery business to the overnight carriers through Fidelity’s escrow subsidiaries.
The lawsuit states that Fidelity is the controlling parent of various escrow subsidiaries and these escrow subsidiaries use UPS, Federal Express, and OnTrac (the “delivery companies”) to handle overnight deliveries in connection with processing and closing federally related mortgage loans. Fidelities subsidiaries then charge escrow customers for these delivery services in the customers real estate transactions. The lawsuit alleges that Fidelity has separate, written “master” agreements with each of the delivery companies through a subsidiary of Fidelity called EC Purchasing in which EC receives a split of the charges received by the delivery carriers and kickbacks in exchange for referring delivery services to the overnight delivery companies.
The lawsuit also states that because Fidelity exercises substantial control over their subsidiaries that no “marketing” services were actually performed nor did Fidelity put in place mechanisms to ensure they were performed under the master agreement. The payments were alleged to be based on the volume of business referred. The defendants argued that overnight delivery fees or express services were not in the real estate business and thus RESPA and Regulation X did not apply. The Court held that the term “settlement service” as used in Regulation X included overnight delivery services and stated the congress did not explicitly provide an exemption in RESPA for overnight delivery services and because Congress did not provide for an exemption neither should the Court.