Today, August 17, 2023, the CFPB issued a consent order imposing a $1.75 million civil money penalty on a large non-bank mortgage company for violations of Section 8 of the Real Estate Settlement Procedures Act (“RESPA”), which prohibits giving or receiving things of value for referrals of mortgage and settlement service business. 

The CFPB alleged in the consent order that the company provided things of value to real estate agents and brokerages in exchange for referrals.  Specifically, the CFPB alleged the following:

Subscription Services.  The mortgage company paid for several subscription services and then gave free access to real estate agents and brokers, many of which made mortgage referrals to the company. As an example, the company paid thousands of dollars per month for one subscription that provided real property information, which the company provided to over 2,000 real estate agents.  Sometimes, the company required real estate agents and brokers to agree to be paired with a particular loan officer before providing them with access to the subscription service.  The real estate agents who received free access made more than 1,000 referrals to the company.

Events.  The mortgage company also “hosted” and “subsidized” events for certain real estate brokers and agents.  The company “would pay for the real estate brokers and agents’ food, beverages, and alcohol” for many events.  And for some events the company would also pay for “entertainment.” The company would also “give free tickets to sporting events, charity galas, or other events.”  The events frequently cost several thousand dollars or more.  The company also denied requests for event sponsorships from real estate brokerages that didn’t refer consumers to the company.

MSAs.  The company also had marketing services agreements (“MSAs”) in place with more than 40 real estate brokerages, under which its payments ranged from a few hundred to several thousand dollars per month.  Many of the real estate agents who received the free subscriptions and events (described above) worked at brokerages that had these MSAs.  The MSAs required brokerages to promote the company to its own agents, including through e-mail and direct mail marketing campaigns.  The consent order also noted that the company “encouraged its MSA partners” to use a smartphone app, which the agents would share with clients, that featured the loan officer’s headshot and company logo, and included a button that the client would use to communicate with the loan officer.  In addition, the consent order noted that the company “performed most of the actual marketing services covered under the MSAs.”  The company “maintained a professional design team and licensed software to create marketing copy, such as co-branded mailers or open house flyers,” and “also had a print shop that created the hard copies of co-branded marketing materials.”  The company also documented the number of referrals that had been made when tracking performance under the MSAs.  The consent order concludes that the company “structured and implemented the MSAs as another mechanism to pay for mortgage referrals, rather than compensate real estate brokerages for marketing to consumers.” 

The mortgage company neither admitted or denied the facts in the consent order.  In addition to the aforementioned $1.75 million CMP, the consent order requires the company to submit a detailed compliance plan for all applicable CFPB-enforced laws before resuming any retail operations (the consent order notes the company ceased retail operations in 2022), and imposes ongoing reporting requirements. 

The CFPB also concurrently issued a related consent order against a real estate brokerage for accepting things of value from the mortgage company in exchange for referrals.  The CFPB issued a CMP of $200,000 against the brokerage.  The consent order against the brokerage provides more specific facts about the allegations in the mortgage company consent order (the brokerage did not admit or deny the facts). 

Subscription Services.  Regarding the subscription services, the real estate brokerage consent order alleges that the retail cost of the service was $300 per month and that more than 100 agents accepted free subscriptions. 

Events.  Regarding the hosted events, the consent order states that the mortgage company hosted an event at a “bar-restaurant” that 50 of the brokerage’s agents attended, and for which the mortgage company paid “more than $6,300 for food, drinks (including alcohol), and rented sports simulators.”  The mortgage company invited agents who referred the most business and newer agents that the company “hoped would develop a referral relationship.” 

MSAs.  Regarding the MSAs, the real estate brokerage’s MSA with the mortgage company was $6,000 per month for about 6 years, totaling $432,000.  The first page of the brokerage’s MSA with the mortgage company stated that, “[Company] wishes to engage Real Estate Brokerage to promote and market [Company] and its loan products to Real Estate Brokerage’s employees and agents,” and included an entire section titled “SALES AGENT-FACING ADVERTISING ACTIVITIES.”  This section allowed the company’s loan officers to promote themselves at the brokerage’s internal meetings, email agents (including emails that described the brokerage as a “referral partner”), and hold a quarterly training event for the brokerage.  The consent order also notes that the brokerage did not conduct the marketing activities under the MSA, failing to send out any of the required 15,000 monthly marketing emails, failing to have the required three video kiosks, and failing to create the required 75 property websites per month with mortgage company content.  In addition, the CFPB pointed to emails between real estate agents and the mortgage company in which loan officers asked for referrals.  Further, the brokerage’s role in marketing, despite the language in the MSA, was limited to providing minor design suggestions to the mortgage company and paying for postage for co-branded mailers. 

This enforcement action shows that the CFPB is once again enforcing RESPA, after a long hiatus that started when the CFPB lost its RESPA case against PHH, in which its aggressive interpretation of RESPA was rejected by the D.C. Circuit (which we wrote about here and here).  There have been signs the CFPB has been interested in RESPA again.  The CFPB posted FAQs on RESPA Section 8 and MSAs in 2020 (which we wrote about here).  And earlier this year, the CFPB issued an advisory opinion on mortgage comparison websites (which we wrote about here). 

This case also presents important issues for mortgage companies to think about under RESPA.  For instance, many companies have returned to widespread use of MSAs since the PHH case.  The CFPB’s rejection of the MSAs in this enforcement action as merely being a “mechanism to pay for mortgage referrals” shows that companies should carefully swim in these waters.  The CFPB hinted at looking closely at the substance of MSAs in its FAQs (which we noted in our blog), and it seems they’re true to their word here.  Many of the issues raised by the CFPB with these MSAs can be avoidable with careful structuring and planning.  In addition, many companies in the real estate space hold or sponsor events to promote and market their services.  The CFPB’s noting of the food, drinks (the CFPB appears to especially dislike alcohol), and sports simulators provided at these events is something to consider (maybe stick with Clausthaler or Sharp’s and board games). 

Because we do not have all the facts in this consent order, and it is one-sided in its nature, where the CFPB draws the line on these issues and the defenses raised are unclear.  But factoring this enforcement action into your compliance reviews will be important.  The size of the CMP shows that the CFPB means business in its enforcement of RESPA, and companies should take note. 

You can find the CFPB’s press release here: https://www.consumerfinance.gov/about-us/newsroom/cfpb-penalizes-freedom-mortgage-and-realty-connect-for-illegal-kickbacks/.  The CFPB’s action against the real estate brokerage can be found here: https://www.consumerfinance.gov/enforcement/actions/realty-connect-usa-long-island-inc/. 

Please email me at rich@garrishorn.com to discuss any of the issues in this blog post or RESPA generally.