RESPA: Is There Such a Thing as a Free Lunch? Legal Issues Forum

Transcription

1 Ohio & Kentucky REALTORS Convention & Expo September 24 27, 2017 Cincinnati, OH RESPA: Is There Such a Thing as a Free Lunch? Legal Issues Forum Presented by: Phillip L. Schulman (1.5 hours elective credit Ohio) Tuesday, September 26, :00 p.m. 2:30 p.m. Ohio REALTORS - Copyright, 2017

2 Ohio & Kentucky REALTORS Joint Convention & Expo September 24 27, 2017 Cincinnati, Ohio CE SESSION PROCEDURES: We have provided all of the course materials for the joint Ohio & Kentucky REALTORS Convention & Expo on line. Please look for the appropriate table in the back of each room for either Ohio or Kentucky session contacts to answer any questions you may have before the session begins. There will be no breaks during the sessions. If you need to leave a session for any reason you will need to stop at the monitor s table in the back of the room and sign out of the session and back in when you return. Whether you leave for a restroom break or to make a phone call we will need to record the time missed from that session. The Ohio Division of Real Estate s code (Revised Code 1301:5 7 03(B) (3) (a) states that you must be present 90% of the time in order to receive CE credit. This means in a: 1.5 hour session you may not miss more than 9 minutes. 3 hour session you may not miss more than 18 minutes. OHIO Ohio attendees registered for the convention will receive five (5) continuing education tickets (five is the maximum number of sessions one can attend). The tickets will be unique to Ohio REALTORS database and your full name will be on each ticket. For each of the courses you attend it will be your responsibility to fill in the name of the course on your CE ticket and turn it into a course monitor at the end of the session. If you registered onsite for the program please visit the Ohio CE table at the back of the room for an on site CE form. Ohio CE certificates will be ed within 30 days. KENTUCKY Kentucky attendees will be required to sign in for each session at the Kentucky CE table at the back of the room. Kentucky attendees will need to submit an evaluation form at the end of each session in order to receive CE credit. OHIO & KENTUCKY If you are an individual desiring both Kentucky and Ohio CE credit, you will need to follow the procedures for both states signing in at the start of the session at the Kentucky CE table and submitting both the Ohio Continuing Education Credit Form or Ticket, and the Kentucky Evaluation Form at the end. Thank you for joining us at the joint Ohio & Kentucky Convention & Expo in Cincinnati!

3 OHIO & KENTUCKY REALTORS CONVENTION 26, 2017 WHAT S A THING OF VALUE? Marketing, Entertaining & Educational Activities under RESPA September 26, 2017 Phillip L. Schulman Partner Mayer Brown LLP pschulman@mayerbrown.com These materials are presented for informational purposes only and are not intended to constitute legal advice. COPYRIGHT 2017 ALL RIGHTS RESERVED Agenda Review of law, guidance, practical application, and risks and compliance strategies for: Normal promotional/educational activities Advertising agreements Lead generation MSAs Office/desk rentals Caveat These materials presented for informal purposes only Not intended to constitute legal advice 2 1

4 I. Introduction To appreciate and understand the various marketing and advertising activities Have to have a handle on RESPA requirements, RESPA exceptions and CFPB view of these RESPA provisions Section 8(a) Section 8(c)(2) PHH case Prospect Mortgage Consent Orders 3 II. Thou Shall Not Provisions A. Section 8(a) reads No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, 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. B. Section 8(b) reads No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed. These subsections constitute RESPA s prohibitions, and serve as the bases for enforcement proceedings and private litigation 4 2

5 II. Thou Shall Not Provisions C. Permissible Conduct Section 8(c) sets forth RESPA s permissible conduct Lists conduct Congress identified as acceptable as not constituting a RESPA violation 1. Payment of a fee to attorneys, title companies or lender agents for services performed (Section 8(c)(1)) 2. Payments pursuant to cooperative brokerage agreements (Section 8(c)(3)) 3. Affiliated business arrangements (Section 8(c)(4)) 4. Normal promotional and educational activities that do not defray expenses otherwise incurred by those in a position to refer settlement services (12 C.F.R (g)(2)(vi) 5 II. Thou Shall Not Provisions D. The Biggie for Marketing and Advertising Activities 1. Section 8(c)(2) Nothing in this section [Section 8] shall be construed as prohibiting the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or services actually performed. 12U.S.C. 2607(c)(2) Seems pretty clear 8(c)(2) exempts 8(a) 6 3

6 II. Thou Shall Not Provisions 2. HUD Established 2 Part Test for Section 8(c)(2) Compliance Part 1: Services and Goods actual = real necessary = useful, meaningful distinct = not done elsewhere in transaction Part 2: Reasonable Market Value payment commensurate with value of services and goods amount in excess of FMV, considered a referral in violation Section 8(a) 7 III. PHH Decision June 2015 A. Marketing and Promotional Activities Hang in the Balance 1. CFPB adopted: New and stark interpretation of Section 8(c)(2) at odds with plain language of the statute 2. According to CFPB Section 8(c)(2) does not provide a substantial exemption from Section 8(a) Because 8(a) prohibits a payment that is tied in any way to a referral of business 3. In other words, if there is a referral in the transaction 8(c)(2) cannot preempt or cure the 8(a) prohibition 4. Section 8(c)(2) merely: clarifies Section 8(a) but does not provide a substantive exemption from Section 8(a) 8 4

7 III. PHH Decision June 2015 A. Marketing and Promotional Activities Hang in the Balance 5. CFPB s interpretation of 8(c)(2) Problematic a. Contrary to 37 years of HUD interpretation of 8(c)(2) Federal circuit courts Plain language of statute 6. Why is CFPB view a Big Deal? a. Most marketing and promotional activities rely on 8(c)(2) as legal foundation for arrangements MSAs Lead generation Room rentals Internet advertising Co advertising Co marketing 7. PHH appeals Cordray decision to U.S. Circuit Court of Appeals 9 III. PHH Decision June 2015 B. DC Circuit Court Opinion On October 11, 2016, a three judge panel of the U.S. Circuit Court of Appeals for District of Columbia issued a ruling overturning a $109 million monetary penalty imposed by the CFPB against PHH Corporation. The three judge panel declared the CFPB: wrong on its interpretation of RESPA wrong on the penalty it imposed against PHH wrong on claiming no SOL applied wrong for retroactively applying a new RESPA interpretation And if that were not enough, 2 of 3 judges held: CFPB unconstitutionally structured 10 5

8 III. PHH Decision June 2015 B. DC Circuit Court Opinion 1. Big win for Settlement Service Industry validated long held view that 8(c)(2) an exemption even if referrals occurred in transactions 2. However, CFPB appeals 3 panel Circuit Court Opinion February 16, 2017 Court grants En Banc review vacates October 2016 decision 3. DOJ submits Amicus Brief in support of PHH position on unconstitutional structure of CFPB 4. Oral arguments were held May 24, 2017 opinion expected end of 2017 likely Court will not find CFPB unconstitutionally structured 8(c)(2) decision will likely stand 11 IV. Prospect Mortgage Consent Orders A. January 2017 CFPB Issues 4 Consent Orders 1. Focus on manner in which lender and broker administered MSAs Lead generation agreements Desk rentals Co advertising B. CFPB imposes fines, prospective compliance and reporting obligations: Brunt of penalties, not surprising Prospect Mortgage $3.5 million 2 Real Estate Brokers $230,000 ($180,000 and $50,000) Mortgage Services $265,

9 IV. Prospect Mortgage Consent Orders C. Main Takeaways from Consent Orders 1. Marketing and advertising arrangements identified in Consent Orders are not per se illegal. this is a big deal CFPB careful not to declare these advertising arrangements unlawful rather, implementation of arrangements at issue here 2. CFPB concludes these instrumentalities Vehicle to funnel referrals to Prospect Mortgage Not payment for services or goods provided 13 IV. Prospect Mortgage Consent Orders C. Main Takeaways from Consent Orders 3. If you couple lawful arrangements with cash payments for referrals required endorsements/steering consumers Exclusive arrangements Preferred Lender designations Required pre qualifications Determine pricing based on capture rates CFPB will look past the lawful arrangement and conclude a Section 8(a) violation exists No surprise here Violations obvious 14 7

10 IV. Prospect Mortgage Consent Orders C. Main Takeaways from Consent Orders 4. CFPB completely ignores Section 8(c)(2) Not mentioned even once in 4 Consent Orders If fees viewed as referral payments even if meet 8(c)(2) CFPB will conclude arrangement is unlawful Predictable given PHH appeal 5. Referrors Beware Typically payors collared by CFPB Here, also went after payees 15 IS THERE SUCH A THING AS A FREE LUNCH? Normal Promotional and Educational Activities 16 8

11 V. Normal Promotional/Educational Activities A. Regulation X Allows NP/EA Provided: 1. Activity is promotional or educational in nature 2. Not conditioned upon or tied to referrals 3. Does not defray expenses that would otherwise be incurred by a person in a position to refer settlement service business B. Risk Indicators 1. Invitees/Attendees/Recipients 2. Cost/market value 3. Frequency 4. Rule of Reason (aka Smell Test ) 17 SOME EXAMPLES Normal Promotional and Educational Activities 18 9

12 V. Normal Promotional/Educational Activities C. Examples of NP/EA 1. Advertising at Broker events Open houses and caravans Broker publications Charity golf event Award ceremonies, annual conferences 2. Training for Broker/Agents Discuss relevant SS topics Cover cost of room, refreshments, flyers What about CE credits 19 V. Normal Promotional/Educational Activities C. Examples of NP/EA 3. Sporting events/lunches May be fine within rule of reason ball game vs. Super Bowl lunch vs. dinner at 5 star Michelin restaurant Your attendance mandatory no free tickets to sporting event no gift certificate to fancy restaurant Frequency an important factor 4. Trinkets with company logo Pads, pencils, notebooks, chargers, hats, t shirts, etc. Price point critical incidental fine Mont Blanc pen with logo not fine 20 10

13 V. Normal Promotional/Educational Activities C. Examples of NP/EA 5. Beware State Laws While RESPA Guidance ambiguous regarding NP/EA some states have drawn a line in sand Liberty Title (Minnesota Commerce Commission) SB 133 (California) Proposed New York Insurance regulations 21 IS THERE SUCH A THING AS A FREE LUNCH? Lead Generation 22 11

14 V. Lead Generation A. Lawful 1. True lead purchase is permissible HUD advisory opinion 2. But beware Lead vs. referral 3. Buying a lead is OK Consumer name Address Phone number, , etc. 4. Actively referring prospective consumers not OK 23 V. Lead Generation B. Cold Leads vs. Warm Leads 1. Cold leads fine Information provided without endorsement of lead purchaser Information provided without endorsement from lead purchaser of the lead sellers Just the plain vanilla consumer info/consumer lists 2. Warm leads not fine Pass along consumer info to lead purchaser, along with endorsement of lead purchaser Directly introduce consumer to lead purchaser (often by phone) 3. Issues in Prospect Mortgage exclusivity Steering consumers to lead purchaser Incenting successful leads 24 12

15 IS THERE SUCH A THING AS A FREE LUNCH? Advertising Agreements 25 VI. Advertising Agreements A. Advertising Agreements HUD RESPA FAQ about Advertising: Question 18: Can a mortgage banker and a real estate broker advertise their services together, for example, on the same brochure or newspaper advertisement? Answer: Nothing in RESPA prevents joint advertising. However, if one party is paying less than a pro rata share for the brochures or advertisement, there could be a RESPA violation

16 VI. Advertising Agreements B. Types of Advertising 1. SSP advertise through RE Broker channel Title or lender pay to advertise on broker channel website broker magazine rider signs, etc. Paying broker directly to advertise 2. Title/lender co advertise with broker on third party site Co marketing TV, radio, print, mailers Internet SS providers pay independent third party 27 VI. Advertising Agreements C. Advertising on Broker Channel 1. Clearly advertise to public not directed to individuals not directed to agents 2. Get third party to determine FMV 3. No broker endorsements no preferred provider language avoid exclusivity 4. Make clear it s a paid advertisement border around ad state paid advertisement 28 14

17 VI. Advertising Agreements D. Advertising with Third Party Provider 1. Co marketing a. Joint advertising that appears on a third party s website/platform typically includes lead share parties share advertising costs b. Keep in mind, SS providers responsible for RESPA compliance lenders and RE agents responsible for own conduct c. Old HUD guidance (Question 18) helpful here pay based upon prominence no endorsement of lender by RE agent 29 VI. Advertising Agreements D. Advertising with Third Party Provider d. Compliance a challenge no guidance from CFPB valuation a challenge not merely prominence on page also value for lead third party valuation avoid exclusivity no quid pro quo per Prospect Mortgage know who else is advertising on site with RE agent better to pay third party than RE agent for advertisement 30 15

18 IS THERE SUCH A THING AS A FREE LUNCH? Marketing and Services Agreements 31 VII. MSAs A. Not Illegal 1. CFPB clearly does not like them Lighthouse Title PHH Bulletin But careful not to declare them illegal B. Historically Even in Prospect Mortgage 1. Analyzed under 8(c)(2) 2. PHH changed that 3. Bulletin said these arrangements likely to violate RESPA 32 16

19 VII. MSAs C. CFPB Concerns 1. No exclusive arrangements 2. No endorsements do not refer to preferred providers 3. No pressure on agents to steer business 4. No quid pro quo arrangements Pre qualifications 5. Don t use capture rates and ROI to value marketing effectiveness in discussions with brokers 33 VII. MSAs D. MSA Considerations 1. Independent third party valuation a must 2. Trust but verify 3. All advertisements directed to general public, not individual consumers or agents banner ads brochures signage rider signs 4. Justify reasons for adjusting monthly fees 5. Disclosure to consumer encouraged 34 17

20 IS THERE SUCH A THING AS A FREE LUNCH? Office/Desk Rentals 35 VIII. Office/Desk Rentals A. Historically 1. HUD Policy Statement ok if at FMV cannot vary rent based upon referrals 2. Fidelity Mortgage Consent Order 3. Prospect Mortgage steering expectations part of the deal exclusivity capture rate affected rent 36 18

21 VIII. Office/Desk Rentals B. Office/Desk Rental Considerations 1. Pay Fair Market Rent third party valuation consider square footage consider ancillary services need comps 2. Make sure written agreement describe space term rental rate default/remedies 3. Avoid lockouts 4. Do not adjust rent based upon capture rate 5. May need to license location as branch Protect consumer s non public personal info 6. Ensure space is actually utilized 37 IX. Conclusion A. Bottom Line 1. Normal promotional/educational activities 2. Lead general 3. Advertising agreements 4. MSAs 5. Office/desk rentals Lawful activities if you do not use these activities to funnel referrals to the payor 38 19