The residential mortgage origination industry has long used Marketing Services Agreements (MSAs) to establish the terms of certain marketing arrangements. An MSA, written or oral, addresses the terms according to which a provider of residential real estate settlement goods or services will be paid for delivering general marketing services to another provider of goods or services related to the settlement of a residential mortgage loan.

Section 8 of the 1974 Real Estate Settlement Procedures Act (RESPA) was intended to prohibit all arrangements whereby any payment or thing of value is provided in exchange for the specific referral of business transacted in the settlement of a federally related mortgage loan. However, an arguably plain reading of the statutory text of Section 8(c)(2) and RESPA’s implementing Regulation X supports the Congressional intent, as documented in the legislative history, that payments for the bona fide value of goods actually furnished or services actually performed are to be exempted from consideration as a referral fee and consequently will not result in a RESPA violation.

Furthermore, decades of informal and formal guidance by the Department of Housing and Urban Development, the agency responsible for interpretation and enforcement of RESPA prior to the establishment of the Consumer Financial Protection Bureau (CFPB or Bureau), provided industry with an interpretive approach consistent with such a plain reading. Several court decisions also referred to the Section 8(c)(2) exemption as a “safe harbor.”

However, a recent string of CFPB consent orders has left the industry and its legal advisers in a quandary. In the consent orders, the Bureau adopted a new interpretation of RESPA Section 8 by arguing that the text of 8(c)(2) is merely a clarification to the prohibition on referrals and is not the establishment of an exception for certain activity. Industry participants have asked the Bureau for its thoughts on a legal framework that would be supportive of a compliant MSA.

In response to industry requests, on October 8, 2015, the Bureau issued Compliance Bulletin 2015-05 (Bulletin). The Bulletin warns that MSAs present “substantial legal and regulatory risks for the parties to the agreement,” and that consequently the Bureau will “continue actively scrutinizing the use of such agreements and related arrangements in the course of its enforcement and supervision work.” It is instructive that the Bulletin provides no guidance as to the elements of a compliant MSA. The likely implication instead is that the Bulletin is a warning that the CFPB deems MSAs to be per se illegal, as exemplified by the Bulletin’s statement that the MSA “risks are greater and less capable of being controlled by careful monitoring than mortgage industry participants may have recognized in the past ...  [and that] efforts made to adequately monitor activities ... are inherently difficult.” The Bulletin also observes that “even where the terms of the MSA have been carefully drafted to be technically compliant with the provisions of RESPA,” the risk of violative behavior “remain[s] significant.”

One of the service providers subject to a CFPB consent order related to its MSA activity (Order), PHH Corporation, has appealed to the United States Court of Appeals for the District of Columbia Circuit its administrative appeal finding by the CFPB Director. The Bureau’s Respondent Brief illuminates the CFPB’s position. The Bureau argues that RESPA Section 8(c)(2) is ambiguous and that any interpretation of 8(c)(2) as providing a “safe harbor” exemption for bona fide goods and services from the referral prohibitions of Section 8(a) is “inconsistent with the text, structure, and goals of RESPA.” The Bureau argues that “Section [8(a)] does not prohibit every payment in connection with a referral, only those payments that are a quid pro quo for the referral,” and that, consequently, “Section 8(c)(2) is irrelevant” when payment is made in connection with a business referral. Furthermore, the Bureau avers that Section 8(c)(2) is a mere clarification as to the absence of an 8(a) violation “when a party making referrals is paid by a party receiving referrals so long as those payments are for services actually performed and are not given in exchange for the referrals.” Although the Bureau acknowledges that “RESPA contains some exemptions (see, e.g., Section 8(c)(1)(B)),” it denies such characterization to the subsection listed next in the textual construction (i.e., 8(c)(2)).

Contrary to the Bureau’s arguments, PHH asserts in its Opening Brief that the Bureau’s interpretation of Section 8(c)(2) as “irrelevant” “shrug[s] off the clear text of RESPA in favor of sweeping reinterpretations that effectively nullify critical parts of the statute.” In supporting briefs, “friends of the court” observe that “because a lawful payment ‘for’ actual services might also be made ‘pursuant to’ a referral agreement, Section 8(c)(2) can only be read to permit conduct that Section 8(a) would otherwise prohibit.” They also point out that the CFPB’s Order “conflicts with the statute’s structure by mistakenly equating ‘bona fide’ with subjective ‘purpose,’ when the language of RESPA as a whole shows that Congress intended the term ‘bona fide’ to mean ‘reasonable’ in an objective, market-value sense.” In furtherance of this argument, the industry proponents note that when Congress intentionally created purpose-based exemptions in other parts of RESPA, the term “good faith” was used instead.

Regardless of arguments in support of the use of properly constructed MSAs, given the Bulletin’s strongly worded warning, the best practice is to cease the use of new MSAs and also consider terminating all existing MSAs, pending the outcome of the PHH appeal.