The CFPB (also known as the mortgage police) aimed to make an example out of some bad apples in the spring of 2014…and they do not miss. The targets were improper marketing agreements between Real Estate agents and mortgage lenders and title companies. In fact, one such story involved one of the highest producing real estate agent teams in the US. For years these ‘bad apple’ agreements have flown under the radar. Now, the CFPB is continuing their mission to “clean house” and is bringing real estate agents into their sites.
What is a good or bad marketing agreement?
Improperly structured marketing agreements offer a financial kickback paid from a title company or mortgage lender to the real estate agent or brokerage. Marketing agreements, when structured properly, involve the two parties proportionately sharing the capital investment for marketing efforts. This is the correct way to structure a marketing agreement; avoiding paying cash for leads. Easy enough right?
Apparently, it wasn’t easy enough as there are still lenders and title companies that misuse marketing agreements. Some use them to funnel cash to a real estate team or brokerage far beyond reasonable measures. Others violate the rules by not having any direct marketing value attributed to the money being paid in the agreements. RESPA (the rules that govern the real estate industry) regs state that a marketing agreement must be for actual and specific marketing efforts and not in return or reward for referrals. The CFPB (tasked with enforcing RESPA guidelines as of July 2011) and RESPA are very clear on this point.
Lenders and title companies cannot pay money unrelated to direct marketing efforts OR in excess of what is reasonable. Those with a fuzzy interpretation of the rules need the rules clarified. This is precisely why the CFBP is shutting down marketing agreements that violate RESPA guidelines.
Why Does the CFPB Care About Marketing Agreements?
The CFPB is concerned with lenders and title companies paying for leads because it ultimately leads to steering. Steering is strictly prohibited by RESPA because its based on a realtor’s financial gain instead of meeting a consumer’s needs. For example, “mortgage lender A” gives “Realtor A” $400 for no specific reason. In turn, “Realtor A” refers their clients to “Lender A” to ensure they continue to receive $400 from “Lender A”. This is a clear example of how real estate agents refer their clients to a specific vendor for personal financial gain. RESPA argues a consumer could receive unfair loan terms such as a higher interest rate and/or fees related to these practices.
Consequently, the CFPB is looking to shine their light on shady realtors, lenders, and title companies participating in this. Their purpose is to protect consumers and improper marketing agreements take advantage of consumers.
Large Real Estate Team May Pay the Price
A clear example of the use of improper marketing agreements was reported in Inman News. Top real estate team, Creig Northrop Team P.C., was privy to a huge class action lawsuit involving all their closings since Jan 1, 2008. They were sued for $11.2 million and required to pay 3 x’s actual damages incurred. In addition, they had to pay treble damages for settlement services charged by Long & Foster (the title company). The damages stemmed from over $500,000 in kickbacks Creig Northrop Team P.C. recieved from Long & Foster title company. A scary skeleton to pop out of the closet 6 years after the fact.
Conversely, many real estate agents are happy to work with title companies and Arizona mortgage lenders that offer their clients the most competitive terms and outstanding service. Many real estate agents also partner on specific targeted marketing efforts and properly structured marketing agreements. Always be certain to only participate in shared marketing that follows the approved guidelines. In this new era of government regulation in lending, there is no margin for cutting any corners. Be diligent!
By Jeremy House