Enter your e-mail address and password below.


Forgot your password? New User? Register Now.
   ARTICLE   |   From Scotsman Guide Residential Edition   |   November 2013

Will Working Together Work Against You?

Marketing agreements shifting guidelines could throw your business off balance

Will Working Together Work Against You?

The mortgage industry recently has found itself in the midst of many changes. Market shifts, regulatory revisions, evolving customer needs — the list goes on and on. And from a legal standpoint, one change that every mortgage professional should take note of is the shifting legality of marketing agreements with real estate agencies, the use of which is governed by the Real Estate Settlement Procedures Act (RESPA).

Mortgage brokers and bankers should be aware that there is ongoing change in regulatory oversight in this arena, and class-action litigation remains a real possibility when it comes to these business arrangements. Marketing agreements between mortgage companies and real estate agencies have long played an important role in the mortgage industry, but if your organization isn’t careful, it may find itself in a precarious position.

In 2010, the U.S. Department of Housing and Urban Development (HUD) rewrote the rules with respect to marketing agreements, at least as the real estate industry understood them. This was done in the context of home-warranty companies paying real estate agents for marketing services, but it also was applicable to all service providers in the real estate industry at large.

With the Consumer Financial Protection Bureau (CFPB) taking over RESPA’s interpretation and enforcement from HUD, mortgage professionals can expect to see more consumer-oriented changes in the coming months and years. Nevertheless, further clarification addressing the current conditions of marketing agreements in the mortgage arena still is needed to reduce legal risk.


Before 2010, HUD had not addressed marketing agreements in any detail, leaving the real estate industry to follow HUD’s positions on what constituted valid and compensable services. Marketing agreements being offered by mortgage companies included both general promotion of their organizations and various forms of joint advertising, not to mention other services that were less clear from a compliance perspective. These included, for instance, exclusive access to a real estate agency’s offices, preferred access to sales meetings and company events, sponsorship and payment for company events, and other services that were tantamount to a referral of the consumer. Particular attention was given to a real estate agency’s salespeople promoting a mortgage company or explaining its loan programs.

There were many examples in the mortgage industry of aggressive marketing agreements that involved substantial amounts of money being paid to a real estate agency for these promotional and marketing services. Certainly, many services were being performed, but not all were technically compensable under RESPA. The amounts being paid often were determined on a competitive basis, lacking any empirical determination of their reasonable value. Marketing agreements of this nature exist today to a lesser degree, although their legal risk is now higher.

The compliance of marketing agreements with RESPA became a matter of legal focus not via HUD, but rather through a series of class-action lawsuits against home-warranty companies and real estate agencies beginning in 2008. The claims held that no compensable services were being performed and that the specified marketing and administrative services were nominal or not being performed. Because of this, these claims argued that these marketing agreements were, in reality, merely referral-fee arrangements.

Shortly before this litigation commenced, the home-warranty industry had become concerned about its marketing agreements and initiated discussions with HUD’s RESPA staff for advice and guidance. This industry wanted more certainty because it relied almost entirely on real estate agents to sell their service contracts with most — but not all — of the home-warranty companies compensating agents for their services. Related to this was the question of whether payments per sold service contract were permissible under RESPA, as opposed to simply charging a flat periodic fee for services.

The National Association of Realtors (NAR) joined in this request for guidance from HUD because this source of revenue was important to many of its member agencies. The Mortgage Bankers Association did not become involved, however, perhaps because it simply did not perceive any risk from a regulatory dialogue focused on home-warranty marketing agreements.

HUD made it clear from the start that it was reluctant to engage in such a dialogue and wanted to take a more definitive position on marketing agreements. Perhaps the department believed that whatever it did in this area would have ramifications on the more problematic marketing agreements being used by the mortgage industry.

The interpretive rule

After extensive meetings involving HUD’s general counsel, in June 2010, the department issued its interpretive rule on payments by home-warranty companies to real estate agents. In November of that year, HUD followed this with its reply to public comments, which responded in part to concerns from NAR on permissible advertising services in marketing agreements. HUD’s interpretive rule focused directly on marketing-agreement practices in the home-warranty industry and made no mention of the mortgage or other real estate service industries. Even so, the positions it has taken are applicable to all service providers using marketing agreements, which will become more apparent to the mortgage industry as the CFPB moves into this area.

HUD almost reluctantly acknowledged that RESPA permits real estate agencies to engage in marketing and promotional services, and initially stated four key requirements of these services:

  1. The payment must be only the reasonable value of the services.
  2. The services must be meaningful and not duplicative.
  3. There must be empirical support establishing the reasonableness of the payment amount being made.
  4. There is actually documentation maintained to ensure that services are provided.

HUD also stated that questions concerning the validity of services under marketing agreements — that is, whether or not they were actually performed and properly valued — would be determined by the department on a case-by-case basis. This position by HUD was viewed by many industry professionals as minimizing the availability of class-action litigation to challenge marketing agreements under RESPA.

The department took a bold step in its interpretative rule by flatly concluding that the direct marketing or promotion of a service provider by a real estate agency to the consumer was a prohibited referral in all cases. This would include, for example, handing out brochures directly to consumers or making verbal pitches or recommendations that a certain service provider be used.

HUD stated that it reached this conclusion because of real estate agents’ unique position to influence clients’ selection of a settlement-service provider. Although this was an assumption and not always the case, HUD obviously sought to reshape the role of real estate agencies and particularly their salespeople in marketing settlement services — such as mortgages —directly to consumers.

Marketer beware

Mortgage professionals should know that HUD made a significant distinction between general marketing to the public, which it found to be a compensable service under RESPA, and direct marketing, which is not compensable in its view. General marketing would include a presence or link on the real estate agent’s website and joint newspaper or broadcast advertising. HUD’s comments on the presence of brochures or marketing materials in real estate sales offices were ambiguous, but this appears to be permissible as long as there is no consumer-specific marketing effort associated with them.

There were no challenges made by the real estate industry to the banning of direct marketing as described above, although there are serious questions as to whether this could be done under RESPA. The issue of marketing agreements has moved along with RESPA as a whole to the CFPB, which raises a handful of pertinent questions concerning the bureau, namely:

  • What more will the CFPB do in this area?
  • What focus will it have on marketing agreements used specifically by mortgage companies?
  • Will it use its broader authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act to further shape this area?
  • When will it act?

As noted earlier, there are numerous ambiguous practices that remain in the use of marketing agreements. In the same respect, large amounts of money are being paid in some instances for services that, although valid to a large extent, are difficult to value or quantify.

Concerning these, mortgage professionals should realize that the CFPB may chose to act if and when it receives complaints that consumers are being steered to particular lenders or other service providers. The CFPB also may look to reduce the high level of compensation that has occurred in some cases when large mortgage bankers establish marketing agreements with regional or nationwide real estate agencies.

• • •

Mortgage bankers and brokers using marketing agreements with real estate agents today must be sure that they are paying reasonable and supportable compensation for services within the parameters of HUD’s interpretative rule. Class-action litigation remains a risk even though HUD viewed this as requiring a case-by-case analysis, which would normally preclude the class-action process. If a practice in this area is categorically improper, such as compensation being paid for services never provided, then a class-action suit may be permitted. In any case, mortgage professionals should make sure that they’re well-versed in this shifting area of the industry.


Fins A Lender Post a Loan
Residential Find a Lender Commercial Find a Lender
Scotsman Guide Digital Magazine

Related Articles



© 2019 Scotsman Guide Media. All Rights Reserved.  Terms of Use  |  Privacy Policy