Affiliated Business Arrangements (AfBAs) and Marketing Service Agreements (MSAs) can provide real estate entities with marketing and promotional opportunities. However, it is crucial to understand the regulatory landscape surrounding these business arrangements to avoid significant financial and legal risks.
Entities that enter into MSAs must adhere to the strict guidelines outlined in the Real Estate Settlement Procedures Act of 1974 (RESPA) and its amendments. The Consumer Financial Protection Bureau (CFPB) has taken an increasingly aggressive stance on MSAs, leading to significant penalties and fines for violations. In contrast, AfBAs have clearer, more concise, and robust disclosure models, making them the preferred choice of regulators over MSAs.
Section 8 of RESPA permits entities to engage in marketing and promotional activities using AfBAs or joint venture compliance models, provided that they adhere to strict guidelines for exemption. However, regulatory crackdowns and strict interpretations of RESPA Section 8 make it necessary for real estate entities and individuals to err on the side of caution.
Entities can protect themselves from financial and legal risks by ensuring full compliance with state and federal regulations when operating an AfBA or MSA. Adequate disclosures and compliance oversight are essential to comply with contemporary interpretations of these business agreements under RESPA.
The CFPB has enforced RESPA violations related to MSAs, leading to significant fines and penalties for entities. For instance, in 2014, Lighthouse Title Inc., a Michigan-based title insurance company, faced a consent order from the CFPB for violating RESPA Section 8. The CFPB alleged that Lighthouse engaged in multiple MSAs that encouraged business referrals for closing services and title insurance. The alleged violations included accepting MSAs to prevent beneficiaries from recommending competitors, failing to assess the fair market value of business services completed under MSAs, and neglecting to document calculations for determining the market value of services provided according to MSAs.
The CFPB also alleged that marketing contracts are a “thing of value” and that contracts could violate Section 8 of RESPA even if the closing fees are within the fair market value of the goods or services provided. Based on this interpretation, if service providers have a paid contract or MSA with a marketer, that party cannot make paid referrals to the same service provider. This interpretation goes against the language in RESPA and HUD’s Interpretive Rule, which permits the payment of a bona fide salary or another form of legitimate compensation specifically for services that are performed.
In conclusion, entities that use AfBAs or joint venture compliance models should ensure full compliance with state and federal regulations when engaging in marketing and promotional activities. Adequate disclosures and compliance oversight are crucial to protect entities from significant financial and legal risks associated with contemporary interpretations of these business agreements under RESPA. By adhering to the strict guidelines outlined in RESPA, real estate entities and individuals can protect themselves from regulatory crackdowns and penalties for violations.
