As I noted last week, there are significant ramifications to the Consumer Financial Protection Bureau’s (CFPB) recent enforcement action and fine against a lender, a mortgage servicer and two real estate brokerages. Foley and Lardner LLP published an analysis highlighting key takeaways from the consent order. Their analysis highlights the far-reaching impact of this order, especially for real estate brokers and agents.
I wanted to highlight the specific issues in the article real estate brokers and agents should be concerned about. You should refer to their report for more details:
- Tracking captures rates from a referral source may be a red flag or may rise to the level of a prohibited activity.
- Limiting access to some service providers (title companies or lenders) but not others may also be determined to be a prohibited activity.
- Lead agreements that involve endorsements and recommendations to use the provider are a target. Basically, sold leads should be cold leads. A real estate broker in a lead agreement should refrain from introducing consumers to the provider purchasing the leads. They should not endorse or recommend that provider to consumers and they should not use designations such as “preferred” for that provider.
- Marketing Service Agreements (MSAs), while not prohibited by the CFPB, appear to be riskier than ever before. If the CFPB believes the MSA is focused on endorsements and encouraging consumers to use the party making payments under the MSA, the whole relationship may be brought into question. And while a lender has a legitimate reason to internally track the results of its efforts to capture more business referrals, it is unwise to discuss capture rates with an MSA partner, at least in the context of trying to boost referrals.
- The CFPB believes that “steering” and “economic coercion” can become prohibited actives. The example in this case was a listing agent who offered a seller’s discount on the sales price conditioned on using the lender for the mortgage.
- Co-marketing programs were also vulnerable based on the circumstances surrounding implementation. The CFPB alleged that the lender’s co-marketing arrangements operated as vehicles to make referral payments. Specifically, the CFPB claimed that the lender was subsidizing the real estate agents’ advertisements on third party websites in exchange for referrals that might flow from such advertising or otherwise. Indeed, the CFPB pointed to anecdotal testimony of how some agents would boast to the lender how they were able to convince a particular consumer to use that lender.
- Office or desk rental agreements (where a lender or other real estate service provider leases from the real estate broker) should be negotiated and prepared solely with reference to the fair market value of comparable rental space in the area. Desk and office rentals should be written to be as simple and clean as possible. While referrals may occur naturally, the rental relationship should not include broker promises to market, endorse, or recommend the provider renting the space. Tracking referrals and measuring capture rates should not be discussed nor used to determine the amount paid as rent.
- And finally, as the authors state in their report: “Real estate agents beware: these actions break new ground in terms of including you among the subjects of CFPB actions and enforcement relief provisions.” The CFPB broke new ground in the real estate brokers’ consent orders by subjecting not only those companies, but also their hundreds of independent contractor real estate agents, to the Conduct Provisions. Specifically, the Conduct Provisions section of the KW Mid-Willamette and RE/MAX Gold Coast consent orders each state that “Respondent and its … agents … who have actual knowledge of this Consent Order” shall not partake in certain enumerated actions related to providing referrals “now or at any time in the future.” Importantly, those consent orders also require the brokers to deliver copies of the orders to each of their real estate agents, such that those agents necessarily will have knowledge of the orders and be required to abide by the Conduct Provisions. It remains to be seen whether the scope of this injunction would be upheld if valid, or how this will be enforced on the individual agent level. Perhaps more importantly, the recordkeeping provisions require KW Mid-Willamette and RE/MAX Gold Coast each to create and retain, for a five-year period, a set of business records that includes each real estate agent’s name, telephone number, email, address, job title, dates of business relationship, and, if applicable, the reason for termination. The CFPB will then have access to these records on demand and could potentially use them to go after individual sales agents who had prominent roles in the alleged RESPA violation, if it so chooses.