When it comes to enforcement of the Real Estate Settlement and Procedures Act (RESPA), there's a new sheriff in town and it is increasingly apparent that he takes his job seriously. The sheriff is the Consumer Financial Protection Bureau (CFPB), a creation of the Dodd-Frank Act. While it is not exactly new - the Bureau began operations in July of 2011 – the real estate industry is just beginning to understand the extent of the CFPB's regulatory powers and the aggressiveness with which it is exercising them. Recently, RESPA News provided an analysis of CFPB's 2013 enforcement actions as well as an overview of the Bureau's powers.
Unlike the Department of Housing and Urban Development (HUD), which was previously charged with RESPA enforcement, the CFPB can initiate civil actions in its own name, with its own attorneys. HUD, like other executive agencies, had to present their cases to the Department of Justice, which would then review the matter and decide whether or not to proceed with a suit.
The analysis went on to point out that, if CFPB determines that a law has been violated, it can impose significant sanctions including rescission, refund of money, payment of damages, public notice regarding the violation, and civil money penalties. These monetary penalties include: $5,000 per day for violation of a consumer protection law, $25,000 per day if the violation is deemed reckless, and up to $1 million per day for any violation committed knowingly.
Gary Kidder, managing partner of Weiner Brodsky Kidder PC, says if the penalties seem surreal, "...the reality is they were put into Dodd-Frank to be a game changer." Not only are the possible financial penalties harsh, but also, according to Gary Cunningham, former Deputy Assistant Secretary at HUD, " If the CFPB files suit, the defendant can expect a broadly circulated press release in its home market and elsewhere in industry publications, which state complaint allegations as facts... and seems intended to be very harmful to the defendant's reputation..."
It is no surprise then, that real estate brokerages are being advised to "stay out of the CFPB's crosshairs." Cunningham says, "Companies must seriously review all of their policies and procedures that are subject to CFPB enforcement to be sure they fully comply... From a RESPA perspective this includes affiliated business rules and, I expect, marketing agreements... the CFPB is not backing off. Stay away from the gray areas."
Moreover, RESPA News warns, "Don't think that because you are a small company that the bureau will overlook you... In fact, the CFPB has begun to target individuals as well as companies..."
There is, I suspect, a tendency for individual agents and teams within a brokerage to think that they are under the radar of agencies like CFPB, and that it is the brokerage, not they, who should worry about things such as RESPA enforcement actions. Not so. Indeed, one of the news-making items in recent months has been a U.S. District Court's certification of a major class-action suit against a team within a major brokerage. The brokerage itself was dismissed. And the charge? That illegal kickbacks were being funneled to the team through a sham marketing agreement.
Those who wish to review their marketing agreements (often referred to as MSAs, for Marketing Service Agreement) would do well to consult an article It's Time for a RESPA Checkup) by the deservedly well-known RESPA attorney, Phillip Schulman. Although written several years ago, it is not only still relevant, it is especially relevant.
Schulman points out that a marketing agreement will satisfy RESPA requirements if it meets two conditions: (1) The payment recipient performs real marketing services; and (2) the marketing fee is commensurate with the fair market value of the services performed and is not paid on a per-transaction basis.
He advises that a marketing agreement should be written and should contain a list of the actual services, and he recommends that "the parties to a marketing agreement create a reporting system under the agreement to ensure all services are performed and measure the level of performance."
As to the payment for marketing services, he emphasizes that it should be a flat fee that is "not tied in any way to closed transactions or to the success of the marketing arrangement." Schulman acknowledges that there is no "one-size-fits-all approach" for determining the fair market value of marketing services. But he does say that "one important factor to consider when determining fair market value is the size of the [entity] performing the services." A large brokerage can produce more marketing materials and reach a large customer base than a small one. Size matters. If, for example, a five-person team were receiving compensation comparable to that of a 100-agent brokerage, it would suggest that the team was being paid for something more than marketing services. The new sheriff would be interested.