The Real Estate Settlement Procedures Act (RESPA) that has safeguarded the rights of homebuyers over the past 50 years, is too stale for the tastes of MBA's President and CEO Bob Broeksmit. The Mortgage Bankers Association’s (MBA) new white paper, published Thursday, particularly takes issue with section 8 of RESPA, which prohibits kickbacks and unearned fee splitting.
The purpose of the MBA’s white paper, “RESPA at 50: Key Reforms to RESPA Section 8 to Better Serve the Modern Mortgage Market,” is to propose solutions to modernize RESPA by aligning the law with current shopping technology, protecting consumers, and decreasing costs and inefficiencies for both the lender and consumer.
One of the arguments laid out in the white paper is that Congress initially intended to outlaw kickbacks or referral fees that unnecessarily increase the cost of settlement services, yet the MBA claims “there is virtually no empirical evidence that RESPA lowered costs post-enactment.”
“At 50 years old, there appears to be little evidence that the law’s intention of lowering settlement costs has ever occurred, and new marketing technologies and reforms since the passage of the Dodd-Frank Act have rendered it obsolete and costly with few consumer benefits,” Broeksmit said.
RESPA essentially controls the business relationship between settlement service providers, including lenders, for federally related mortgage loans. Section 8 of RESPA prohibits payments in return for referrals of settlement service business; prohibits splitting fees in connection with the performance of settlement services other than for services rendered, and provides exceptions to the general prohibitions for certain business transactions, such as digital or servicing marketing agreements and affiliated business arrangements.
Part I of the white paper describes how the current regulations on referrals are unclear, leaving service providers without a strong indication of whether they are complying with regulations properly. Part II provides a background on how the passage of the Dodd-Frank Act and subsequent reforms have made RESPA Section 8 outdated and ineffective.
Part III of the white paper proposes several solutions to modernize RESPA. The MBA’s proposals include:
Marketing Services Agreements (MSAs) and Desk Rentals
- Change the method by which the CFPB determines whether a Marketing Services Agreement (MSA) or a desk rental agreement is an illegal hidden referral fee. These changes will allow lenders and settlement service providers to market their products competitively, receive fair compensation for that marketing, and give consumers the benefit of receiving information about alternative settlement service providers.
- The CFPB should revise its policy on rental office spaces so that whether the arrangement is a hidden referral fee is determined according to whether the amount paid for the space exceeds its fair market value.
- Additionally, in lieu of limiting the compensation for MSAs to the fair market value of the agreement, a lender or settlement service provider instead should be required to provide disclosures to consumers explaining the marketing arrangement and disclose that the consumer is free to choose other settlement service providers.
“Modernizing and providing more clarity on structuring marketing services agreements and affiliated business arrangements and making it easier for lenders to market digitally to consumers would spur greater competition, increase consumer choices, and lower settlement costs without compromising core protections,” said Broeksmit.
Digital Marketing and Lead Generation
- The CFPB should recognize advances in how modern businesses communicate and make it easier for lenders to digitally market their products to consumers.
- In 2023, the CFPB released an Advisory Opinion on Digital Mortgage Comparison-Shopping Platforms that prohibited the non-neutral display of lenders, deeming it an Unfair, Deceptive, or Abusive Act or Practice and RESPA violation. The MBA disagrees and believes that the CFPB should fully repeal the Advisory Opinion.
- The CFPB should also amend Regulation X to allow lenders to advertise and market their products or services directly to settlement service providers, so long as the marketing does not provide a thing of value in return for referrals.
- Lastly, the CFPB should clarify that mass marketing advertisements, even if they are tailored for an individual borrower profile, are not referrals.
Affiliated Business Arrangements (AfBA)
- The CFPB should update its guidance on affiliated business arrangements (AfBAs) to reflect the modern work-from-home environment, by eliminating outdated factors in HUD’s 1996-2 Statement of Policy.
- To give greater clarity to entities relying on this exception, the CFPB should modify or eliminate several factors used to determine if an affiliate is a sham business, including whether the affiliate has dedicated office space, whether it does business with parties other than those that created the affiliate, and whether the workforce of the affiliate is made up of employees or independent contractors.
- The CFPB and Congress should make several changes to simplify affiliated business disclosures to make it easier for consumers to receive and understand information about the affiliate arrangement and thereby make it easier to shop for alternative settlement service providers. This includes:
- Permitting affiliated business disclosure to be provided electronically without needing to comply with the E-Sign Act.
- Getting rid of the requirement that affiliate disclosures include an organizational chart of the affiliate.
- Removing the estimated fee section in the affiliate disclosure because consumers already receive the Loan Estimate under the TRID rule.
Additional Recommendations
- Bring RESPA in line with current jurisprudence and ensure mortgage lenders and settlement service providers have clarity as to their potential liability.
- The CFPB should recognize in guidance and in future actions that, as demonstrated by both its plain statutory terms and its legislative history, RESPA sets only limited prohibitions on the payment of a thing of value for a referral.
- The CFPB should also update its guidance to recognize that subsequent litigation should change their interpretation of RESPA in certain situations and make changes to the way RESPA is litigated.
“MBA and its members stand ready to work with the Consumer Financial Protection Bureau (CFPB), Congress, and industry stakeholders to reform this expensive and outdated compliance regime to the benefit of consumers and lenders alike,” added Broeksmit.
