Mortgage Banking & Consumer Credit Alert
July 2008
www.klgates.com
Authors:
It’s Time for a RESPA Checkup:
Phillip L. Schulman
202.778.9027
phil.schulman@klgates.com
Federal and State Regulators Begin to Scrutinize
Marketing Agreements
Holly Spencer Bunting
202.778.9853
holly.bunting@klgates.com
In March of this year, the Colorado Division of Real Estate (“Division”) initiated an
investigation into a $600,000-per-year marketing arrangement between a national title
insurance underwriter and one of the country’s largest real estate brokerage franchisors.
In exchange for an annual fee, the franchisor agreed to exclusively market and promote
the title underwriter’s products and services to the broker’s nationwide franchisees. The
Division, however, questioned whether the agreement was for services rendered or a
disguised arrangement to pay referral fees. As a result, the Division has subpoenaed
documents and records from the broker’s franchisees and at least nine other real estate
companies that maintain marketing agreements with mortgage lenders and other settlement
service providers. The U.S. Department of Housing and Urban Development (“HUD” or
“Department”) also has agreed to assist the Division in its investigation by reviewing the
marketing agreements obtained by the Division for violations of the Real Estate Settlement
Procedures Act (“RESPA”). Accordingly, for the first time in RESPA enforcement history,
HUD is poised to target the permissibility of marketing agreements under RESPA. If you
are a settlement service provider and a party to a marketing agreement, now is the time for
a RESPA checkup. If structured properly, marketing agreements are legal under Section
8(c)(2) of RESPA.
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I. RESPA Requirements
Section 8(a) of RESPA prohibits any person from giving or receiving a thing of value in
exchange for the referral of settlement service business. The statute, however, provides
a number of exceptions to this prohibition, including an exception for goods or facilities
actually provided and services actually performed. Section 8(c)(2) states that “the payment
to any person of a bona fide salary or compensation or other payment for goods or facilities
actually furnished or for services actually performed” does not violate Section 8 of
RESPA.1 Presumably, therefore, a marketing agreement will qualify for a Section 8(c)(2)
exception from RESPA if it satisfies the following 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 not paid on a per-transaction basis.2
A marketing agreement will not comply with RESPA if it merely disguises the payment
of referral fees to providers in a position to refer settlement service business. To create a
marketing agreement that is legal under Section 8 of RESPA, settlement service providers
should keep the following guidelines in mind.
Mortgage Banking & Consumer Credit Alert
II. Actual Marketing and Advertising
Services
First, one party to the agreement (usually a real estate
broker or home builder) must perform actual marketing
and advertising services that are general in nature
and that are unrelated to any specific transaction.
Marketing agreements should be written and should
contain a list of these actual services. For instance, a
settlement service provider could distribute the other
provider’s brochures and promotional materials in its
office locations and at special events, allow the other
provider’s representatives to attend a certain number
of sales meetings per month or year to make sales
and product presentations, provide a website link to
the other provider’s webpage, and create and manage
opportunities for the other provider to promote its
products to the public (e.g., speaking engagements).
These are only a few examples of the types of actual
marketing services a settlement service provider could
perform under a marketing agreement. The greater the
number of services performed, the easier it will be to
justify a marketing fee.
Be advised that it is not enough to merely list these
types of services in a marketing agreement; one party to
the agreement must actually perform the services. We
recommend 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 an example, if a home builder agrees
to distribute a title insurance agency’s brochures under a
marketing agreement, the home builder should prepare
a monthly report for the title agency that identifies the
number of brochures printed in the previous month
and distributed in each of the builder’s sales offices.
If HUD or state regulators were to later question the
legitimacy of the marketing agreement under RESPA,
both the builder and title agency could demonstrate
that actual marketing services were performed in
accordance with Section 8(c)(2) of RESPA.
III. Fair Market Value Marketing Fees
Second, the marketing fee paid under the agreement
must be commensurate with the fair market value of the
marketing and advertising services actually performed.
While HUD has not provided any meaningful guidance
regarding how to determine the reasonableness of a
particular fee, it has emphasized that transactionally
based compensation is not permissible. Thus,
a marketing agreement should require a flat fee
(whether paid monthly, quarterly, semi-annually or
otherwise) that reflects the fair market value of the
actual services performed and is not tied in any way to
closed transactions or to the success of the marketing
arrangement. If an adjustment is made to the amount of
a marketing fee, that adjustment should correlate only
to an adjustment in the marketing services performed.
It is not acceptable, for example, to reduce a marketing
fee merely because the marketing services performed
by one party have not resulted in increased settlement
service business.
The ultimate question, therefore, is how to determine
a fair market value fee. Unfortunately, there is no onesize-fits-all approach, and settlement service providers
must make this business decision for each marketing
agreement. That being said, one important factor to
consider when determining fair market value is the
size of the settlement service provider performing
the services. For example, a real estate broker with
20 offices and 1,000 real estate agents would be
able to market a title insurance agency’s services to
more potential home buyers than a broker with one
office and 15 agents. In other words, a larger real
estate broker will be able to distribute more of the
title agency’s brochures and flyers, will produce more
hits or impressions on a website, and will generate
more combined customer traffic at broker events or
open-houses than the smaller real estate broker. As the
larger broker will produce more marketing materials to
reach their larger customer bases and expose the title
agency to more potential customers, it follows that
marketing services performed by the larger brokers
have a higher fair market value. Thus, to gauge fair
market value, settlement service providers may want to
retain the services of a third-party public relations firm
or advertising professional to evaluate the fair market
value of the agreed-upon services. In the end, both
the settlement service provider paying the marketing
fee and the provider performing the marketing
services should be able to document and justify fair
market value.
July 2008 | 2
Mortgage Banking & Consumer Credit Alert
Given HUD’s and the Division’s recent focus on
marketing agreements, it is possible that regulators
could target any settlement service provider that
performs marketing services or pays marketing fees
under the agreements. As a result, given the civil and
criminal implications of non-compliance with RESPA,
settlement service providers must be ready to answer
HUD and state inquiries and defend their business
practices. If you have questions or concerns about your
own practices and marketing agreements under RESPA,
please contact Phillip L. Schulman (202.778.9027 /
phil.schulman@klgates.com) or Holly Spencer Bunting
(202.778.9853 / holly.bunting@klgates.com).
Endnotes
1 12 U.S.C. § 2607(c)(2).
2 See HUD Informal Advisory Opinions, dated April 11 and 24, 1986, and May 31, 1985, by
John J. Knapp and Grant E. Mitchell, respectively.
July 2008 | 3
Mortgage Banking & Consumer Credit Alert
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Mortgage Banking & Consumer Credit Alert
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