REALTORS(R) BEWARE: Federal and State Regulators Begin to Scrutinize Marketing Agreements under RESPA
by Phillip L. Schulman, Esq., Partner, Kirkpatrick & Lockhart Preston Gates Ellis
RISMedia's The Power Broker Network Report, September 2008
Real estate brokers and agents occupy a unique position in the settlement service industry; we are the first point of contact for most consumers in the market for a home and, as a result, are often asked to make referrals to mortgage companies, title agencies, and attorneys. Although Section 8 of the Real Estate Settlement Procedures Act (“RESPA”) prohibits real estate brokers, agents and any other persons from giving or receiving any thing of value for these referrals, Section 8(c)(2) of RESPA allows settlement service providers to be paid for actual and distinct services provided to mortgage lenders, title insurance companies, or any other providers. As a result, many real estate brokers have entered into agreements with mortgage lenders and title companies to perform marketing and advertising services in exchange for a marketing fee.1
These marketing agreements, however, have recently come under fire from both the U.S. Department of Housing and Urban Development (“HUD” or “Department”) and state regulators who are investigating whether the agreements are disguises for prohibited referral fees under RESPA. Notably, the Colorado Division of Real Estate (“Division”) has launched an investigation into a $600,000-per-year marketing agreement between a national title insurance underwriter and a large real estate brokerage franchisor that agreed to exclusively market and promote the title underwriter’s products and services to its franchisees. While the agreement listed a number of marketing-related services to be performed, regulators appear to be questioning whether these services were actually provided and whether sufficient services were performed for the $600,000 annual fee.2 The Colorado Division also has subpoenaed documents from at least nine other real estate companies alleged to have marketing agreements with banks and mortgage lenders, and the Department has agreed to examine at least three marketing agreements obtained by the Division for possible RESPA violations.3 Based on this recent activity, now is the time to ensure your marketing agreements comply with RESPA. If structured properly, marketing agreements are legal under Section 8(c)(2) of RESPA.
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 from 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.4 To comply with RESPA, therefore, a marketing agreement must qualify for this exception and satisfy the following two conditions:
(1) The payment recipient (real estate broker) must perform real marketing services; and
(2) The marketing fee must be commensurate with the fair market value of the services performed.
The Department also has suggested that any fees paid for services rendered should not be paid on a per-transaction basis.5 For the sake of illustration, assume that a real estate broker plans to enter into a marketing agreement with a title insurance agency to advertise the title agency’s products and services in return for a marketing fee.
II. Actual Marketing and Advertising Services
First, the real estate broker must perform actual marketing and advertising services that are general in nature and that are unrelated to any specific transaction. For instance, a real estate broker could perform the following services:
• Distribute the title insurance agency’s brochures and other promotional materials in the broker’s office locations;
• Display signage or flyers promoting the title agency in the broker’s offices and at special events;
• Allow title agent representatives to attend a certain number of broker sales meetings per month or year to gain direct access to the broker’s real estate agents;
• Place the title agency’s banner advertisement on the broker’s webpage and link to the title agency’s website; and
• Create and manage opportunities for the title agency 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 real estate broker could perform under a marketing agreement. The greater the number of services performed, the easier it will be to justify a marketing fee.
III. Fair Market Value Marketing Fees
Second, the marketing fee paid by the title insurance agency must be commensurate with the fair market value of the marketing and advertising services actually performed by the broker. While HUD has not provided any meaningful guidance regarding how to determine the reasonableness of any particular fee, it has emphasized that transactionally-based compensation is impermissible. Thus, real estate brokers should keep the following guidelines in mind when structuring the fees under a marketing agreement:
• 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.
• An important factor to consider when determining fair market value is the size of the real estate broker. For example, a broker with twenty offices and 1,000 real estate agents would be able to market the title agency’s services to more potential home buyers than a broker with a single office and 15 agents. In other words, a larger broker will be able to distribute more of the title agency’s brochures and flyers, will produce more hits or impressions on a Web site, 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.
• Any adjustments to the marketing fee should correlate to adjustments to the marketing services and should not track the volume or value of referrals received in the past.
To gauge fair market value, the real estate broker or title agency 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 geographical area covered by the marketing agreement. Both the settlement service provider paying the marketing fee and the real estate broker performing the marketing services should be able to justify that a marketing agreement complies with RESPA.
Given HUD’s and the Colorado Division’s recent focus on marketing agreements, it is possible that regulators could target the real estate brokers who perform marketing services and receive the fees under the agreements, as well as the mortgage lenders and title companies that pay them. As a result, given the civil and criminal implications of non-compliance, real estate brokers and agents must be ready to answer HUD and state inquiries and defend their business practices, including the receipt of any fees and things of value. If you have questions or concerns about your own practices and marketing agreements under RESPA, we encourage you to seek additional resources and legal advice.
1Marketing agreements tend to require wide scale marketing activities, and, as a result, generally are entered into between mortgage lenders or title companies and large builders, real estate brokerage firms, or mortgage brokerage firms with many offices and employees. Marketing agreements generally are not executed with individuals.
2See “RESPA Worries Scuttle Marketing Agreement,” Inman News, June 18, 2008, at http://www.inman.com/news/2008/06/18/respa-worries-scuttle-marketing-agreement.
3See “HUD to Probe Bank-Real-Estate Deals,” The Denver Post, July 7, 2008, at http://www.denverpost.com/mobilebusiness/ci_9812270.
412 U.S.C. § 2607(c)(2).
5See HUD Informal Advisory Opinions, dated April 11 and 24, 1986, and May 31, 1985, by John J. Knapp and Grant E. Mitchell, respectively.
