CFPB cracks down on Kickback scheme disguised as MSA

http://http://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-prospect-mortgage-pay-35-million-fine-illegal-kickback-scheme/

 

This is fantastic! A lot of crooked real estate agencies (which is a frighteningly large percentage of them) lean in on lenders and require that lenders pay into what are known as Marketing Services Agreements (MSAs). Essentially they are supposed to be agreements where the lender and the real estate office split the costs of advertising and marketing. Think of those postcard mailing campaigns that you’ve glanced at and chucked into the recycling bin or open houses with banners, signs and swag. On its face it seems to make sense, two companies or two sales people go in together to generate business. Of course, in real life, things are rarely so easy.

See, there’s a very important law – RESPA, the Real Estate Settlement Procedures Act of 1974. The relevant part of RESPA is Section (a): the prohibition against kickbacks and unearned fees. This covers “referral” fees and “buying the business.” Essentially the law prohibits any one in the real estate industry from paying other parties for referrals or making payment for services rendered contingent on the closing of a real estate transaction (financing, sales, etc). So your real estate agent can’t get paid for sending you to his “preferred” lender. Ever since the law was passed and with every passing update, clarification and revision the real estate industry has tried to find ways to circumvent the law. MSAs and ABAs (affiliated business arrangements) have been the preferred vehicles for these extralegal gymnastics.

So what happens is that instead of obviously well-spirited advertising campaigns and events, companies set up relationships wherein, for example, a lender “leases” a desk at a real estate brokerage’s office. That lender pays well-above market rates for that “privilege,” say $2500/month for a desk and a chair. That lender, of course, expects something for his/her generosity. They want loans that they can close and make money. This isn’t in the spirit of serving the consumer mind you, this is about the $$$. The real estate office is seeking to either defray it’s rental expenses or generate a profit and the lender is seeking an easy path to deals. Now, paying above-market rent for a desk is questionable but not as questionable as the further perversion of these kinds of arrangements: varying the rent each month and making it dependent on how many deals were sent to the lender. Yes, this is very common. It is not what happened in the linked story but this kind of action gladdens me deeply since I am tired of being approached by crooked real estate agents to set up MSAs and hearing about how other, less scrupulous, lenders are “in-house” or “preferred” with a particular real estate office.