This week, I will be leading an interactive session at ALTA ONE that provides an in-depth look RESPA’s rules around marketing – and how to leverage ALTA’s Homebuyer Outreach Program (HOP) to make the right impression. Read on for a sneak peek of what to expect, and be sure to check back after the event for a recap of my key learnings.
Real estate agents and brokers; mortgage bankers and brokers; title companies and title agents; home warranty companies; hazard insurance agents; appraisers; flood and tax service professionals; and home and pest inspectors are all persons covered by Real Estate Settlement Procedures Act (“RESPA”). Under RESPA Section 8 (12 U.S.C. 2607), covered persons cannot:
- Pay or give a “thing of value” to any person or company for business they refer or create for you. 12 C.F.R §1024.14(b)
- Split fees or receive fees for services you did not actually perform or earn.12 C.F.R §1024.14(c)
Basically, kickbacks and split fees can get you into trouble if you are not careful. However, title companies and title agents avoid a RESPA violation – the non-Marketing Services Agreement way – through normal marketing and advertising activities in compliance with Section 8(c) exceptions.
RESPA Section 8(c) allows “normal promotional and educational activities that are not conditioned on the referral of business and that do not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or business incident thereto.” 12 C.F.R. §1024.14(8)(2)(vi). This exception is specific and requires an understanding of how the courts and the Consumer Financial Protection Bureau (CFPB) interpret.
…So, What Can You Do? You may engage in “normal promotional activities” as long you are in compliance with RESPA. Some things to consider include:
- DO consider non-exclusive written advertising agreements that clearly and adequately set out the terms of the relationship including number and frequency of ads, timeframes and locations for delivery. Be sure and retain these agreements to demonstrate your efforts to comply with RESPA, as well as any federal and state laws and regulations governing the co-marketing efforts.
- DO ensure co-branded marketing is not done in exchange for referrals or conditioned upon the referral of business. Payments must not be tied to referrals or closings. For example, if a title company is offsetting the marketing costs of a real estate broker on a third-party real estate listing aggregator’s website, and the broker refers business to the title company, it may appear the title company is paying the expense in exchange for a referral of the business in violation of Section 8.
- DO ensure that all costs and payments for marketing, advertising, or promotional products and expenses, etc., done with any real estate professional, builder, insurance agent, title company, etc., is shared equally or proportionally between the parties at fair market value. What constitutes the proper share should be (1) based on the fair market value for the creation/design, printing, mailing and other services in connection with the advertisement; and (2) in direct proportion to each party’s prominence and space in the advertisement. If one party is paying less than its proper share for a brochure, webpage or advertisement, this may be a violation of the anti-kickback provisions of Section 8. For example: If the title company and real estate professional share an ad 50/50, the split cost for each would be 50% of the total cost. If the real estate professional has 3/4 of the ad and the title company only has the remaining 1/4, the real estate professional would pay 3/4 of the total cost while the title company would paid the remaining 1/4.
- DO document and retain evidence of payments and method of determining fair market value for actual marketing opportunities as proof of compliance. Each party engaged in co-marketing activities should consider the following.
- How did you determine fair market value? What is your methodology? How did you come up with your numbers?
- What parameters did you use to determine fair market value (FMV)?
- Is a similar product or service free in the marketplace? Is there a cost to produce the product or service? Such evidence may include what other independent third-party providers charge for the service or thing of value in the marketplace. Avoid relying on your partner or competitor’s valuation of services alone to establish value in the marketplace.
- Have you obtained a third-party valuation? Best practice is not to do the valuation yourself, but to get a third party to provide specific value for advertising and promotional activities.
- DO monitor and audit your advertising arrangements regularly. You want to be careful that payment amounts are not modified and that you are paying for advertising actually performed in connection with the fair market value for those services. This will also help you determine if these activities actually provide the value you are paying for to your business.
- DO pay a third-party marketer directly, rather than reimbursing any real estate professional, builder, insurance agent, title company, etc., directly for services. Retain documentation of these payments, including invoices or cancelled checks, etc., to professional companies in order to demonstrate how the cost is proportionally split to ensure RESPA compliance.
- DO always disclose affiliate and marketing relationships and make clear the option to shop. You may want to consider requiring any marketing materials to include the word “Advertising” or “Advertisement” in a prominent location so the consumers may easily identify it as promotional.
- DO ensure any advertisement targets general consumer groups, not individuals or specific sales teams. Marketing to specific real estate agents who have the ability to influence the selection of settlement services providers, rather than broad advertisements to the general public, may be seen as a violation of RESPA.
Disclaimer: This is provided for informational/instructional purposes only and does not constitute the giving of legal advice or establish an attorney-client relationship. Consult with a RESPA attorney to make sure you understand and properly comply with any and all applicable laws. As a reminder, some state and local laws prohibit or otherwise restrict activities that may be permissible under RESPA.