Marketing Service Agreements Compliance Essentials

Marketing Service Agreements, or MSAs, have long been a significant topic within the mortgage industry, offering both opportunities and challenges for lenders that wish to make use of them. MSAs constitute an arrangement whereby service providers, such as mortgage lenders and/or real estate professionals, agree to split marketing services and costs.

While the allure of decreasing marketing costs can be substantial, understanding the intricacies of these agreements – and the regulatory landscape that governs them – is essential for industry professionals who may be considering such partnerships.

What Are Marketing Service Agreements?

“Splitting costs” with a fellow provider is what MSAs ultimately boil down to, but let’s get a little more specific. Marketing Service Agreements are contracts between two or more parties, typically a mortgage lender and a real estate broker, where the lender compensates the broker for marketing and promotional services. These services might include advertising, lead generation, and other marketing activities that are primarily designed to enhance the visibility and sales of the lender’s mortgage products. The core idea is that both parties should benefit from the increased business that hopefully stems from these shared marketing efforts.

How MSAs Operate

So what forms might an MSA take? In practice, MSAs could potentially involve several related activities within an overall campaign, such as:

• Joint Advertising: Both parties contribute to the cost of advertising campaigns that promote their shared services.
• Lead Sharing: Real estate brokers and mortgage lenders share potential leads between teams.
• Co-Branding: Marketing materials are brainstormed and created that feature both the lender’s and the broker’s branding.
• Event Sponsorship: Mortgage industry events could be co-hosted or co-sponsored to enhance brand visibility for both partners. This could also include further advertising opportunities like conference lectures or informational booths.

Legal and Regulatory Considerations

Marketing Service Agreements, can, in effect, double a lender’s advertising power, provided that both entities follow the framework of the agreement. However, ensuring that both parties play fair is far from the only consideration. For an MSA to be lawfully compliant, it must be structured carefully to avoid legal pitfalls. This involves ensuring that resulting compensation is balanced, reasonable, and reflects the fair market value of the services provided, and not as a reward for referrals, which can be a legal gray area.

The regulatory framework surrounding MSAs is primarily governed by the Real Estate Settlement Procedures Act (RESPA). RESPA Section 8 explicitly prohibits kickbacks and unearned fees in exchange for referrals of settlement service business that involves federally-related mortgage loans. Violations of RESPA can result in significant penalties, including fines and even imprisonment. Mortgage companies looking into the MSA option should closely review and understand the below key regulatory capstones:

1. CFPB Guidelines: The Consumer Financial Protection Bureau (CFPB) has provided various guidelines and compliance aids regarding MSAs. In their compliance aid on RESPA Section 8, the CFPB emphasizes that payments under an MSA must be for bona fide services and at fair market value. Any arrangement that disguises referral fees as marketing payments is prohibited.
2. Established Legal Precedents: The National Association of Realtors regularly highlights the importance of clarity provided by legal interpretations of RESPA. For instance, recent legal precedents have stressed the necessity for detailed documentation that justifies the payments being made under an MSA. This documentation should clearly outline the services provided and their corresponding value, so as to ensure that no confusion arises from agreement stipulations.
3. Creating Compliant MSAs: Mortgage companies and/or brokers who enter into MSAs should have clear and comprehensive steps in place for creating compliant MSAs. These steps include conducting thorough due diligence, ensuring transparency in agreements, and continuously monitoring and auditing the MSA to ensure ongoing compliance.

Risks and Considerations for Mortgage Professionals

As we’ve briefly touched on above, entering into an MSA without a clear understanding of legal boundaries carries several potential risks that mortgage professionals must consider.

• Regulatory Scrutiny: Given that MSAs were often misused in the past to circumvent RESPA regulations, any agreement is inherently likely to attract an added layer of scrutiny from regulators, such as the CFPB. Ensuring compliance through meticulous documentation and adherence to regulatory guidelines is critical to avoid any appearance of impropriety.
• Reputational Damage: Any perception of illegality may seriously harm a mortgage professional’s reputation. Utilizing transparency via ethical conduct while structuring, maintaining, and moderating MSAs are essential to sustaining trust with clients, partners, and regulators.
• Financial Implications: Non-compliance with RESPA can result in severe financial penalties. Payments made under MSAs must be for actual services rendered at fair market value. Under-the-table ‘deals’ under the guise of an MSA will result in harsh penalties once discovered.

Best Practices for Entering into an MSA

By now, Marketing Service Agreements may seem like a hazardous and tricky tiptoe through a rules-strewn minefield. And while it is true that the landscape of MSAs is extremely regulatory-driven, the same can be said for any process within the financial industry. When done correctly within the letter of the law, MSAs can be extremely beneficial for all parties involved. Here are a few major rules of thumb to follow to make sure your MSA plans go off without a hitch:

1. Conduct Thorough Due Diligence: Before entering into an MSA, conduct a comprehensive review of the potential partner’s business practices and reputation. Make sure you really know who you are partnering with, and that the services provided under the agreement are legitimate and necessary.
2. Document Everything: Keep detailed records of all services provided and payments made under the umbrella of the MSA. This documentation should clearly demonstrate that reasonable payments are being made for bona fide services at fair market value.
3. Seek Legal Counsel: Engage with legal experts who specialize in RESPA and mortgage industry regulations. Not even the most competent mortgage professional knows everything within every field. Legal counsel can provide invaluable guidance in structuring MSAs to ensure correct compliance.
4. Regular Audits: Implement a tested and vetted system for regular audits of the MSA. This helps ensure ongoing compliance that is routinely monitored, which can identify any potential issues before they become problematic.
5. Transparent Communication: Maintain open and transparent communication with all parties involved in the MSA. This includes clearly articulating the purpose of the agreement, the services provided, and the compensation structure.

The Bottom Line on MSAs

Marketing Service Agreements offer significant benefits in terms of shared marketing efforts and business growth within the mortgage industry. However, just like virtually any financial industry technique or option, they also come with regulatory responsibilities. By understanding the legal landscape, conducting thorough due diligence, and maintaining transparent and ethical practices, mortgage professionals can leverage MSAs effectively while staying compliant with RESPA regulations. As with any business agreement, the key to success lies in careful planning, meticulous documentation, and ongoing oversight.