U.S. mortgage firms are getting back into joint marketing and advertising arrangements, reviving a controversial practice that was effectively banned in the aftermath of the 2007-2008 subprime mortgage crisis.
Such arrangements involve mortgage originators and title insurers, hungry for sales leads, paying a real estate broker or homebuilder to promote their services and products, or to rent a desk in their offices.
They were effectively banned by the Obama administration under the Consumer Financial Protection Bureau’s then director, Richard Cordray. He brought more than two dozen enforcement actions, including against big banks like JPMorgan Chase and Wells Fargo & Co, alleging the arrangements violated federal laws that bar kickbacks or referral fees that could increase the cost of buying a home.
In interviews, nearly two dozen lawyers, consultants and mortgage executives told Reuters that the CFPB’s sharp pullback under the Trump administration has emboldened the industry to get back into these arrangements.
“I have seen a significant jump in the number of banks, mortgage lenders and title companies who have gotten back into co-marketing/advertising arrangements because the regulatory environment has shifted,” said Marx Sterbcow, a mortgage lawyer and managing attorney at New Orleans-based Sterbcow Law Group.
Cordray aggressively enforced the 1974 Real Estate Settlement Procedures Act (RESPA), which bars giving or receiving anything of value in exchange for referrals for homebuying services such as mortgages, title insurance and appraisals.
While co-marketing arrangements are not illegal under RESPA, Cordray found many were used to disguise an illegal referral fee as compensation for marketing or advertising services.
“My view is about the same as it was when I was at the bureau. A lot of arrangements… are questionable at best, but probably illegal,” Cordray told Reuters.
Republicans said Cordray overstepped the law and note that the courts did not always back his interpretation. After taking over as acting head of the CFPB, Mick Mulvaney said the agency would not take such an aggressive stance.
He pulled two high-profile RESPA suits Cordray had been fighting in court against mortgage lender PHH Corp. and law firm Borders & Borders. Under Cordray, the CFPB initially lost those suits, but Mulvaney departed from the bureau’s usual practice by choosing not to fight those rulings. Mulvaney also closed Cordray’s three-year RESPA probe of online real estate giant Zillow’s co-marketing program.
Overall, CFPB enforcement actions have fallen by around half under the Trump administration, a Reuters analysis found. “All of those moves together sent industry the message that the agency wouldn’t be aggressively pursuing RESPA enforcement as it had been in the past,” said Richard Horn, partner at Garris Horn in Arizona and a former CFPB lawyer.
Online CFPB complaints and industry chat rooms reveal frustration among industry executives who claim competitors are unfairly exploiting the more relaxed regulatory environment.
“I know that the CFPB is now essentially gutted and will probably ignore my complaint, but I challenge you to do the right thing,” said one anonymous complaint claiming a RESPA violation.
The CFPB declined to comment, but Kathy Kraninger, the new CFPB director, told Reuters in April the agency is reviewing RESPA enforcement and may publish new recommendations.
TRUMP ‘WIN’
Because the marketing arrangements are private, there is no data on their use, although Reuters identified dozens online.
Mark Meyer, chief executive of mortgage services consultancy MLinc, said he had added around 75 new clients looking for help drafting co-marketing agreements since January 2018, compared with no new clients the previous year. He added that the Trump administration has been “a win” for mortgage firms.
Industry executives say these arrangements help homebuyers by guaranteeing them a pre-approved rate that allows them to expedite a purchase. But consumer groups say they can result in borrowers being steered toward more expensive mortgages.
“Consumers are often robbed of the experience to shop around by pledging their business to one provider on the spot, often unknowingly agreeing to pay higher fees,” said Linda Jun, counsel at Americans for Financial Reform.
CFPB research from 2015 found that almost half of mortgage borrowers fail to shop around, costing them several thousand dollars over the life of a loan. A third of borrowers said they relied on their real estate agent for mortgage information.
The agency’s overhaul has coincided with a period of intense competition in the U.S. mortgage market due to falling home sales. This competitive pressure has also made such arrangements more attractive.
Several industry executives, however, said firms had been uncomfortable getting back into such arrangements until the regulatory risk had abated.
“The risk of compliance was so great under Cordray that lenders had to wear both a belt and a pair of suspenders,” said Josh Weinberg, who oversees compliance at New Jersey-based lender First Choice Loan Services.
“Now there’s a loosening up on some of the risk in (marketing services agreements). We are more willing to consider them, especially with the recent changes at the bureau.”
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