If your brokerage makes use of “preferred vendor lists,” you could be extending a welcome mat to regulators, according to many compliance experts — yet another potential regulatory minefield for real estate brokers to avoid.
What are preferred vendor lists?
These lists are a fairly common practice used by brokers of all sizes across the country, primarily on their websites. Sometimes called “preferred partner,” “trusted partner” or “recommended vendor” lists or other names, they provide consumers with contact information for title settlement service companies, lenders, mortgage brokers, escrow agents, home warranty companies, insurance providers and even home improvement contractors.
Call them what you want, but many attorneys and compliance advisors call them flirting with danger — because regulators may view them as a form ofmarketing service agreement (MSA), which have become a top concern for the Consumer Financial Protection Bureau (CFPB) in the last year.
“I think the term ‘preferred’ has become a minefield,” said Ken Trepeta, president and executive director of the Real Estate Services Providers Council Inc., or RESPRO, a national nonprofit trade association that educates real estate and mortgage industry providers on how to offer affiliated services to buyers through subsidiaries, joint ventures and strategic partnerships.
What RESPA says about preferred vendor lists
There is no provision in the Real Estate Settlement Procedures Act (RESPA) — the federal law that governs the relationships between real estate professionals — that specifically mentions these lists.
However, any such list that is created with the understanding that the companies on it will refer business or other favors to the broker may be deemed by a regulator to be a violation of RESPA Section 8(a) , which provides that “no person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.”
Before Trepeta assumed the helm of RESPRO and was leading the Government Affairs division of the National Association of Realtors (NAR), he helped create a “dos and don’ts” RESPA compliance list that warns brokers and agents, “Do not designate a settlement service provider as the broker’s or agent’s ‘preferred’ company” as part of an MSA, and “Do not enter into exclusive MSAs such that the broker agrees to perform marketing and advertising services for only one lender or title company.”
“I would venture to say that there probably are not that many preferred providers who are preferred without some strings attached,” Trepeta said. “One must avoid calling anyone a preferred provider or anything that looks like an attempt to steer. One must avoid using the word ‘required’ or implying a required use.”
When ‘preferred’ generates leads
“Preferred” lists may in fact be a form of lead generation to many brokers, but a recent CFPB enforcement action shows that this could be dangerous territory, according to Chuck Cain, an attorney who specializes in RESPA and executive vice president of agency operations at WFG National Title Insurance Co.
“One must avoid calling anyone a preferred provider or anything that looks like an attempt to steer. One must avoid using the word ‘required’ or implying a required use.” – Ken Trepeta, president and executive director of RESPRO
In February of this year, the bureau targeted Maryland mortgage lender New Day Financial LLC for entering into an arrangement with a veterans’ organization to be named the “exclusive lender” of the organization and sending mail to the organization’s members, urging them to use its products. According to the bureau’s charges, NewDay paid lead-generation fees to the organization, as well as a $15,000 monthly licensing fee to the broker that arranged the setup.
NewDay paid a $2-million civil penalty to the CFPB for violating RESPA.
“Even if the agreement is not made in consideration of the referral of business, there is no evidence that shows this is not the motive,” Cain noted. “If you are a real estate broker that has any sort of vendor relationship, ask yourself this: Why are you doing it? Is it so you can offer customers a list of vendors you have used in the past, vetted and know do a quality job? Or is it another way to get money through the back door?”
Although real estate professionals get paid from the business they generate, “there are no clear, legal ways to be paid for the referral of business,” Cain pointed out. “In that way, RESPA may seem very counterintuitive and counterproductive to the whole structure of the industry, and it may be hard for brokers and agents to wrap their minds around that.”
Brokers who wish to provide consumers with recommendations for trustworthy vendors do have other options that are easier to demonstrate RESPA compliance to regulators, Cain said.
“You can run an ad for the provider on your website, along with a note saying, ‘a promotional fee has been paid for by so-and-so,’” Cain suggested. “That is what the bureau is currently advising companies to do. You can hand out items like tri-fold fliers or display information in stand-up racks in your office — as long as there is no consideration made or understanding of the referral of business. And none of this should be done without legal counsel reviewing exactly what is being done.”
If you’re a broker who assumes these lists are so commonly used, regulators can’t possibly target all of them, think again. First, it’s worth noting that some of the top RESPA attorneys in the country declined to be interviewed for this story because they are currently involved in legal or regulatory actions in which these lists are an issue.
Second, it’s quite common for regulators to make an example of a large, well-known company for conduct deemed questionable, and some of the most common business practices get wiped out when market leaders are forced to change their ways.
“While it’s true that some regulators choose not to take action against small companies or in cases where a small amount of value has exchanged hands, they have gone after the big cat that laid out the large dollars,” Cain said. “It’s also a mistake to think that because the company down the street didn’t obey the stop sign and got pulled over, you can escape because the cops have already pulled the speeder over.
“And if your reasoning is, ‘well, everyone else is doing it,’ is that really what you want to tell a judge during a federal prosecution? Because then that judge is going to say, ‘tell us who everyone else is.’”