When my son graduated from high school, he
had to give a speech. He began by reading from his prepared text.
"I want to talk about my mother and
the wonderful influence she has had on my life," he told the audience.
"She is a shining example of parenthood, and I love her more than words
could ever do justice."
At this point he seemed to struggle for
words. After a pause, he looked up with a sly grin and said, "Sorry, but
it's really hard to read my mother's handwriting."
Welcome to Q2! I am attending the NYMBA conference for a few days, but 1,300 miles south, in
Florida (aka "God's waiting room"), folks are talking "real
estate boom." Tampa now takes the title of the nation's healthiest housing
market, at least according to TenX, a real-estate auction and analytics company which
rates locations based on a number of key factors, including population and job
growth, unemployment rate and wage growth, as well as industry-specific
indicators like inventory and construction.
For business opportunities, an independent mortgage
banker seeks an equity partner to expand its current platform. The
Company is licensed in several Western States (including Arizona, Colorado,
Hawaii, Idaho, Oregon, and Washington) with a full operations center in California.
Approvals include Fannie-Mae, FHA full Eagle, VA and Reverse, and current
channels include retail and consumer direct. Ideal candidates include real
estate brokerage firms looking to establish an in-house lending division, a
mortgage banker looking to increase its footprint in California, or investment
firms looking to add a mortgage banker into its portfolio of
investments. For a confidential discussion, please e-mail Rob Chrisman;
principals only please; specify opportunity.
Builder incentives, RESPA, and MSAs
Following the Prospect Mortgage Consent Orders there
has been a lot of RESPA chatter, including questions about builder incentives.
I received this note from Chicago-based attorney Brian Levy (Katten
& Temple, LLP) about it.
"The Prospect Orders did not directly address RESPA
issues with builder incentives, but many of the same concerns raised in
Prospect regarding coupling payments with referral type obligations
could be extended to builder/lender relationships as well. At the same
time, builders, who are in the business of selling their own homes, are very
differently situated than the Realtors in Prospect.
"The Prospect Orders pose a challenge for anyone who couples
MSA's or similar arrangements with offering incentives to consumers to use the
providers making the payments. The CFPB's conclusion in Prospect was that the
payments made by Prospect to the Realtors was in return for referrals,
not something else like leads, marketing services, or web advertising etc. The
Orders did not analyze whether the payments were for 'services rendered' as
would be expected under Section 8 (c) (2) of RESPA and CFPB probably contends
that 8 (c)(2) analysis needs to wait for certainty from the PHH
appeal. Rather, CFPB simply looked at what else was going on in Prospect's
relationships (i.e., payments made by Realtors to their agents,
statements made about the relationship, endorsements, exclusivity, incentives
etc.) and concluded that the relationships were really just about paying for
referrals. Specifically, of concern to the builder incentive question, the
Prospect Order suggests that even a prequalification requirement in a Realtor's
form agreements (allegedly based on having confidence in only certain lenders'
approvals), was likely a subterfuge for a paid referral arrangement. CFPB
took the position that any lender's approval is as good as another and even
argued that offering a consumer discount by the Realtor was another example of
referral activity in return for payment.
"Yet, whether a pre-qual requirement or financial
incentive, standing alone, is the same thing as a 'referral' under RESPA
remains an open legal question. CFPB staked out a position in Prospect much
different from where HUD came down on that issue. The Eghbali Consent Order
from last May only adds to the confusion on when a consumer discount can be a
RESPA violation. On the other hand, not all incentives to use a provider
are coupled with any MSA type payments or relationships. Further, as home
sellers, builders have a much stronger argument that it is truly in their best
interests to offer incentives to consumers to use preferred lenders, and that
is what drives the desire to have an incentive, rather than as an effort to
drive referrals for payment. Meanwhile, Affiliated Business Arrangements have a
special RESPA exemption that is technically a safe harbor if the 3 requirements
are met. For AfBA's, the critical test on incentives is whether the
consumer is 'required' to use the affiliated lender. Courts have found
that reasonable incentives not to be a 'required use,' so it seems unlikely
that the Prospect reasoning would be extended to builders offering reasonable
incentives to use an affiliated lender."
Mr. Levy wrapped up with, "Ultimately, a builder
(or any referral source) who offers reasonable incentives to consumers to use
preferred lenders based solely on confidence in service levels should
have nothing to fear under RESPA. Coupling such an incentive, however,
with an MSA or similar arrangement, could raise similar issues to Prospect for
the CFPB if your narrative isn't strong enough to overcome CFPB skepticism. At
that, builders have a much better story to tell than Realtors, but it is
imperative that the parties to strategic alliance arrangements understand and
can articulate that any incentives are unconnected to any payments."
Thanks Brian!
And Shumaker Williams, P.C.'sJ. Steven Lovejoy,
Esq., writes, "Recently you posted yet another piece on Zillow
advertising and, generally, Marketing Services Agreements in the context of
possible RESPA issues. You included a 'Top 10 things you need to know before
you buy a lead or participate with a referral source in lead generation.' I
subscribe to most of those, but have a caveat about 'thing' number 7, which
read: 'Paying for a Referral Partners ad to generate leads on any platform,
such as print or Internet, is a RESPA Section 8 violation unless you have
shared space equal to the percentage you are contributing. For instance, if you
pay for 50% of the ad, then you must have 50% of the size of the ad.'
"It's not that simple. If the cost is split 50-50,
the size allocation is not the only factor. One must consider the overall
content of the ad, its component parts and the respective benefits received
from the ad. For example, assume a mortgage company and a realtor get together
to sponsor one of those magazines you find at the grocery store with pages and
pages of property listings. You might think the realtor gets more bang from the
listing ad than the mortgage company. But the mortgage company is unlikely to
get business from the ad unless the recipient is firstly interested in the
property. So, the portion of the ad that talks about the property benefits BOTH
the realtor and the mortgage company. We also need to look, however, at whether
the space use, prominence and content of the copy identifying the realtor and
the mortgage company are 50-50. Is there roughly equal contact information for
both parties?
"In our joint marketing agreements, we also include a
monitoring and adjustment clause such that, if, over time, the mortgage company
gets little business from the ad in comparison to the realtor, the 'split' of
the cost is adjusted accordingly. Even a fair 50-50 split described above in
'thing' #7 could violate RESPA if the mortgage company received little or no
business from the ad, in comparison to business received by the Realtor.
"The upshot is that any proposed joint advertising
should be vetted with a RESPA-knowledgeable attorney to determine whether there
is any significant risk that the arrangement could be considered payment of a
referral fee. Moreover, the joint marketing arrangement should be spelled out
in a contract that applies these RESPA-derived principles. True joint
advertising to the public has not been declared violative of RESPA so long as
each party pays a fair portion of the cost, each side gets benefit from the ad,
and the benefit is not tied to referrals.
Rob also indicated that the MSA/Zillow discussion has triggered
renewed questions about builder incentives to new home buyers for using a
preferred, or even related, lender or mortgage broker. I refer you to my January 16, 2016 piece on Rob's blog that analyzes this
issue in depth. Nothing has changed on that front since then. RESPA
does not prohibit offering a financial incentive to a borrower. That is not
a kickback or referral fee, UNLESS the lender directly or indirectly funds the
incentive offered to the buyer by the builder." Thank you, Steve!
Capital Markets
One person's opinion is just as good as someone else's,
right? Certainly, Fed presidents have been talking about "reducing the
balance sheet," e.g., the trillions of dollars of MBS on its books. The
Federal Reserve is likely to begin reducing its $4.5 trillion balance sheet in
early 2018, JPMorgan economist Michael Feroli wrote in a research note. He expects the Fed to stop reinvesting in
mortgage-backed securities next year and to reach its target by early 2024.
Projecting things 7 years out? Wow.
Looking at rates, on Friday they stayed in the range we've
been for a while despite the Chicago PMI topping expectations for March. And
MBS prices held their own. The 10-year note closed nearly .250 better to yield
2.40% while the 5-year note and agency MBS prices improved about .125 by the
end of the day.
Looking ahead to this week we have a lot of scheduled news
cumulating with Friday's employment figures. Today, besides another spate of
Fed speakers, we'll have Markit PMI, whatever that is, along with the March Institute
of Supply Management PMI, and February Construction Spending. Tomorrow is
February's Trade Balance and February Factory Orders. Wednesday is the usual
MBA's survey of last week's apps, but also the March ADP Employment Change,
March ISM Services, and March FOMC Minutes. Thursday things continue with March
Challenger Job Cuts, and Initial Jobless Claims. Friday is the big kahuna with
the March employment numbers. With all that coming up we commence the week
with rates not much different than Friday afternoon: the 10-year is yielding
2.39% and agency MBS prices are "unched a bunch."
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