For the past several years, Prospect Mortgage, LLC, has weathered a blast furnace of regulatory heat due to its aggressive marketing efforts, which some have called kickbacks. Last week, the company entered into a consent order with the Consumer Financial Protection Bureau that serves as a useful guide for other real estate businesses.
The CPFB accused Prospect of violating the Real Estate Settlement Procedures Act (RESPA) through improper lead agreements, market services agreements, and desk licensing agreements. Prospect also supposedly ran afoul of RESPA by having its counterparts require buyers to obtain pre-approval for loans with Prospect. (Even some all-cash buyers had to get pre-approved by Prospect.) Other alleged RESPA violations include paying for referrals from a mortgage servicer (for refinancings) and by using a third-party’s website ads to pay for referrals.
The parts of the consent order from which other business can learn most are the ones dealing with agreements for lead payments, marketing services, and desk licensing.
Prospect’s lead payments—in which it pays a different company for information about a prospective borrower—were supposedly unlawful because the referrers not only received money for the information, but they also actively referred the potential customers to Prospect. An exclusivity provision in the lead agreements was also problematic. To avoid these types of potholes, business that want to purchase lead information should do so with no exclusivity strings and without any promotion by the lead provider.
According to the consent order, the problem with the MSAs was that the payments were based on referral levels and not on marketing efforts. The success of the effort was tracked as part of a “capture rate.” One way to steer clear of difficulties like this is to have an independent assessment done of the value of marketing services, then pay that rate, and do not vary the payments based on the level of referrals. Of course, many people believe MSAs are simply too dangerous and not worth the effort. That is probably sound advice.
Finally, the desk licensing agreements purportedly violated RESPA because they were not just payments for renting office space. They also allegedly relied on promotions and endorsements by the hosting company. The access given to Prospect was scrutinized because no other lenders were allowed to have deals like that or to present educational seminars to agents of the hosting company. Again, for situations like this, you are best off to get independent assessments of the value of the office rental, give no express endorsements or promotions, and allow different lenders to rent from you.