Zillow Co-Marketing and Marketing Service Agreements (MSAs)
Last week we drifted into CRA issues, and risked losing half our mortgage banking readers. But we're back on track this week to put the issues surrounding MSAs, and Zillow co-marketing agreements in particular, into plain English.
I was in a meeting the other day, the topic was strategies for increasing purchase business. One executive had stated the obvious: "One day we won't have enough refis that just walk in the door. I'm worried that day is soon! We need to refocus on realtors and other referral sources for purchase business. Any ideas?"
One classic idea is marketing service agreements (MSAs). Most often in the form of a co-marketing agreement with a realtor, but also with builders, accounting firms, and other parties. Arrangements where a loan officer and realtor share the cost of marketing expenses appear generally effective in creating referrals bringing in new customers.
But some of our clients have avoided strategies like this, placing less emphasis on maintaining referral sources and instead relying on "walk-ins." For that reason, maybe, we're less comfortable with things like MSAs, that increase regulatory risk.
Which explains ... what happened when this idea was presented to compliance? Stonewalled. "Too risky." "Not sure if compliant." "MSAs are the focus of increased regulatory scrutiny."
Here at SCA, we recognize that MSAs can present regulatory risks, but still believe that MSAs are often a good idea. Here's what we think:
Are Marketing Service Agreements Legal?
Yes.
What is the danger?
RESPA Section 8. This is the law that prohibits us from paying for referrals. (Not including employees or mortgage brokers). We cannot say, "I'll give you $$ for each borrower you refer to me." Maybe it is anti-capitalistic, but it's definitely illegal. So the danger is that you structure the MSA in a manner that violates Section 8 (for example, by paying more than fair market value for the marketing service and thereby making this instead an illegal "kickback").
But MSAs fall outside of the general ban in Section 8 because the law still allows us to pay for legitimate services that are actually performed (as opposed to paying for mere referrals). An originator could pay a realtor to mow his lawn, or fix his car. And it often makes sense since originator can also pay the realtor to perform marketing services for him.
Determining "Fair Market Value" is the Key
So how do you find the fine line between (a) legally paying a realtor for marketing services and (b) illegally paying for referrals? The most important thing is to determine (and document) fair market value. Note: There are also other things to avoid to be safe, for example, the agreement shouldn't be exclusive, but we consider the fair market value issue to be most important right now.
Zillow Example: Good Recent Example
Since we're writing a blog, not a book, please let us try to explain our opinion here with one example. Zillow. We've been getting a lot of calls about Zillow lately, with lenders wondering if it's safe to co- market with realtors here.
Zillow is a real estate search website that earns income by charging real estate agents to advertise. Zillow allows borrowers to search for homes, view pictures, and get property estimates. Realtors pay Zillow to post their information alongside available homes. Zillow also allows realtors to split the marketing expense by agreement with a loan originator (which we call an MSA). Here, the originator gets a portion of the advertising space and is identified on the realtor's listing as a "preferred lender."
Example: Realtor pays Zillow $3,000 to post her information on Zillow where there will be 600-1000 page views by people searching for homes within her chosen zip codes. Realtor offers a portion of this ad space to an originator, and asks the originator to pay 50%. Although originator gets a small portion of the ad space, he does get the same number of page views. If a customer clicks on the originator's advertisement, it takes him/her to a separate web page devoted to the originator, complete with biography and customer reviews.
Can you allow your originator to enter into this agreement?
Yes, but probably not at 50% (see below).
How can we do this safely?
Step One: Clarify the Agreement
Explain to your originator that, "we are not paying for referrals ... we are not paying for referrals ... we are ... getting the point?" Instead, we are paying for the advertising space and access to the web page viewers. The agreement does not depend on whether the realtor ever refers a single borrower to you. The agreement is unaffected even if the realtor starts referring borrowers to a competitor! Note: E-mail evidence - Make sure your originator understands this so that they don't indicate otherwise (even jokingly) in an e-mail or anywhere else. You really don't want a regulator to see an e-mail to a realtor suggesting, "Not sure if I'm going to keep sharing marketing with you if you're giving loans to my competitors."
Step Two: Pay Only Fair Market Value
Why? If an advertisement costs the realtor $100 and the originator pays $200, the originator is obviously not paying for the advertisement, but instead illegally for referrals. This is the biggest challenge with the Zillow example. We have to determine, in each individual case, the value of the co-marketing relationship to the originators (without considering any irrelevant value of possible referrals that may or may not come, but definitely don't need to come, we're not saying that ...).
Here's one process for doing this:
First, we start by comparing the cost to the realtor's cost. The regulators are big on each party paying their pro rata share. Therefore, if you get 20% of the Zillow's web-page, you probably should not be paying 50% of the price. On Zillow, you can see that an originator gets less than 10% of the space on the primary page. However, about 20% of the ad is non-distracting, neutral, "white space." Also, when you click on the originator's advertisement, it takes the viewer to a new web page that is 100% dedicated to the originator. Making this a more complicated calculation, the primary web-page is probably 4 times more valuable than the originator's individual page (because Zillow viewers are intending to look for homes, not originators, so they only get to the originator's page if they first look at the primary page). Note: This mathematical calculation is really the safest way to go about this, even though it may seem a little arbitrary. Our goal is to create something the regulator could review to say, "Yeah, they really put a good faith effort into this, and they didn't just ignore RESPA Section 8." It's hard to give you a specific number here, but let's just say you calculate this to be 20%.
Next, compare Zillow to alternatives. Get a few quotes (seriously) on alternatives: print, radio, other internet solutions. Compare this to the Zillow offering. For example, you might have an offer from a local newspaper that costs only $500 and promises a similar number of reader impressions. On the other hand, only a small percentage of local newspaper readers may be interested in a mortgage in contrast to a large percentage of people visiting Zillow. Explain whether your analysis affects the 20% determination in Step One. With Zillow, it probably will not, because Zillow appears to be a pretty good deal. However, if there are cheaper alternatives to Zillow that appear to be just as effective, you may need to adjust the 20% downwards to reach true "fair market value."
Finally, document this process well and keep the report summarizing this effort in case you're ever questioned.
In other news:
The FDIC released a list of enforcement actions, some of which are pretty interesting (this link itself just lists the actions, you have to track down the details elsewhere).
The FDIC is also releasing videos to help bank employees comply with CFPB regulations, which you can find here. The first one is on the Ability-to-Repay Rule.
The LOS salesman said the new system would cut workload by 50%. "I'll take two," said every wiseacre in the room ... While we complain about the CFPB's effect on our morale, a new study suggests the CFPB's own morale is dropping fast.
Lest we forget that we're members of an honorable profession, that we're facilitating the achievement of the American Dream, or that our work to provide borrowers with mortgages is expressly backed by official U.S. policy, let's remember the rationale behind our government's decision to promote home ownership (last I checked, rent payments were not tax deductible ... why? Here's why):
Home ownership has been shown to increase self-esteem and life satisfaction because homeowners have greater control over and responsibility for their living environment.
Home ownership has been called a "forced savings plan" and home equity is the largest single source of household wealth for most Americans.
Home ownership spurs the growth of communities and neighborhoods. Homeowners are more likely to care about a community than transient renters because they have an investment in the community. This allows greater growth of social and political networks, lowers the rate of crime, and encourages community activism.
"Life is like the car pool lane
The only way to get to your destination is to take some people with you."
- P. Ward
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**These are our opinions. We're not authorized, or willing, to express those of others.**