Bye-Bye Marketing Pacts, Hello Level Mortgage Playing Field

A more level playing field among loan officers may soon emerge as marketing services agreements between mortgage lenders and referral partners increasingly fall out of favor because of questions about their legality.

The agreements often leave service providers obliged to recommend a partner, even when a better alternative is available for a consumer. What's more, many lenders see MSAs as a necessary evil to avoid putting their loan officers at a competitive disadvantage.

But as MSAs go away, loan officers will have to aggressively compete based on their skills and customer service to win referral business.

"To some extent, what is old is new again — good, old-fashioned relationship building," said Sue Woodard, a former loan originator and sales trainer who is now the chief executive of Vantage Production, a marketing technology vendor in Red Bank, N.J.

While the Consumer Financial Protection Bureau has not issued a wholesale ban of MSAs, its exams and enforcement actions have focused on whether consumers benefit from the arrangements, said Mitchel Kider, an attorney with Weiner Brodsky Kider in Washington.

"Bottom line with all of this is, the CFPB wants you, if you are going to be making a referral, to be making that referral for the right reasons, not because you are getting paid for it, but because you think this is a good lender and you think this is a beneficial lender," he said.

If MSAs go away, "then the consumer and Realtor are looking at who can give them the best service for their transaction, quicker and at the best price," said Jeff Bode, the president and owner of Mid America Mortgage.

The agreements have not been all that successful for Mid America, and Bode said the Addison, Texas-based lender is in the process of winding down the few it still has in place.

"When CFPB takes an interest in them, there's no reason to flirt with danger for marginally improved profits," he said.

Ultimately loan officers and real estate agents only get paid when a loan and home sale close. Doing things to speed up the origination and closing process, and thus accelerating how quickly people get compensated, will win lenders more business.

"You're going to have to make those groups feel like you're the best solution for them and they're being rewarded for what they bring to you as a lender," said Mark Mackey, CEO of International Document Services in Salt Lake City. "And you need to reward them by making sure they're compensated quickly or you're not slowing down their side of the process."

Referrals between real estate agents and lenders should be based on the originator's transparency, ability, speed and competitive pricing, "and that pretty much goes hand in hand with a more transparent and open market," said Rajesh Bhat, the CEO of Roostify in San Francisco.

The biggest thing that referral partners are looking for from their lenders is communication, Woodard said. "It is the No. 1 thing that I hear from the top Realtors in the country that they want from their lending partner," she said.

Recounting a discussion with a group of real estate agents, Woodard said she asked what would cause them to change the loan officers they work with. "Not one of them said, 'I want money, I want a slice of the pie,'" she said. "They all consistently said, 'I want great communication from the person I work with.'"

Incidentally, joint venture agreements, another target of CFPB's anti-kickback probes, could see increased usage when MSAs go away.

Regulators have long pursued so-called sham joint ventures, where there is no true splitting of both the risk and reward. A truly legitimate joint venture needs to be "a substantially capitalized" entity, a true lender with about $2.5 million of its own capital, plus its own licensing, employees and secondary market approvals, Kider said.

Even as PHH Corp. is doing away with its MSAs, it will keep in place its joint venture with Realogy, parent company of some of the country's biggest real estate franchises, including Century 21, Coldwell Banker, and Better Homes and Gardens Real Estate.

During PHH's second-quarter earnings conference call, CEO Glen Messina told analysts that while he believes MSAs will "go by the wayside," joint ventures will continue to be a viable option for lenders. "But they have to be structured like real honest-to-goodness, true joint ventures, with capital at risk," he said.

"But at the end of the day, nothing is better than having a good, strong retail sales force."