Yesterday I talked about this hot topic and some thoughts on why you may want to reconsider using MSA’s as a means to drive in business. Today, I’m outlining the best practices that were recommended by the attorneys on the Panel who discussed MSAs.
Increased scrutiny by the CFPB leaves many companies wondering whether or not they should allow an MSA. At the MBA Legal Issues conference this past week, three of the best legal minds in MSA lender defense represented their opinions on this topic. The interesting thing is that although they did not agree on many of the specifics, they did define best practices that are designed to protect your company should you still want to offer an MSA.
One point that was overlooked and needs to be considered is how this practice affects your Fair Lending. Many people forget that all of these regulations overlap. Let’s assume you are a mortgage banker that offers MSA agreements to the well-served real estate offices, but neglect the under-served real estate offices. If I were to guess, I would bet that many mortgage bankers have this issue and should consider this a problem if they continue to practice by MSA. If you’re going to “advertise” for business you need to advertise in well-served and under-served markets!
They also agreed that even if a lender strives towards best practices, it still may not satisfy the regulatory bodies, so be prepared to defend it (read ‘litigate’, which costs money).
So, if you are still going to participate in an MSA, here are the best practices recommended by the leading attorneys on the panel.
First, understand that if the CFPB does not like a practice, they will make the examination of this practice intense. So be prepared with facts, pictures, agreements and how you monitor it.
Does your agreement pass the compliance test?
- Is this service an actual service? And is this service necessary and distinct?
- Payment for the service must be fair market value and tied specifically to functions performed. For instance, when you walk in the door of the real estate office do you see the “advertising” you are paying for?
- Do you have the empirical data necessary to show an examiner that the cost of putting your logo on a door for your MSA office is the correct price for this service based on comparables in the area for similar advertising? You’re going to be asked for this!
Next, here are the areas to monitor and monitor well!
- Avoid a Quid Pro Quo (meaning I’ll do this for you and you do this for me).
- Have an independent third party draw up the agreement.
- Trust by Verifying the services being performed.
- Have the company receiving the service, sign off (checklist format) that they have performed all of the tasks for that month before they receive any payment. If they missed a task, then you have to short the invoice. You cannot pay them for something they didn’t do. And yes, the examiners will ask you to prove that they did it, so you have to provide pictures, flyers, etc. proving each of the services was performed with a time/date stamp.
- Services performed should be referenced as “advertising” and noted as such.
- Do not pay for direct consumer solicitations.
- Avoid “exclusive” arrangements.
- Avoid “preferential” designations such as “preferred lender.”
- Disclosure statement to the consumer is encouraged.
- Justify any change in monthly fees. For example, a fee increase may be appropriate if two real estate companies merged and now the advertising costs increased because the market size increased.
According to these top legal minds, if you’re not willing to do all of that, then you may want to consider another way to get business.