CFPB and the slow end of Marketing Agreements (MSAs)/Affiliated Business Arrangements (ABAs)

Prediction: MSA and ABA agreements between Law Firms/Settlement Agents will end

Right now selecting a closing law firm/settlement agent occurs when buyers submit an offer for closing meaning, for the time being, ABAs and MSAs are useful because real estate agents often suggest the brokers preferred closing attorney. After October 3rd I believe this will no longer be the case.


Post October 3rd I believe selecting the closing law firm/settlement agent will occur when borrowers apply for a loan because lenders will be prohibited from revising Loan Estimates (the new form of the GFE). In order for lenders to provide accurate disclosures borrowers will need to select the law firm/settlement agent very early point in the application process from a list of firms that have been vetted and who have previously provided itemized fees to the lender. This scenario plays out in two ways:


  1. Borrowers will seek pre-approval for a mortgage and will have selected a law firm/settlement agent prior to contacting an agent. In this scenario the MSAs/ABAs will be useless because borrowers will be locked in with a firm/settlement agent before ever discussing the issue with real estate agents.
  2. Borrowers will apply for their loans after beginning work with a real estate agent. In this scenario the agent will have the ability to suggest a preferred law firm/settlement agent; however the borrower will still be required by the lender to choose from a preset list of vetted firms/agents. Since closing fees will be available to borrowers it is doubtful agents will be able to direct closings to preferred law firms/settlement agents who have raised fees to cover their MSA/ABA costs.


In either case the MSA/ABA will become less profitable for law firms/settlement agents because direct referrals will be less likely. Alternatively competitive pricing will be far more difficult for firms/settlement agents who maintain MSAs/ABAs since smaller offices with less overhead will be able to offer lower fees. 


First a little background.

Have you ever wondered brokers have a preferred closing attorney? It probably because the broker has an MSA or an ABA. MSAs and ABAs in essence both serve the same function; they are a work around for the RESPA prohibition on kickbacks for referrals.  In an ABA or MSA the law firm/settlement agent pays for the “marketing expenses” of a real estate broker in exchange for the privilege of being named that broker’s preferred closing attorney.


Law firms/settlement agents then increase closing fees to cover the cost of the MSA/ABA and Buyers pay inflated attorney fees at closing to finance the deal.  ABAs and MSAs have turned the few law firms/settlement agents rich enough to afford them into giants and made effectively closed out the field for smaller firms who often have more competitive pricing.


MSAs and ABAs are not without risks for law firms/settlement agents. Brokers cannot force agents or the buyers and sellers they work with to use a law firm/settlement agent, they can only strongly suggest. Also the amount law firms/settlement agents pay to brokers must be fixed for a period of at least six months and cannot be based on the number of closings each month the law firm/settlement agent gets from the broker.  


CFPB Changes

This is where the new CFPB rules come in to play. Starting October 1st 2015 the CFPB will redefine the way we conduct residential real estate transactions. One of the primary goals of the CFPB is to allow buyers to shop for services required to close residential real estate deals. To incentivize lenders to promote shopping for services the CFPB has changed disclosure rules in a very ingenious way both at the application phase when borrowers are applying for loans and at the closing phase where final costs must be disclosed.


This is where the process gets interesting. Lenders are held to three categories of tolerance for estimated fees vs. actual costs at closing; 0 Tolerance which means the fees have to either be equal to or less than what is estimated, 10% Tolerance which means the fees have to be within 10% of what was estimated and Disclosure Items which means at closing any difference between the estimate and actual costs must be disclosed but do not have to fall within any tolerance.  If the cost of an item versus what was estimated breaks any of these tolerances the lender must provide a credit to the borrower to bring the item back within tolerance. Finally the key change, lenders cannot revise the Loan Estimate if the discover later that fees will change at closing.


For Example:  Transfer Taxes are a 0 Tolerance item. If the lender estimates transfer taxes will be $500.00 but they turn out to be $600.00 at closing, the lender must provide a $100.00 credit.


Starting October 1st whether or not the borrower is allowed to shop for a service required for closing will determine which tolerance category it is placed in. Services where borrowers have no ability to shop will be 0 Tolerance items. If borrowers are allowed to select from a list of service providers the lender has previously vetted the service will be a 10% Tolerance item. If borrowers can choose any service provider they want without restriction the services is a Disclosure Item without any tolerance requirement.


During the application phase lenders must disclose to borrowers the costs of lender and the fees for any service required to obtain and close the loan. In practice this means that the lender is going to have to vet service providers so that the lender knows their fees and knows they are CFPB compliant in order to make an accurate Loan Estimate (the replacement for the current Good Faith Estimate).


Where law firms/settlement agents are concerned, lenders are not going to simply allow borrowers to choose anyone. Lenders have a vested interest in vetting law firms/settlement agents given the litany of requirements the CFPB places on the closing process. As recently as this week we have seen that lenders like Wells Fargo and other large lending institutions, who just cancelled all of their ABAs and MSAs, are also not going to subject themselves to the losses that would result from 0 Tolerance cures by requiring borrowers to use a single law firm/settlement agent (Link to the Wells Fargo Press Release). Instead it seems lenders will opt for allowing borrowers the ability to shop for law firm/settlement agents from a list of vetted providers making closing fees a 10% Tolerance item. This limits the lenders exposure to an unqualified law firm/settlement agent while also allowing wiggle room for settlement costs to limit the need for credits to cure cost discrepancies.



As a partner in a small firm I am both biased and excited because it seems our industry may finally be coming to a point where being chosen to close a transaction is based upon service and price rather than MSAs and ABAs. I am happy to see buyers/borrowers being provided the tools they need to make cost effective choices for their real estate transactions. It is encouraging that the CFPB seems to view MSA/ABA agreements for exactly what they are, a legalized kickback for which borrowers pay the price. This will be an interesting year for all of us in the industry and I am looking forward to the challenges it will bring as well as the opportunities.

Keep in mind also that in addition to this prediction about the impact of procedural changes and disclosures the CFPB released the following statements today:

“Wells Fargo’s decision to exit all marketing services agreements is an important step for the mortgage industry towards ensuring compliance with the RESPA statute and freeing up more choices for consumers.  We are concerned that such agreements can carry significant legal risk for companies and undermine transparency for consumers.  Companies should take note of today’s action and consider carefully whether their own business practices comply with the consumer protections provided under the law, which bars kickbacks for customer referrals.”

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