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Co-op Advertising Agreement

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We have a mortgage originator in our mortgage division that would like to enter a co-op advertising agreement with a builder in a new subdivision. The bank would like to commit approximately $1000 each month for advertising as the subdivision's exclusive lender. The advertising will consist of ads on signs, billboards and fliers listing the builder, one realty company and one lender. The bank's advertising budget will be reflective of the ads, i.e. if one-fourth of a $400 ad, the bank will pay $100 for their section. However, in order to spend the money on the advertising, the bank would like to recover the costs of the ads by deducting a portion of the advertising from the originator's commission payment. I get nervous anytime you mention putting a realty company and a mortgage lender jointly in an ad, due to RESPA concerns. Would this situation fall under the exemption in Sec. 3500.14 (g)(vi)? I also assume that we would need an agreement with our originators for recovery of the fees from their commission.

There is a marketing exception that allows a lender to participate with a builder. A key element of the exception is that each entity must pay its fair share. If you are getting one-fourth of the ad space in a $400 ad and it costs you $100, you are right on the mark. Guidance I have received tells me that joint advertising should be done on a referral-neutral basis. This means the exclusive agreement between the builder and you cannot be based on past referrals or the promise of future referrals.

Cooperative advertising should be done with caution. HUD has expressed concerns over a lender paying a real estate agent to advertise the lender's rates. HUD seems to draw a distinction between paying for specific ad space and a referral of the lender's products. My suggestion would be that if this concerns you, and it sounds like it does, provide the ad copy to counsel familiar with RESPA rules and HUD interpretations. The fact that you are paying a proportionate share sounds good, but the content of the ad and exclusivity of the agreement may cause concern.

First published on 5/14/07

First published on 05/14/2007

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