Written By Shereefat Balogun, Regulatory Compliance Counsel
Any P.Diddy fans out there?! Well, Diddy’s 1997 hit “Can’t Nobody Hold Me Down” rings loud in my head as I read through the latest CFPB Order against a mortgage lender for violating the prohibition on “kickbacks” in Section 8(a) of RESPA. Now many of you are aware that the CFPB’s order and penalty against PHH Corporation similarly alleging RESPA violations was reversed by a panel of the U.S. Court of Appeals for the D.C. Circuit. Notwithstanding, the CFPB seems resilient in its efforts.
A few days ago, the CFPB announced consent orders against Prospect Mortgage, LLC (Prospect), a mortgage lender for paying illegal kickbacks for mortgage business referrals, and some of its partners. Essentially, the order against Prospect accuses the lender of using a variety of schemes to pay kickbacks for referrals of mortgage business in violation of RESPA. Here are some of the activities the CFPB found to be in violation of Section 8(a) of RESPA:
- Using Lead Agreements to Pay Brokers for Referrals. According to the order, Prospect entered into agreements whereby it paid real estate brokers for each lead it received. A lead generally consisted of a prospective buyer’s name, address, email address, and phone number, which Prospect would then use to reach out to the prospective buyer to market its loans products. Moreover, under these agreements, brokers would also take steps to steer consumers to Prospect, many times under Prospect’s encouragement. For example, the order states that Prospect paid one broker between $25 to $500 per lead, typically totaling $2k to $3k a month. The broker, in turn, would hand out $20 bills to their agents, one for each consumer that the agent directed to Prospect’s loan officers.
- Encouraging Brokers and their Agents to Require Buyers to Obtain Preapprovals with Prospect’s Loan Officers. The CFPB found that Prospect violated Section 8(a) by providing that a broker listing a property for sale would require any prospective buyer seeking to submit an offer to first obtain a preapproval from Prospect. For example, one lead agreement required the broker to “educate and train” its agents on the need for consumers to seek Preapproval with Prospect, and that the broker would only earn lead fees for those listings “in which Prospect has been designated as the preferred lender such that the listing agent is required to have all customers who desire to submit an offer on the property receive a Prospect Mortgage pre-qualification.”
- Paying a Mortgage Servicer for Referrals. The CFPB alleges that Prospect had a contract with a mortgage servicer whereby the mortgage servicer would market Prospect’s services to its servicing clients, and tried to persuade them to refinance their existing mortgage with Prospect. In return, Prospect paid the mortgage servicer a portion of the proceeds received from any resulting refinance and also gave them the mortgage servicing rights on the refinance mortgage.
- Encouraging Brokers to Use Fees and Credits to Pressure Consumers into Using Prospect. The order alleges that in response to pressure from Prospect, brokers at time took steps to economically coerce consumers into using Prospect. For example, one broker made a seller’s credit conditional on using Prospect for the mortgage. Also, other brokers allegedly imposed per diem fees (a penalty imposed on the buyer for each day beyond the contractual closing date the buyer was unable to close because financing had not been approved) unless the buyer used Prospect.
Remind Me About Section 8(a) Again.
Section 8(a) of RESPA generally prohibits any person from giving or receiving a fee, kickback, or other “thing of value” in exchange for the referral of a settlement service involving federally related mortgage. See, 12 U.S.C § 2607(a). “Thing of value” is broadly defined, and thus many credit unions tend to be cautious regarding real estate transactions and referrals. In short, a credit union may not pay another company or its employees for the referral of settlement service business.
What Are Compliance Folks Saying?
“OK, I understand the general prohibition, but I thought some activities were allowed. What about Section 8(c)?” Interestingly, the CFPB did not even mention Section 8(c) in its orders.
Section 8(c) lists several types of conduct that are permitted, so long as certain conditions are satisfied. Indeed, Section 8(c), states:
Nothing in this section shall be construed as prohibiting (1) the payment of a fee (A) to attorneys at law for services actually rendered or (B) by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance or (C) by a lender to its duly appointed agent for services actually performed in the making of a loan, (2) the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed…
12 U.S.C § 2607(c)(emphasis added).
Regulation X further expressly permits:
- A payment to an attorney at law for services actually rendered;
- A payment by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance;
- A payment by a lender to its duly appointed agent or contractor for services actually performed in the origination, processing, or funding of a loan;
- A payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed;
- A payment pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and real estate brokers. (The statutory exemption restated in this paragraph refers only to fee divisions within real estate brokerage arrangements when all parties are acting in a real estate brokerage capacity, and has no applicability to any fee arrangements between real estate brokers and mortgage brokers or between mortgage brokers.);
- Normal promotional and educational activities that are not conditioned on the referral of business and that do not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or business incident thereto; or
- An employer's payment to its own employees for any referral activities.
See, 12 C.F.R. §1024.14(g)(iv)(emphasis added.).
Despite acknowledging that referrals are inherent in real estate transactions, the CFPB did not provide much guidance as to how lenders and other industry partners should structure referral arrangements to comply with RESPA.
If it’s any consolation, the rule does advise that the CFPB “may investigate high prices to see if they are the result of a referral fee or a split of a fee. If the payment of a thing of value bears no reasonable relationship to the market value of the goods or services provided, then the excess is not for services or goods actually performed or provided. These facts may be used as evidence of a violation of section 8 and may serve as a basis for a RESPA investigation.” 12 C.F.R. §1024.14(g)
If your credit union is offered some kind of referral or similar arrangement, or is involved in referral programs that may not have previously been vetted, it may be worth calling your lawyer. In light of RESPA’s already restrictive language, coupled with the recent CFPB interpretations and aggressive prosecution, credit unions involved in the mortgage business are advised to consult with counsel before making referrals.
If you have any questions on this or any other compliance issue, please feel free to reach out to us. We’re here to help you!