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   ARTICLE   |   From Scotsman Guide Residential Edition   |   August 2004

Compliance: From A to Z

Compliance: From A to Z is a series of monthly articles by James Russell in Scotsman Guide intended to educate mortgage originators on consumer compliance issues. The series will go beyond the superficial and will provide specific details on how to establish a sound compliance program and avoid the pitfalls associated with applicable laws, regulations and required disclosures.

RESPA: Kickbacks and Unearned Fees.

This month we will review the general requirements of the Real Estate Settlement Procedures Act (RESPA) and HUD's Regulation X, as it relates to kickbacks and unearned fees. So, let’s go to the source!

What Does RESPA Actually Say About Kickbacks and Unearned Fees?

The following are excerpts from RESPA:

Section 8:

(a)  No person shall give and no person shall accept any fee, kickback or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.

(b)  No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.

What Does Regulation X Say About Kickbacks and Unearned Fees?

The following are excerpts from HUD's Regulation X:

Sec. 3500.14: Prohibition against kickbacks and unearned fees.

(b)  No referral fees. No person shall give and no person shall accept any fee, kickback or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a settlement service involving a federally related mortgage loan shall be referred to any person. Any referral of a settlement service is not a compensable service, except as set forth in Sec. 3500.14(g)1). A company may not pay any other company or the employees of any other company for the referral of settlement service business.

(c)  No split of charges except for actual services performed. No person shall give and no person shall accept any portion, split or percentage of any charge made or received for the rendering of a settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed. A charge by a person for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee and violates this section. The source of the payment does not determine whether a service is compensable, nor may the prohibitions of this part be avoided by creating an arrangement wherein the purchaser of services splits the fee.

(d) Thing of value. This term is broadly defined in section 3(2) of RESPA (12 U.S.C. 2602(2)). It includes, without limitation, monies, things, discounts, salaries, commissions, fees, duplicate payments of a charge, stocks, dividends, distributions of partnership profits, franchise royalties, credits representing monies that may be paid at a future date, the opportunity to participate in money-making programs, retained or increased earnings, increased equity in a parent or subsidiary entity, special bank deposits or accounts, special or unusual banking terms, services of all types at special or free rates, sales or rentals at special prices or rates, lease or rental payments based in whole or in part on the amount of business referred, trips and payment of another person's expenses or reduction in credit against an existing obligation. The term “payment” is used throughout Secs. 3500.14 and 3500.15 as synonymous with the giving or receiving any “thing of value” and does not require transfer of money.

(e)  Agreement or understanding. An agreement or understanding for the referral of business incident to or part of a settlement service need not be written or verbalized but may be established by a practice, pattern or course of conduct. When a thing of value is received repeatedly and is connected in any way with the volume or value of the business referred, the receipt of the thing of value is evidence that it is made pursuant to an agreement or understanding for the referral of business.

(f)  Referral. (1) A referral includes any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business incident to or part of a settlement service when such person will pay for such settlement service or business incident thereto or pay a charge attributable in whole or in part to such settlement service or business.

(g)  Fees, salaries, compensation or other payments. 

(1) Section 8 of RESPA permits:

(iii) 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;

(iv) 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;

(vi) 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

(vii) An employer's payment to its own employees for any referral activities.

Summary of Section 8 of RESPA and Section 3500.14 of HUD's Regulation X.

Consider the three key issues of the law and the regulation:  1) payment or receipt of a thing of value, 2) agreement or understanding (explicit or implicit) and 3) referral of a mortgage loan. It is generally illegal if you combine these three issues.

Kickbacks—FAQ

The easiest way to explain the above is to put it in a Frequently Asked Question (FAQ) format.

 

FAQ: May I give a gift certificate to a real estate agent for a referral?

Answer: No. The regulation would seem to imply that a one-time gift with no prearranged agreement would be acceptable. However, this is extremely gray, and it would be difficult to prove that there was no prearranged agreement. Certainly, if there was more than one instance of a gift, it would establish a pattern and make the “exchange” illegal.

 

FAQ: May I take breakfast to a real estate agent's office every other Friday?

Answer: Maybe. This could be construed as a fee for a referral since it has become a practice. To help to ensure that there are no improprieties, the mortgage originator should visit with the real estate agents throughout breakfast and provide the real estate agents with information on the mortgage originator's services, loan programs, etc. Then, the breakfast morphs into a promotion (see 3500.14(g)(vi)) which is a little easier to defend.

 

FAQ: May I give my customers a chance to win a trip (monthly lottery) for each referral they send my way?

Answer: No, since a "chance to win" is a thing of value, this would be illegal.

 

FAQ: May I give my customers a chance to win a trip (monthly lottery) for doing business with me?

Answer: Yes, there is no problem offering your current or prospective customers a discount or any other thing of value for their own mortgage. No referral is involved.

 

FAQ: May I do joint advertising with a real estate broker, builder or title company?

Answer: Yes, as long as you both pay your fair share of the advertising.

 

FAQ: May I provide note pads to a real estate agent's office with my company's logo and phone number?

Answer: Yes, since this is a promotional product for your company. However, you could not provide note pads with the real estate agent's name since this would a thing of value that would defer the real estate agent's expenses.

 

FAQ: May I purchase mortgage leads from a lead generation service?

Answer: Yes, since you are only purchasing leads (advertising) and not actual referrals. Additionally, there is no guarantee that the leads will actually generate a certain number of originations. Some originators try to equate paying a kickback (illegal) to purchasing a lead (legal). However, most regulators can differentiate between the two by looking at factors such as close rate, amount of fee paid, how the fee amount is determined, number of “leads” purchased, who sold the “leads,” when the fee was paid, etc.

My Observations on Kickbacks

I get a call a week from a mortgage originator asking if he/she can do “X.” The answer is usually “no,” and I direct the caller to the actual regulation. Next, the mortgage originator gets mad at me since everyone does what he/she wants to do. I point out that, while violations of this requirement are difficult for regulators to find, the penalties are severe. Enforcement of this requirement has received new life in recent years due to increased federal (HUD) efforts and the recent deluge of new state enforcement authorities. Violations of the “kickback” provisions of RESPA can consist of both civil and criminal penalties, including loss of FHA privileges, removal from the mortgage origination industry, monetary fines and jail time. And, just so you know, philosophically I disagree with the referral fee provisions of RESPA. Why shouldn’t someone be allowed to get a referral fee if someone else is willing to pay it?

Affiliated Business Arrangements

A recent hot topic is the affiliated business arrangement (ABA) since this appears to be a potential exception (legal loophole) to the kickback provisions of RESPA and Regulation X. ABAs are typically agreements between service providers in the real estate industry. Although the details of these arrangements are beyond the scope of this article, here are some of my observations:

  1. ABAs do not allow referral fees or kickbacks; all fees must still be earned.
  2. Many reportedly sound ABAs (including some at nationally recognizable firms) are fraudulent arrangements. In the past, HUD has looked past the form of the arrangement and looked at its substance. 
  3. You should get your attorney involved. You will need an attorney to develop a valid ABA and/or to represent you after the regulators decide your ABA is not valid.

The author is not an attorney, and this article is not intended as legal advice. You should obtain an attorney for any legal advice. FDIC-insured financial institutions should not rely solely on this information since they have additional advertising requirements.



 


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