In October 2014, one of the Weekly NewsLINEs was dedicated to compliance with Section 8 of the Real Estate Settlement Procedures Act (RESPA) and prohibitions against kickbacks and unearned fees in residential real estate transactions. Compliance with Section 8 continues to be a hot zone and new enforcement actions by the Consumer Financial Protection Bureau (CFPB) and state regulators are bringing significant fines and penalties to mortgage lenders.
In January, 2015, the CFPB and the Maryland Attorney General took action against Wells Fargo and JPMorgan Chase for an illegal marketing-services-kickback scheme they participated in with Genuine Title, a now-defunct title company. The agencies also took action against former Wells Fargo employee Todd Cohen and his wife, Elaine Oliphant Cohen, for their involvement. In exchange for business referrals, Genuine Title gave the banks’ loan officers cash, marketing materials, and consumer information. The proposed consent orders would require $24 million in civil penalties from Wells Fargo, $600,000 in civil penalties from JPMorgan Chase, and $11.1 million in restitution to consumers whose loans were involved in this scheme. Cohen and Oliphant Cohen also will pay a $30,000 penalty.
The marketing-services-kickback scheme violated Section 8 of RESPA, which prohibits giving a “fee, kickback, or thing of value” in exchange for a referral of business related to a real-estate-settlement service.
On February 10, 2015, the CFPB announced action against NewDay Financial, LLC for deceptive mortgage advertising (see Weekly NewsLINEs Mortgage Advertising Compliance – A Path with Many Turns) and Section 8 kickbacks. According to the order, NewDay deceived consumers about a veterans’ organization’s endorsement of NewDay products and participated in a scheme to pay kickbacks for customer referrals. NewDay is ordered to pay a $2 million civil money penalty for its actions.
NewDay sent direct mail solicitations that contained a recommendation from the veterans’ organization to its members, urging them to use NewDay’s products, which, together with other telephone and web-based referral activities, constituted a referral of settlement service business. NewDay’s payments to the veterans’ organization and the coordinating company for these referral activities constituted illegal kickbacks violated Section 8 of RESPA.
What Does Section 8 of RESPA require and what does it prohibit?
Section 8 of RESPA specifically addresses prohibitions on kickbacks and unearned fees given or accepted in connection with a settlement service for a federally related mortgage loan (loans covered by RESPA). RESPA prohibits any settlement service provider from giving or receiving anything of value for the referral of business in connection with a mortgage or charging fees or markups when no additional service has been provided. To give or accept a fee, actual work must be performed and there must be evidence of the work exchanged for the fee documented in the file to evidence compliance. RESPA prohibits unearned fees for services not actually performed, including fee splitting.
Violations of Section 8’s anti-kickback, referral fees and unearned fees rules are subject to criminal and civil penalties. In a criminal case, a person who violates Section 8 of RESPA may be fined up to $10,000 and imprisoned up to one year. In a private law suit, a person who violates Section 8 may be liable to the person charged for the settlement service an amount equal to three times the amount of the charge paid for the service.
RESPA defines a “thing of value” as any payment, advance, funds, loan, service, or other consideration. It also defines the term “settlement service” as any service provided in connection with a real estate settlement including, but not limited to, the following: title searches, title examinations, the provision of title certificates, title insurance, services rendered by an attorney, the preparation of documents, property surveys, the rendering of credit reports or appraisals, pest and fungus inspections, services rendered by a real estate agent or broker, the origination of a federally related mortgage loan (including, but not limited to, the taking of loan applications, loan processing, and the underwriting and funding of loans), and the handling of the processing, and closing or settlement.
Before accepting or paying a fee for referral of a residential mortgage loan transaction you must determine if a payment (or fee splitting arrangement) is permissible under RESPA. First, determine that the loan origination services were actually performed. Next, determine that the payment of a thing of value bears a reasonable relationship to the market value of the goods or services provided. Any amount in excess of the market value is not allowed by RESPA.
The U.S. Department of Housing and Urban Development (HUD) has provided some guidance as to when it believes compensable services have been performed by the lender’s agent or contractor. In its “Statement of Policy 1999-1 Regarding Lender Payments to Mortgage Brokers,” HUD provided the following non-exhaustive list of services normally performed in the origination of a loan that it considers compensable services:
(a) Taking information from the borrower and filling out the application;
(b) Analyzing the prospective borrower’s income and debts and pre-qualifying the prospective borrower to determine the maximum mortgage that the prospective borrower can afford;
(c) Educating the prospective borrower in the home buying and financing process, advising the borrower bout the different types of loan products available, and demonstrating how closing costs and monthly payments could vary under each product;
(d) Collecting financial information (tax returns, bank statements) and other related documents that are part of the application process;
(e) Initiating/ordering VOEs (verifications of employment) and VODs (verifications of deposit);
(f) Initiating/ordering request for mortgage and other loan verifications;
(g) Initiating/ordering appraisals;
(h) Initiating/ordering inspections or engineering reports;
(i) Providing disclosures (truth in lending, good faith estimate, others) to the borrower;
(j) Assisting the borrower in understanding and clearing credit problems;
(k) Maintaining regular contact with the borrower, realtors, lender, between application and closing to appraise them of the status of the application and gather any additional information as needed;
(l) Ordering legal documents;
(m) Determining whether the property was located in a flood zone or ordering such service; and
(n) Participating in the loan closing.
In Statement of Policy 1999-1, HUD stated that compensable services would be considered to be performed if: (1) the lender’s agent or contractor took the application information and performed at least five additional items on the list (or substantially similar items); and (2) the payment was not a fee given for steering a customer to a particular lender disguised as compensation for purported “counseling type” services (taking the application plus performing only the additional services identified in (b), (c), (d), (j) and (k) above).
Stay vigilant for Section 8 compliance. As product offerings and marketing campaigns evolve, implement a compliance review before signing agreements with third-parties for marketing services, before launching promotional campaigns, and before new product terms and conditions are consecrated in stone. When it comes to RESPA violations, an ounce of prevention is worth a ton of cure.
Around the Industry:
Effective Now:
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CFPB Deputy Director Antonakes talks supervision and enforcement.
On the Horizon:
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MCM Q&A
If a consumer rescinds a mortgage transaction during the rescission period and had paid for an appraisal up front, must the creditor refund the appraisal fee to the consumer? Find out here.
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