The Real Estate Settlement Procedures Act (RESPA) was enacted in 1974. Compliance with and rule-writing authority for RESPA was originally assigned to the U.S. Department of Housing and Urban Development (HUD) as its Regulation X; however, in July 2011, rule-writing authority and oversight for Regulation X was transferred to the CFPB. RESPA rules protect consumers by requiring creditors and other providers of residential loan and mortgage settlement services to make certain disclosures to consumers for transactions subject to real estate transaction settlement processes. It also prohibits settlement service providers from conducting or participating in certain acts or practices commensurate with business arrangements for consumer-purpose real estate transactions. RESPA generally does not cover open-end transactions secured by a dwelling if all of the disclosures required by Regulation Z have been provided to the consumer.
Specifically, Section 8 of RESPA addresses the prohibitions on kickbacks and unearned fees in connection with loans covered by RESPA. The rule to follow is very clear: actual work must be performed and documented in exchange for a fee. So, RESPA prohibits unearned fees for services that were never performed. Section 8 is an area to not be taken lightly. Prior to the CFPB assuming control of RESPA, HUD took an active enforcement position, and the CFPB has followed. Penalties for noncompliance can be severe. You may be fined up to $10,000 and imprisoned for up to one year. Should civil liability occur, penalties can amount up to three times the amount of the violation and court proceedings costs. Here are examples of penalties for noncompliance:
In 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 a former Wells Fargo employee for their involvement. The combined penalty between the two institutions was $35.7 million.
NewDay Financial LLC was ordered to pay a $2 million penalty illegal kickbacks (and deceptive mortgage advertising). NewDay deceived consumers about a veterans’ organization’s endorsement of NewDay products and participated in a scheme to pay kickbacks for customer referrals, according to the consent order.
Fidelity National Financial is a title company that paid a $4.5 million fine in 2011. They illegally paid kickbacks to brokers for the referral of home loan
Also, in 2011, Prospect Mortgage, LLC, a mortgage lender, was fined $3.1 million for paying improper kickbacks or referral fees to affiliates.
In 2018, the FDIC published its Consumer Compliance Supervisory Highlights where an overview was provided of 2018 examination findings; issues concerning Section 8 of RESPA were included. The FDIC stated that desk rental arrangements were used to hide illegal referral fees. The report noted that “One issue involved institutions that purportedly leased offices or desk space from realtors and home builders, where the amounts paid to realtors and home builders greatly exceeded the fair market value of the rentals. Another issue involved desk rentals that appeared to be sham or subterfuge arrangements to disguise the payment of impermissible mortgage referral fees.” While RESPA does allow lenders to enter into bona fide marketing and advertising agreements with title and settlement providers, these arrangements must be based on fair market value of the advertising and marketing services received. The violation occurs when it is used to conceal the payment of illegal referral fees.
Although RESPA has been around for quite some time and systems are often automated to comply with these requirements, the industry continues to experience Section 8 problems. Monitoring of marketing incentives, third-party relationships, employee training, social media, and advertising should occur on a regular basis. In addition, dust off the HUD guidance (Statement of Policy 1999-1) that provides a list of services that are normally performed in the origination of a loan that HUD considers compensable services. They are:
1. Taking information from the borrower and filling out the application;
2. 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;
3. 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;
4. Collecting financial information (tax returns, bank statements) and other related documents that are part of the application process;
5. Initiating/ordering VOEs (verifications of employment) and VODs (verifications of deposit);
6. Initiating/ordering request for mortgage and other loan verifications;
7. Initiating/ordering appraisals;
8. Initiating/ordering inspections or engineering reports;
9. Providing disclosures (truth in lending, good faith estimate, others) to the borrower;
10. Assisting the borrower in understanding and clearing credit problems;
11. 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;
12. Ordering legal documents;
13. Determining whether the property was located in a flood zone or ordering such service; and
14. Participating in the loan closing.
The guidance also stated that compensable services would be considered to be performed if: 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 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).
We never have a dull moment in the mortgage industry with compliance. Stay straight when it comes to Section 8!