Get your “kicks” on Route 66, not from RESPA!
The Real Estate Settlement Procedures Act (RESPA) was enacted by Congress in 1974 to regulate the disclosure of all costs and business arrangements in a real estate transaction settlement process. One purpose of RESPA is to regulate the referral of business between companies involved in a real estate transaction settlement. An example would be a title insurance company, with a real estate broker as one of the owners, receiving referral title business from that broker’s real estate business. For the referrals, the broker or the broker’s real estate company would receive a fee from the title insurance company. This type of relationship is not necessarily illegal, but the authors of RESPA recognized that they could bring clarity, convenience and/or savings to the consumer if the conduct of referrals was regulated and disclosed. Referral arrangements must pass muster under Section 8 of RESPA.
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. In plain language, 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 enforcement is alive and well. Here are some examples:
January 2014 – The CFPB initiated an administrative proceeding against PHH Corporation and its affiliates (PHH), alleging PHH harmed consumers through a mortgage insurance kickback scheme that started as early as 1995.
June 2014 – The CFPB ordered a New Jersey company, Stonebridge Title Services Inc., to pay $30,000 for paying illegal kickbacks for referrals.
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 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.
February 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.
Be sure the Compliance Management System provides for periodic, broad-based checks for practices that could violate RESPA 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 “kicks,” take a detour on Route 66.
Around the Industry:
CFPB enforcement and settlements – the gift that can keep on giving.
On the Horizon:
Are deeds in escrow the right option for your distressed loan workout? See this.
How might the CFPB’s five-year mortgage rule review change the regulatory landscape? See this.