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Thursday, June 29, 2017

Consumer Incentive Campaigns

QUESTION
As a lender, we would like to run a promotion whereby we offer to reimburse the borrower the cost of the appraisal at closing. We would like to know if this is permissible and if there are any parameters that should be considered with respect to such a promotion. If the program is permissible, is it possible to deduct the cost of the appraisal from the individual loan officer’s compensation?

ANSWER
With respect to your first question, neither the Real Estate Settlement Procedures Act and its implementing regulation, Regulation X, nor any other regulation prohibits a lender from “incenting” a consumer to do business with the lender, so long as the “thing of value” (in the case the lender credit for the appraisal charge) is not in exchange for referrals. [12 CFR § 1024.14(g)(1)] 

As to who pays for it (company vs. loan officer), with respect to a forward mortgage or a fixed rate reverse loan, the lender must pay for it as otherwise it would be a reduction in the compensation due to the loan officer which is not permissible. [12 CFR § 1026.36(d)(1)] As the Truth-In-Lending Act’s loan originator compensation rule does not apply to reverses structured as open-end credit, in those instances, it is permissible for the loan officer to reduce his compensation to cover the credit. [12 CFR § 1026.36(b)]

In discussing the parameters of promoting such a program, consideration should be given to whether the program will be offered to all potential applicants or whether it is limited to a certain group of applicants.  If the latter and the program results in a disproportionate number of applicants in non-protected classes receiving the credit as opposed to those in protected classes, the lender may be facing a fair lending issue.

Listed below are additional items to consider in setting forth the parameters of such a promotion:
  • Ensure it is clear that the offer is for a closing credit only. If the loan does not close and fund, there is no credit or refund to the applicant for the appraisal fee. 
  • Is the amount of the credit limited in any manner? For example, credit for appraisal fee not to exceed $500, with the borrower being responsible for any amount in excess of $500.  Also, ensure that it is clear the credit is only for the actual cost of the appraisal; if the appraisal charge is less than $500, the borrower does not receive the difference between $500 and the appraisal charge.
  • Set forth the term of the promotion, including whether the consumer must apply by a certain date or close the loan by a certain date. 
  • If there is a certificate that must be physically presented in order to obtain the credit, that requirement should be stated.
  • Consider the loan programs to which the offer applies. Does it only apply to purchase money mortgages? Refinances?
  • Set forth limitations as to the availability of the program to only new customers, if applicable.
  • Consider whether the offer can be used in conjunction with any other loan offer.
  • Be clear that the offer is not redeemable for cash. 

Of course, in advertising the promotion a lender needs to include the lender’s NMLS # and state licensing information, and give consideration to the following “typical” general disclosures:
  • Programs, rates, terms, and conditions are subject to change without notice.
  • Certain restrictions may apply.
  • All approvals subject to underwriting guidelines.
  • Not all applicants will qualify. 

And, if the advertisement discloses the amount or percentage of down payment for a credit sales transaction, the number of payments, the period of repayment, the amount of any payment or amount of any finance charge, then the lender must also disclose the following [12 CFR § 1026.24(d)]:
  • The total down payment as a dollar amount of percentage.
  • Terms of repayment.
  • The “annual percentage rate” using that term.
  • If a variable rate loan, a statement that the rate may change. 

As in all advertising, in promoting a lender closing credit offer, the lender must also ensure that the advertisement meets not only federal regulatory requirements but any additional state laws and regulations. 

Joyce Wilkins Pollison
Director/Legal & Regulatory Compliance
Lenders Compliance Group