One of our loan officers wants to participate in a joint marketing program with a realtor in which the two of them hand out “vouchers” bearing both of their pictures and contact information and offering $500 off closing costs “courtesy of” the LO, the realtor, and our mortgage company to employees of certain school districts that are highly regarded in our area. Do you see any potential problems with this kind of marketing?
I think you right to be concerned about these vouchers, for a number of reasons, including possible violations of RESPA, Fair Lending laws, and the provisions of the Dodd-Frank Act prohibiting Unfair, Deceptive, and Abusive Acts and Practices (UDAAP) (as well as similar state laws).
1. RESPA Sections 8(a) and 8(b)
Joint marketing pieces like this are problematic in and of themselves because they can often be characterized as mutual endorsements and hence, as implied mutual referrals. Both the realtor and the loan officer are providing “settlement services” as that term is defined in RESPA’s implementing Regulation X (12 CFR 1024.2). So RESPA Section 8 is applicable to both of them. If either party pays more than their fair share of making or distributing the advertisement, that differential itself could potentially be characterized as the payment of a thing of value for purposes of obtaining the referral of a settlement service.
In that regard, all three elements of a RESPA Section 8(a) violation would appear to be present:
- The payment or receipt of a “thing of value”
- Pursuant to an agreement or understanding
- For referral of “settlement service” business involving a federally related mortgage loan.
Adding the monetary inducement of “$500 off closing costs” makes the vouchers even more problematic. While offering a financial inducement directly to a prospective borrower is probably not itself a RESPA Section 8(a) violation, splitting the cost of that financial inducement may violate RESPA Section 8(b) which prohibits not only “referral fees,” but also “splits” of any charge “made or received” for the rendering of a settlement service on a federally related mortgage loan “other than for services actually performed.”
The applicable language in Regulation X (12 CFR §1024.14) reads as follows:
(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 or not 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.
Here, splitting the cost of the $500 borrower inducement would appear to fall squarely within the above prohibition, since no services performed by either the LO, the lender or the real estate broker with respect to each other are identified.
2. Possible Fair Lending/ Discriminatory Impact/redlining
Federal regulators have encouraged mortgage lenders to be careful about advertising patterns or practices that a reasonable person would believe indicate the existence possible discrimination against members of protected classes (i.e., disparate impact). By offering the vouchers only to employees of elite schools, you may be engaging in exactly that kind of prohibited pattern or practice. This means that if you were to go forward with this voucher program, it would need to be carefully drawn to make sure that no protected class of persons is excluded from access to participation, either intentionally or statistically.
3. Possible UDAAP Violation
Discriminatory practices are inherently UDAAP violations. But there are also potential UDAAP issues if the vouchers ARE offered to everyone equally, but some prospective borrowers are led to believe that the incentive is offered only to them because of their special status as employees of one of the elite schools. That is deceptive on its face and invites further regulatory scrutiny and/or enforcement action.
In short, if your company wants to offer buyer incentives such as discounts off closing costs, it may be best to offer the incentives to all prospective borrowers on your own and not attempt to also incorporate such efforts into a joint marketing campaign with another settlement service provider. Otherwise, the potential for regulatory violations tends to multiply exponentially.
Michael R. Pfeifer
Director/Legal & Regulatory Compliance
Lenders Compliance Group