Referral Fees: Agreement or Understanding

QUESTION
There has been a lot of litigation and concerns involving referral fees. One of the areas of confusion relates to what is the so-called “agreement” or “understanding” involving a referral of business. So, what do these terms mean?

ANSWER
RESPA defines a “referral” to a settlement service provider in two ways:

1. A referral includes any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business incident to or part of a settlement service when such person will pay for such settlement service or business incident thereto or pay a charge attributable in whole or in part to such settlement service or business.

2. A referral also occurs whenever a person paying for a settlement service or business incident thereto is required to use a particular provider of a settlement service or business incident thereto. (Emphasis added.) [24 CFR 3500.14(f)]

The required use concept is significant. This doctrine holds that “required use” means “a situation in which a person must use a particular provider of a settlement service in order to have access to some distinct service or property, and the person will pay for the settlement service of the particular provider or will pay a charge attributable, in whole or in part, to the settlement service.” [24 CFR 3500.2]

However, the offering of a package (or combination of settlement services) or the offering of discounts or rebates to consumers for the purchase of multiple settlement services does not constitute a required use. Any package or discount must be optional to the purchaser. The discount must be a true discount below the prices that are otherwise generally available, and must not be made up by higher costs elsewhere in the settlement process.

An “agreement” or “understanding” in this context means “the referral of business incident to or part of a settlement service,” and it need not be written or verbalized, but may be established by a practice, pattern or course of conduct. When a “thing of value” (i.e., any payment, advance, funds, loan, service, or other consideration) is received repeatedly and is connected in any way with the volume or value of the business referred, the receipt of the thing of value is evidence that it is made pursuant to an agreement or understanding for the referral of business. [24 CFR 3500.14(e)]

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

Loan Officer Paying an Assistant

QUESTION: We are an FHA-approved lender with several branch officers. At one of our branches, a loan officer has an assistant, who is not licensed, but helps him close loans. The Loan Officer pays his assistant directly from his own compensation. Is this arrangement permissible?

ANSWER: The arrangement described above is not permissible. A Loan Officer may not pay his assistant out of his own compensation; rather, the lender must bear this expense.

HUD requires that a lender originating or servicing an FHA insured loan pay all of its own operating expenses. This requirement applies to the operating expenses of both the main and branch offices. “Operating expenses” is defined to include, without limitation, “equipment, furniture, office rent, overhead, employee compensation, and similar expenses”. (Emphasis added.) [HUD Handbook 4060.1 Rev-2, paragraph 2-8]

HUD further underscores this requirement by stating:

“A FHA approved mortgagee must pay all of its operating expenses including the compensation of all employees of its main and branch offices. Other operating expense that must be paid by the FHA approved mortgagee include, but are not limited to, equipment, furniture, office rent, utilities and other similar expenses incurred in operating a mortgage lending business. A branch compensation plan that includes the payment of operating expenses by the branch manager, any other employee or by a third party is a prohibited arrangement.” (Emphasis added.) [HUD Handbook 4060.1 Rev-2, paragraph 2-14B]

Additionally, HUD requires the lender to have control over and responsibly supervise its branch employees. [HUD Handbook 4060.1 REV-2, para. 2-9] In the scenario described above, the assistant is not an employee of the lender, but rather an employee of the Loan Officer. As such, the lender cannot control or supervise the assistant’s activities, which is a violation of HUD requirements.

In light of the foregoing, a Loan Officer employed by an FHA lender may not employ and directly compensate his own assistant. The assistant must be employed and compensated by the lender. However, the lender may be able to restructure the Loan Officer’s compensation arrangement so that ultimately she or he bears the cost of the assistant.

Joyce Pollison
Director/Legal & Regulatory Compliance
Lenders Compliance Group

Right of Rescission in Home Equity Plans

QUESTION 

The User Guide to our Loan Origination System states that it provides all the “material disclosures” for the right of rescission in home equity plans, but it does not outline what disclosures are supposed to be given to the borrower. What are the right of rescission disclosure requirements for home equity plans?

ANSWER
There are five “material disclosure” right of rescission requirements for home equity plans. If these are provided to the consumer as part of the account opening disclosure requirements, the lender has satisfied the regulatory compliance mandates.

For purposes of the right of rescission in home equity plans, the following disclosures are considered “material disclosure” requirements:

1. The method of determining the finance charge and balance upon which the finance charge will be imposed.

2. Annual Percentage Rate (APR).

3. The amount or method of determining the amount of any membership or participation fee that may be imposed as part of the plan.

4. The length of the draw period and repayment period.

5. For both the draw period and repayment period, an explanation of how the minimum periodic payment will be determined and the timing of the payments, including the required disclosures if paying the minimum payment may or will result in a balloon payment.

[12 CFR § 226.15(a)(3), Footnote 36]

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

Limits to Running AUS Transactions

QUESTION:
Are there limits to how many times a loan originator may submit or resubmit a loan through Fannie Mae’s Desktop Underwriter? 

ANSWER: 

There are several automated underwriting engines, usually embedded within the Loan Origination System (LOS), that analyze the collateral, income, assets and credit obligations referred to as “Automated Underwriting Findings” or simply “AUS findings.” Fannie Mae’s engine is entitled “Desktop Underwriter” (DU), Freddie Mac’s is named “Loan Prospector” (LP), and the USDA’s “Guaranteed Underwriting System” is called “GUS.” 

As a general rule, FHA, VA and Agency guidelines do not specifically reflect the maximum number of submissions and resubmissions a lender may make before or after the loan closes (i.e., AUS findings are frequently re-run after the loan funds in order to make corrections). Often, the AUS findings will be run more than one time - and in some case multiple times - as information changes once the verification process begins. One reason to resubmit is due to the fact that loan terms may change or the borrower’s income and assets may increase or decrease.

As a Best Practice rule, loan officers and processors should place notes in the LOS to support each resubmission. Multiple resubmissions might be considered a Red Flag. A Red Flag may be caused by a lender trying to manipulate the transaction data into returning an Approve/Eligible result.

The more accurate notes that are maintained on the actions, decisions, and milestones in the processing of DU files, the stronger the position in defense of the foregoing resubmissions.

Brandy George
Director/Underwriting Operations
Lenders Compliance Group