Referral Fees and Fee Splitting

QUESTION

We have heard a lot recently about the prohibition against referral fees. Another subject that has come up also is how fee splitting is a violation, too. Please let us know the distinction between referral fees and fee splitting?

ANSWER

Both prohibitions against referral fees and fee splitting are set forth in Section 8(a) and Section 8(b), respectively, of the Real Estate Settlement Procedures Act (RESPA).

Let us define what a “referral” is in the context of RESPA. A referral includes any oral or written action directed to a person that 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 the settlement service or business incident thereto or pay a charge attributable in whole or in part to the settlement service or business.

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

RESPA provides that no person shall give and no person shall accept any fee, kickback or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person. [24 CFR § 3500.14(b)] A referral of a settlement service is not a compensable service, except as provided in certain exemptions to Section 8.

With respect to fee splitting, RESPA provides that 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 real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed. [24 CFR § 3500.14(c)] (My emphasis.)

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 the fee splitting provision. [24 CFR § 3500.14(c)]

To clarify further, the fee splitting prohibition bars all unearned fees, including, but not limited to, cases in which:

1. Two or more persons split a fee for settlement services, any portion of which is unearned;
2. One settlement services provider marks up the cost of the services performed or goods provided by another settlement service provider without providing additional actual, necessary, and distinct services, goods, or facilities to justify the additional charge; or
3. One service provider charges the consumer a fee where no, nominal, or duplicative work is done, or the fee is in excess of the reasonable value of goods or facilities provided of the services actually performed [Statement of Policy 2001-1, Department of Housing and Urban Development, 66 FR 53052, 53059 (2001)] 

Jonathan Foxx

President & Managing Director 

Lenders Compliance Group

Closing Disclosure: Three Day Waiting Period

QUESTION

We are a settlement agent and the mortgage lender we are representing is sending out an incomplete Closing Disclosure (“CD“) in order to start the “3-day process.” Is this acceptable? What are the lender’s obligations with regards to the contents of the CD?

ANSWER

No, it is not acceptable. Under the TILA-RESPA Integrated Disclosure Rule (“TRID”), a lender must provide the CD no later than three business days before consummation of the loan. The purpose of the CD is to finalize information that appears on the Loan Estimate, including the mortgage terms and the projected payment amount, as well as to summarize the closing costs incurred by the purchaser and seller (if applicable). [1026.19(f)(1)(ii)]

TRID generally requires that the CD contain the actual terms and costs of the transaction. However, when actual costs are not “reasonably available,” lenders may estimate the disclosures using the “best information” that is “reasonably available.” [Comments 1-26.19(f)(1)(i)-2.1] This requires due diligence on the part of the lender.

If a lender estimates costs based on the “best information reasonably available” and this information changes prior to consummation, the lender must provide a revised CD at or before consummation with the actual terms of the transaction. [1026.19(f)(1)(i)] However, this is not an opportunity for the lender to amend a CD when it did not use due diligence or good faith in preparing the initial CD. 

Comment 1026.19(f)(1)(i)-2.i states:

                i. Actual term unknown. An actual term is unknown if it is not reasonably available to the creditor at the time the disclosures are made. The “reasonably available” standard requires that the creditor, acting in good faith, exercise due diligence in obtaining the information. For example, the creditor must at a minimum utilize generally accepted calculation tools, but need not invest in the most sophisticated computer program to make a particular type of calculation. The creditor normally may rely on the representations of other parties in obtaining information. For example, the creditor might look to the consumer for the time of consummation, to insurance companies for the cost of insurance, to realtors for taxes and escrow fees, or to a settlement agent for homeowner's association dues or other information in connection with a real estate settlement. The following examples illustrate the reasonably available standard for purposes of § 1026.19(f)(1)(i).

A. Assume a creditor provides the disclosure under § 1026.19(f)(1)(ii)(A) for a transaction in which the title insurance company that is providing the title insurance policies is acting as the settlement agent in connection with the transaction, but the creditor does not request the actual cost of the lender's title insurance policy that the consumer is purchasing from the title insurance company and instead discloses an estimate based on information from a different transaction. The creditor has not exercised due diligence in obtaining the information about the cost of the lender's title insurance policy required under the “reasonably available” standard in connection with the estimate disclosed for the lender's title insurance policy.

As such, the statute makes clear that a lender may not send out an incomplete CD to a borrower simply to satisfy the 3-day advance notice requirement. If a lender does not exercise due diligence in preparing the CD and, as a result, the CD does not contain accurate fees or estimates of fees based on at least the “best information reasonably available,” this would be a clear violation of TRID.

Neil Garfinkel

Executive Director/Realty Compliance Group

Director/Legal & Regulatory Compliance

Lenders Compliance Group

Closing Disclosure: Non-Purchasing Spouse

QUESTION

We are a lender with some questions regarding disclosing the Closing Disclosure (CD). If we have a borrower and a co-borrower, must we send both individuals the CD for review? If we e-disclose, for the three day waiting period requirement do we use the date the disclosure was sent or the date we receive confirmation that the borrower received the CD? Lastly, if we have a non-purchasing spouse (NPS), can we add their name to the CD and have them sign at closing? 

ANSWER

In a rescindable transaction, such as a refinance, the Closing Disclosure must be given separately to each consumer who has the right to rescind, which includes, in most states, a spouse not on title. In transactions that are not rescindable, such as purchases, the CD may be provided to any consumer with primary liability on the obligation.  [12 CFR 1026.17(d)]

As to having the NPS sign at closing on a rescindable transaction, there is no requirement for the CD to be signed by the consumer under the TRID rules. The use of signature lines for documenting receipt of the disclosure is at the option of the creditor. That being said, you should ascertain whether or not this may be required by a specific loan program or investor to ensure a purchase of the loan. 

With respect to notification through e-disclosure, if the creditor has evidence that the consumer received the CD earlier than three business days after it is mailed or delivered, the creditor may rely on that evidence and consider it to be received on that date. Most lenders and investors appear to be accepting the tracked opening of an email as receipt provided in conjunction with the E-Sign Act. However, this is not a universal practice, so make sure you check individual investor guidelines to determine what they will accept as evidence of receipt.  

Joyce Wilkins Pollison

Director/Legal & Regulatory Compliance 

Lenders Compliance Group

TRID: Itemizing Fees on the Closing Disclosure

QUESTION

Is it true that a creditor cannot itemize recording fees and other government fees and taxes on the Closing Disclosure (“CD”)? If so, how does a creditor reflect such fees and taxes on the CD?

ANSWER

Yes, it is true! The TILA-RESPA Integrated Disclosure Rule (“TRID”) does not permit the itemization of recording fees and other government fees and taxes on the CD.  Instead, TRID requires that all recording fees and government fees and taxes, other than transfer taxes, be added together and listed as a lump sum on the CD. [§ 1026.37(g)(1)(i)] 

The lump sum total must be recorded in Section E of the CD as “Recording Fees and Other Taxes” under the “Taxes and Other Government Fees” subheading. [Idem] 

Additionally, all transfer taxes must be totaled and recorded as a lump sum on the next line.

[§ 1026.37(g)(1)(ii)].

See below:

Moreover, TRID does not permit additional lines or items to be added to individually catalogue these fees and taxes. [Commentary at 1026.37(g)(1)-6] If no recording fees or transfer taxes are charged, these lines should simply be left blank. Lines from this section should never be deleted. [Idem]

In the event a creditor desires to itemize and disclose these fees and taxes, or state law requires such disclosure, we suggest the creditor do so using a separate document. To meet this need, the American Land Title Association (“ALTA”) has developed the ALTA Settlement Statement (http://www.alta.org/cfpb/documents.cfm), which provides a model form for disclosure of all itemized fees and charges that buyers and sellers pay during the settlement process.

Michael Barone

Executive Director

Director/Legal & Regulatory Compliance 

Lenders Compliance Group

Communications to Collect a Debt

QUESTION

Recently, we were cited by our regulator for not stopping our communications in our debt collection efforts. Apparently, we violated a regulation that requires us to stop such communications at a certain point. When should we stop communicating with a borrower for debt collection purposes?

ANSWER

Under the Fair Debt Collection Practices Act (FDCPA), once a debt collector receives written notice from a consumer that either the consumer refuses to pay the debt or that the consumer wishes the debt collector to cease further communication with the consumer, the debt collector must cease communicating with the consumer with respect to such debt. [15 USC § 1692c(c)]

Note that the term “consumer” includes the consumer’s spouse, parent (if the consumer is a minor), guardian, executor, or administrator. [15 USC § 1692c(d)]

Notification is effective upon receipt by the debt collector. Due to the strict liability standard of the FDCPA, the debt collector will generally be liable for any communication sent after the date of receipt, even if the debt collector has no actual knowledge of the request.

Issues will arise under the applicable provision with respect to what constitutes a valid written notice from the consumer, or whether a consumer’s subsequent communication to the debt collector waives the prior request to cease communication. One suggestion is to use the “least sophisticated consumer” standard, as courts have used this standard in interpreting the FDCPA; that is, courts will liberally interpret a notice to be valid and will uphold a consumer’s rights despite communications that appear to waive the request to cease communication.

Also note, issues may arise with respect to multiple debts owed by a consumer. The Federal Trade Commission (FTC) has weighed in on this subject. According to the FTC, a consumer who requests that communication be ceased with respect to a previous debt, must repeat that request in connection with a subsequent debt being collected by the same debt collector. [Atteberry, FTC Informal Staff Letter, 12/30/77]

Jonathan Foxx

President & Managing Director 

Lenders Compliance Group

Re-disclosure due to Rate Lock

QUESTION

We understand that a revised disclosure must be sent to the consumer when there are certain revisions. However, are we required to send a revised LE for a rate lock when the interest rate and terms remains the same? And if the loan is not initially locked, are we prohibited from adding any origination fees if they were not initially disclosed?

ANSWER

The regulation is not entirely clear on whether a revised disclosure is required when a rate is locked at the same rate that was originally disclosed. §1026.19(e)(3)(iv)(D) states:

"[N]o later than three business days after the date the interest rate is locked, the creditor shall provide a revised version of the disclosures required under paragraph [1026](e)(1)(i) of this section to the consumer with the revised interest rate, the points disclosed pursuant to § 1026.37(f)(1), lender credits, and any other interest rate dependent charges and terms."

One can infer this language presumes that a rate-lock in and of itself is a revision requiring re-disclosure. However, the regulation is silent as to whether revised disclosures need to be provided if there is a rate lock that does not change the initially disclosed terms. Given the current state of the enforcement environment on the state and federal levels, it is probably prudent to re-disclose even when your rate lock does not change terms.

As to the addition of origination charges when the loan is locked, whatever charge is changed cannot be used for purposes of resetting a good faith tolerance. Only revised disclosures that are produced pursuant to one of the §1026.19(e)(3)(iv) triggering events allow a lender to reset the tolerance for purposes of determining good faith. Therefore, if a lender sends a revised disclosure because of a rate lock – a triggering event pursuant to §1026.19(e)(3)(iv) – and it adds new origination fees to the disclosures, then the revised disclosures could be used to calculate some good faith tolerances, but not others.

Section 1026.17(c)(2)(i) provides that disclosures may be estimated based on the best information reasonably available to the creditor at the time the disclosures are made. That requires the creditor, acting in good faith, to exercise due diligence in obtaining information. [Comment 17(c)(2)(i)-1]

If a creditor adds an origination fee that is unrelated to the rate lock, then that unrelated fee cannot be used to reset the base tolerances. Whether fees are changed or added due to a rate lock or other reason, creditors should always establish a documented defensible position supporting such changes and have policies in place ensuring that any changes adhere to their good faith obligations for all estimates to be based on the best information reasonably available to the creditor at the time the initial disclosures are made.

Michael Goldhirsh

Executive Director/Vendors Compliance Group 

Director/Legal & Regulatory Compliance - Lenders Compliance Group

Subleasing Office Space

QUESTION

We are a lender with some concerns regarding our office sharing arrangements. One of our branches shares space with a realtor, another subleases from a certified public accountant, and still another subleases from a real estate appraiser. Each branch has an individual locked office with shared access to conference room and break areas. Are these arrangements permissible?

ANSWER

Provided the lender is paying the fair market value for the space pursuant to a written lease agreement, each of the scenarios is permissible. The appraiser and realtor landlord arrangement raises greater concern as both of them are also settlement service providers; but again, such arrangements are not prohibited as long as there are no payments for referrals and the rent charge is the actual fair market value for the spaces and services provided that a non-settlement service provider would pay.

Section 8 of RESPA prohibits the giving or accepting of a “thing of value” to another person for the referral of settlement business. RESPA defines “thing of value” to include “lease or rental payments based in whole or in part on the amount of business referred”. RESPA does permit payments for goods or for services actually performed. Thus, the question is whether the lender is leasing space at a higher than market rate in exchange for referral of business from the realtor or appraiser. 

The rental payment must reflect the general market value for the spaced leased. If you are leasing at a higher than market rent, there will be a presumption that the rental payments represent disguised referral fees. You cannot arbitrarily assign the fair market value: you need to make sure it is researched and well documented. In determining the fair market value of rental space, one must look at what a non-settlement service provider would pay for the same amount of space and services rendered in the same or a comparable building as opposed to what a settlement service provider would pay for the space and services.

The value of a referral cannot be considered in determining whether there is a reasonable relationship between the rental payments and the facilities and services provided. The value may include an appropriate proportion of the cost for office services actually provided to the tenant, such as secretarial services, utilities, and office equipment. If the rental payments exceed the fair market value of the space and services provided, the excess amount will be considered as payment for the referral of business in violation of Section 8.

Joyce Wilkins Pollison

Director/Legal & Regulatory Compliance 

Lenders Compliance Group

Denials under HMDA

QUESTION

We realize there are reasons for denials under HMDA. However, how many reasons for denial are we allowed? Also, what are the categories for denials?

ANSWER

For HMDA purposes, a financial institution may elect to report the reason it denied a loan. It may report up to three reasons for denial. [12 CFR § 203.4(c)]

To understand the categories for denials, it is best to base the denial reasons specified in the model Adverse Action Notice (i.e., Regulation B notice) for the denial reasons under HMDA. The model form for Adverse Action is Form C-1 in Appendix C to Regulation B, the implementing regulation of the Equal Credit Opportunity Act.

It is possible to extrapolate the denial categories into more precise reasons. The following table provides the adverse action notice denial reason and its corresponding HMDA denial reason. [12 CFR Part 203, Appendix A]

Adverse Action Notice Denial Reason	HMDA Denial Reason
Income insufficient for amount of credit requested. Excessive obligations in relation to income.	Debt-to-Income ratio.
Temporary or irregular employment. Length of employment.	Employment history.
Insufficient number of credit references provided. Unacceptable type of credit references provided. No credit file. Limited credit experience. Poor credit performance with financial institution. Delinquent past or present credit obligations with others. Garnishment or attachment. Foreclosure or repossession. Collection action or judgment. Bankruptcy.	Credit history.
Value or type of collateral not sufficient.	Collateral.
Unable to verify credit references. Unable to verify employment. Unable to verify income. Unable to verify residence.	Unverifiable information.
Credit application incomplete.	Credit application incomplete.
Length of residence. Temporary residence. Other reasons specified on notice.	Other.

Jonathan Foxx

President & Managing Director

Lenders Compliance Group

Affiliated Business Arrangements and Marketing Services Agreements

Question

What are the differences between an Affiliated Business Arrangement (“ABA”) and a Marketing Services Agreement (“MSA”)?

Answer

There are significant differences between MSAs and ABAs. These differences relate to ownership, structure and permissible referral activities.

An ABA involves two are more entities that are under common ownership or control. An example of an ABA would be a real estate brokerage company having an ownership interest in a title company. On the other hand, a MSA involves a marketing relationship between two unrelated parties. An example of a MSA would be a lender entering into a marketing relationship with an unrelated real estate brokerage company. The parties involved in MSAs usually do not have common ownership or control.

Under a properly structured ABA, the two commonly owned or controlled entities may refer settlement business to each other. The Real Estate Settlement Procedures Act (“RESPA”) states that settlement service providers can legally refer business under an ABA relationship. Section 8 of  RESPA and Section 3500.14 of Regulation X define ABAs as arrangements in which: (1) a person who is in a position to refer business incident to or a part of a real estate settlement service involving a federally related mortgage loan, or an associate of such person, has either an affiliate relationship with or a direct or beneficial ownership interest of more than one percent in a provider of the settlement service; and (2) either of such persons directly or indirectly refers such business to that provider or affirmatively influences the selection of that provider. [ 24 CFR 3500.14]

In order to properly structure an ABA relationship under RESPA, the affiliated companies must: (1) disclose the nature of the affiliated relationship to the consumer at or prior to the referral, (2) not require that the consumer use the referred service provider, and (3) not give any consideration or item of value in exchange for the arrangement, except for the fair market value of the goods, facilities or services actually furnished. 

Under a MSA relationship, the two unaffiliated entities absolutely cannot have an agreement to refer settlement business to each other. Rather, a settlement service provider, such as a mortgage company, may enter into a MSA with an unaffiliated settlement service provider, such as a real estate brokerage company, to perform general marketing services in exchange for a fee. Fees paid under a MSA must be based on the fair market value of the advertising and marketing services provided and cannot be based on volume of business.

Unlike ABAs, MSAs do not have an explicit statutory basis. Furthermore, and notwithstanding that RESPA permits “the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed,” [12 U.S.C. 2607(c)(2)] the Consumer Financial Protection Bureau (“CFPB”) has cautioned against the use of MSAs and specifically indicated they cannot be established to circumvent RESPA’s general prohibition on the payment and acceptance of kickbacks and referral fees. [CFPB Compliance Bulletin 2015-05]

Given the CFPB’s position, a MSA should only be entered into after careful evaluation of the risks and rewards associated therewith. A MSA relationship must be properly structured so as not to appear to evade RESPA’s prohibition on the payment and acceptance of kickbacks and referral fees. The marketing services to be performed under a MSA must be clearly articulated and documented within the agreement between the parties. A qualified and independent third party should determine the fair market value for the proposed services and a party should not pay or receive a fee above this amount as it could be a potential violation of Section 8 of RESPA. Prior to making any payments, the parties must, therefore, verify that the services contracted for have actually been performed. If any of the services are not rendered, a regulator may determine that all or a portion of the fee paid as part of the MSA is a referral fee in violation of Section 8 of RESPA.

Neil Garfinkel

Executive Director/Realty Compliance Group

Director/Legal & Regulatory Compliance 

Lenders Compliance Group

Requiring a Borrower’s Alternate Income Sources

QUESTION

We went through a state banking audit and were cited for requiring applicants to provide their income certain sources other than employment income. How are we supposed to underwrite loans if we don’t get that kind of information?

ANSWER

You do not specify the other sources of income in your question. However, a creditor may not inquire whether income stated in an application is derived from alimony, child support, or separate maintenance payments unless the creditor discloses to the applicant that such income need not be revealed if the applicant does not want the creditor to consider it in determining the applicant’s creditworthiness. [12 CFR § 202.5(d)(2)]

Regulation B, the implementing regulation of ECOA, provides a model application form to illustrate how income information may be requested consistent with this restriction. [12 CFR Part 202, Application B; 12 CFR Supplement I to Part 202 – Official Staff Interpretations § 202.5(d)(2)-1)] Note that one of the model forms is a version of the URLA application from January 2004, which is not the current conversion of the form specified by Fannie and Freddie.

A general inquiry about the source of income may lead an applicant to disclose alimony, child support, or separate maintenance income. So, a creditor that makes a general inquiry about the source of income should preface the request with the required disclosure about income from alimony, child support, or separate maintenance. [12 CFR Supplement I to Part 202 – Office Staff Interpretations § 202.5(d)(2)-2]

However, must the foregoing disclosure regarding income from alimony, child support, or separate maintenance be made for all requests of income? Actually, No. If an inquiry about income is specific and worded in a way that is unlikely to lead the applicant to disclose the fact that income is derived from alimony, child support, or separate maintenance payments, the disclosure regarding income from alimony, child support, or separate maintenance is not required. For instance, a creditor in an application form could ask about specific types of income such as salary, wage or investment income without providing the disclosure. [12 CFR Supplement I to Part 202 – Official Staff Interpretations § 202.6(b)(8)-1]

Jonathan Foxx

President & Managing Director 

Lenders Compliance Group

Loan Estimate: Disclosing Discount Points

QUESTION

When disclosing the initial Loan Estimate on an unlocked loan, do we need to disclose the discount points that would be charged as if the loan were locked at the time the Loan Estimate was disclosed?

ANSWER 

Yes, under the TILA-RESPA Integrated Disclosure (“TRID”) Rule, the disclosures always need to be made in “good faith”. Therefore, the rate and fees set forth on the Loan Estimate (“LE”) must be accurate (to the best of lender’s knowledge) on the day the disclosure is delivered to the borrower. 

Omitting a discount fee or adding a credit for a rate that is inconsistent with the lender’s rate sheet on the day the LE is disclosed to the borrower, is deceptive and not in good faith.  In essence, the lender would be making it appear to the borrower that the rate is available without a discount or with a credit, which would be inaccurate. Not only would these actions violate the spirit of TRID (viz., the “know before you owe” consumer disclosure requirements), but it may also be considered an instance of Unfair, Deceptive, or Abusive Acts or Practices (“UDAAP”).

Michael Barone

Executive Director

Director/Legal & Regulatory Compliance

Underwriting Child Support

Question

I have an applicant who pays $200 more a month than the child support order directs, which he has been doing for a few years. Do I include the additional $200 in the debt to income ratio?

Answer

Although this voluntary, regular, monthly payment is not required to be included in the in the monthly obligations, you may do so and still comply with Agency Underwriting guidelines. This is a perfect example of a compensating factor, meaning the applicant qualifies and meets the debt to income ratio guidelines while also including a regular and voluntary monthly payment that is not described as a legal obligation.

When an applicant is required to pay alimony, child support, or maintenance payments under a divorce decree, separation agreement, or any other written legal agreement (and those payments must continue to be made for more than ten months), the payments must be considered as part of the borrower’s recurring monthly debt obligations. 

FHA, VA, FNMA and FHLMC do not require voluntary payments to be taken into consideration.

Document the file with the appropriate legal documents to support the legal obligation. When that obligation will be met, or expires, is crucial. A letter of explanation from the borrower may be requested by an underwriter as a best practice, so the next person touching the file can see this issue was addressed and explained.

Brandy George

Director/Underwriting Operations Compliance

Lenders Compliance Group