QUESTION
What is our mortgage company’s compliance policy on offering a “lender credit” to a group of individuals?
Can we use fliers like the one I saw a real estate broker hand out at a recent parent-teacher night?
The flier said:
“Attention fellow parents and faculty: Are you looking to buy or sell your next home? Please allow me to offer my real estate services on your next home adventure. Like you, I feel our children’s education is vitally important to our society. If you purchase or sell a home with me I will donate $300 back to our classrooms!”
ANSWER
There are at least two major areas of compliance concern that arise in a mortgage context from this type of marketing activity: (1) Fair Lending; and (2) RESPA. I will address each of these issues in order.
1. FAIR LENDING
In a mortgage context, the flier in question would offer a significant inducement to a limited subset of the general population (“teachers” and “fellow parents”) based on criteria largely unrelated to the prospective borrower’s financial qualifications to obtain the loans. That means that some people are excluded from the offer. Whether the persons excluded are members of a protected class is not immediately apparent from the face of the ad, because the categories identified do not inherently exclude such class members. However, as a practical matter, by excluding from the offer non-teachers and people without children, such a program could easily have a “disparate impact” on one or more protected classes of prospective borrowers. This could result in a violation of one or more fair lending statutes.[1]
As explained by Jonathan Foxx, Managing Director of Lenders Compliance Group, at pages 8-9 of his article entitled Advertising Compliance: Getting Ready for the Banking Examination published in the June 2016 edition of National Mortgage Professional Magazine:
“Advertisements are a minefield of potential fair lending violations. …Importantly, an allegation of a fair lending violation does not require any showing that the treatment was motivated by prejudice or a conscious intention to discriminate against a person beyond the difference in treatment itself. …When a company applies a racially or otherwise neutral policy or practice equally to all credit applicants, but the policy or practice disproportionately excludes or burdens certain persons on a prohibited basis, the policy or practice is described as having a Disparate Impact. The fact that a policy or practice creates a disparity on a prohibited basis is not alone proof of a violation. According to the interagency examination procedures set forth by Federal Financial Institutions Council (FFIEC), ‘when an examiner finds that a lender’s policy or practice has a disparate impact, the next step is to seek to determine whether the policy or practice is justified by business necessity. The justification must be manifest and may not be hypothetical or speculative. … Even if a policy or practice that has a disparate impact on a prohibited basis can be justified by business necessity, it still may be found to be in violation if an alternative policy or practice could serve the same purpose with less discriminatory effect. …”
Based on the information given, it is not possible to say with certainty whether a donation program similar to that described in the flier would actually constitute a fair lending violation. However, any time you extend inducements to only a subset of the population based on criteria other than their financial qualifications---even if the exclusionary criteria is not overtly directed at a protected class and even if it has a laudable charitable purpose---there is an increased risk of disparate impact on such a protected class and, hence, a potential fair lending violation.
2. RESPA
The “lender credit” offered in the flier described is directed at “Fellow Parents and Faculty” and promises that “If you purchase or sell a home with me I will donate $300 back to our classrooms.” This offer could constitute a violation of Section 8 of the Real Estate Settlement Procedures Act (RESPA), which reads in pertinent part:
“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 part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.”
There are three elements to an illegal kickback under RESPA: (1) a “thing of value,” (2) an “agreement or understanding,” and (3) a “referral” of a real estate settlement service [2] (mortgage origination is a “settlement service”). If any of these three essential elements is missing, the activity is not illegal under RESPA. Here, however, a donation of $300 “back to our classrooms” is clearly a “thing of value,” at least for the teachers and parents of the children whose classrooms would receive the donation.
On its face, the donation is offered to the persons who actually “purchase or sell a home with [the broker].” That supports an argument that the offer is only a type of “lender credit.” However, the funds are going to other parties in addition to the borrower --- “our classrooms” --- as the result of which the parents and teachers of children in those classrooms presumably benefit. The flier is apparently distributed to those same persons, such that there is a built-in inducement for them to “refer” other persons to the broker in order to increase the donations to “their” classrooms, thus satisfying the second and third requirements of Section 8. For these kinds of “donation” arrangements to work under RESPA Section 8, the beneficiary of the donation should not also be the person from whom referral of business is sought, no matter how salutary the charitable purpose of the donation.
Adoption of a charitable donation-type marketing program modeled on the realtor ad described carries increased legal and regulatory risk. It is theoretically possible to mitigate, but not entirely eliminate those risks. In the end, whether to go forward with such a program, given those risks, is a business judgment decision for management.
Michael Pfeifer
Director/Legal & Regulatory Compliance
Lenders Compliance Group
[1] These statutes include: The Fair Housing Act (FHA) 42 USC 3601 et seq.; Equal Credit Opportunity Act (ECOA) 15 USC 1691 et seq; CFPB Supervision and Examination Manual, Ver. 2, Part II(C), Equal Credit Opportunity Act; Home Mortgage Disclosure Act (HMDA) 12 USC 2801 et seq.
[2] A settlement service includes any service provided in connection with a prospective or actual real estate settlement. (12 C.F.R. §1024.2(b).) The making of a mortgage loan is a “settlement service” (Ibid.)
