Payment for Bank Referrals

QUESTION

One of our branches is talking with a local bank that wants to refer their mortgage loans to us. I know that, in the past, if the bank did a certain amount of work on the file up front they could be payed a fee. Is this still possible? And if so how do we stay compliant doing this?

ANSWER

It is still possible, but only on certain conditions.

First, payment of anything of value for referral of business is illegal under Section 8(a) of the Real Estate Settlement Procedures Act ("RESPA") 12 U.S.C. 2706, which reads:

“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.”

Second, it is also illegal under RESPA Section 8(b) to split fees with anyone for the rendering of a real estate settlement service:

“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.”

Under Regulation X (12 CFR §1024.2(b)), the implementing regulation of RESPA, “settlement services” are defined in, to include, among other things, the following:

“(1) Origination of a federally related mortgage loan (including, but not limited to, the taking of loan applications, loan processing, and the underwriting and funding of such loans);

(2) Rendering of services by a mortgage broker (including counseling, taking of applications, obtaining verifications and appraisals, and other loan processing and origination services, and communicating with the borrower and lender);

(3) Provision of any services related to the origination, processing or funding of a federally related mortgage loan... “

However, there are certain exceptions to Sections 8(a) and (b). These are set forth in Section 8(c) of RESPA, which states that “Nothing in this section shall be construed as prohibiting [a list of payments and arrangements].” This list is quite lengthy and a significant body of case law and regulatory rulings have grown up over the years interpreting them. But the general concept of Section 8(c) can be summarized by stating that RESPA does not prohibit paying any person a bona fide salary or compensation or other payment for goods or facilities actually furnished or services actually performed.

Two aspects of Section 8(c) have proven especially controversial, including:

• The meaning of the introductory phrase, “Nothing in this section shall be construed as prohibiting.” The CFPB has interpreted this phrase as meaning that while Section 8(c) does not prohibit the payment of bona fide compensation for services actually performed, the phrase does not go so far as to grant a “safe harbor” for such a payment occurring in conjunction with a service for which RESPA does not allow compensation (such as a referral).  In the CFPB’s view, Section 8(c)(2) “clarifies” Section 8(a) and does not create any “safe harbor.” This issue was addressed in the recent and widely followed litigation case of PHH v. CFPB 881 F.3d 75 (January 31, 2018) in which the En Banc panel of the Court of Appeals for the District of Columbia Circuit upheld a three judge panel’ of that Circuit’s decision rejecting the CFPB’s interpretation.  
• The meaning of the term “bona fide.” Some, including the CFPB, argue that the term “bona fide” requires a fee to be reasonable; that is, to have a reasonable relationship to the value of the good, facility, or service for which it is paid. In that regard, one widely recognized technique for supporting the “bona fides” of a particular fee is to obtain a market survey showing that the fee is in line with market practices.

Thus, while payment of fees for mere referrals is prohibited, the Court of Appeals in PHH v. CFPB has said that lenders may compensate intermediaries, such as the bank in your question, for services actually rendered. 

How much work must an intermediary do to earn compensation? There is no bright line standard, but one of the best known and widely accepted tests was developed by the Department of Housing and Urban Development (“HUD”) in the 1990s. In two 1995 rulings and RESPA Statement of Policy 1999-1, HUD set forth the test it uses in determining whether a violation of Section 8 has occurred in such situations. These are probably the rules you are thinking of and they still apply. 

Under the test, HUD reviewed a loan transaction to determine how many of the following services were performed:

• (a) Taking information from the applicant and filling out the application. Filling out a prospective borrower’s worksheet may substitute for the act of filling out a mortgage loan application if, for reasons of efficiency, the lender prefers to have the actual application filled out in a central location.
• (b) Analyzing the applicant’s income and debt and prequalifying the borrower to determine the maximum amount the applicant can afford.
• (c) Educating the borrower in the home buying and financing process, advising the borrower about the different types of loan products available, and demonstrating how closing costs and monthly payments would vary under each product.
• (d) Collecting financial information (for example, tax returns, bank statements) and other related documents that are part of the application process.
• (e) Initiating or ordering verifications of employment (VOEs) and verifications of deposit (VODs).
• (f) Initiating or ordering requests for mortgage and other loan verifications.
• (g) Initiating or ordering appraisals.
• (h) Initiating or ordering inspections or engineering reports.
• (i) Providing required legal disclosures (Truth-in-Lending, Good Faith Estimate, others) to the applicant.
• (j) Assisting the applicant in understanding and clearing credit problems.
• (k) Maintaining regular contact with the applicant, real estate broker or salesperson, and lender, between application and closing to apprise them of the status of the application and to gather any additional information as needed.
• (l) Ordering legal documents.
• (m) Determining whether the secured property is located in a flood zone or ordering a flood determination.
• (n) Participating in the loan closing.

If the intermediary took the application (item a), performed at least five additional items on the list, and received a fee reasonably related to the market value of the services performed, HUD determined that no Section 8 violation had occurred.

Bottom line: What you are considering does appear to be legally permissible, provided that you and the bank comply with the requirements set forth above.

Michael R. Pfeifer

Director/Legal & Regulatory Compliance

Lenders Compliance Group

Mortgagee Review Board: Suspension of Mortgagee

QUESTION

We are an FHA lender who recently got a notice from the Mortgagee Review Board. This is the first time we ever received such a notice and frankly our attorney has no experience in knowing how to respond. We were referred to you, since we are preparing a response and you have handled this kind of engagement. We have a lot of questions and could use some immediate guidance. Here are just a few of the questions we need to know. What is this Mortgagee Review Board? What can it do to us? If we get suspended, can we still originate FHA loans? 

ANSWER

Given the complexity of the answers to your questions, I will provide only cursory responses here, with the suggestion that you seek appropriate risk management guidance and legal counsel to assist in a matter involving the Mortgagee Review Board (“MRB” or “Board”). I am going to provide brief answers to your stated questions; however, I urge you to immediately seek competent compliance support, since the MRB process is very extensive and time sensitive.

Generally, I recommend what I call “triune triage” to urgent matters such as this one, consisting of a three-part collaboration with the financial institution, the risk management firm, and the legal counsel experienced in matters concerning HUD-FHA. This three-way effort is important because we, as the risk management firm, have all the people and due diligence tools to handle deep dive preparation, and counsel has the means and familiarity with the legal process and procedures for interacting with the MRB. You must get a risk management firm such as ours, which has the widest range of hands-on, compliance support services in the country, because there are many features to preparation that will make demands on your readiness. I caution against trying to go it alone in matters involving the MRB.

The Board is the sole organization within the Department of Housing and Urban Development (“HUD” or “Department”) that is authorized to take administrative action against HUD-FHA Mortgagees and Title I Lenders that violate HUD-FHA requirements, or the non-discrimination requirements of the Equal Credit Opportunity Act, The Fair Housing Act, and certain other statutes. The Board is authorized to impose civil monetary penalties on Mortgagees and Title I Lenders that violate the Department's requirements, and it also may approve the initiation of a suspension or debarment actions.

The Board’s Chairman is the Assistant Secretary for Housing-Federal Housing Commissioner, and consists also of the General Counsel, the President of the Government National Mortgage Association, the Chief Financial Officer of HUD, the Assistant Secretary for Administration, the Assistant Secretary for Fair Housing and Equal Opportunity (in cases involving violations of the Department's nondiscrimination requirements), as voting members, and the Inspector General, the Director of Office of Lender Activities and Land Sales Registration, or their designees, as non-voting advisors.

Your inquiry does not indicate if your firm is a Title I Lender, which is an entity that processes or services loans for property improvements and the purchase of manufactured housing; or a Title II Mortgagee, which is an entity that processes or services loans for single family homes. A lender may be approved by HUD for both Title I and Title II. But I think some salient details can be somewhat responsive to your questions.

You ask what the MRB can do. It calls for documentation that may form a basis for administrative action, particularly when that documentation results from any report, audit, monitoring review, investigation or other information. After such review, the Board may determine if administrative sanctions and/or the imposition of civil money penalties may be warranted, and it would then seek to impose certain administrative sanctions, including civil money penalties for substantive and material violations of HUD-FHA requirements.

Depending on the nature and the extent of the violations, the Board may impose administrative sanctions, such as a reprimand, probation, suspension, and withdrawal of approval. Each of these carries adverse implications for the Mortgagee with respect to its relationship with HUD and other regulatory bodies, its relationship with investors, its financial stability, and its reputation with consumers and employees, among other things.

With respect to your question about suspension of a Mortgagee – Title I Lenders also have specific suspension features – while the sanction is in effect the insurance on mortgages accepted for insurance is not affected, except for cases involving fraud or proven misrepresentation by the holding Mortgagee. However, insured mortgages may not be originated or purchased by a Mortgagee whose approval has been suspended or withdrawn. So, suspension is a harsh curtailment of the very basis of the Mortgagee’s economic activity. Generally, the Mortgagee may service HUD-FHA insured mortgages.

Furthermore, a suspended Mortgagee may not submit new applications to HUD-FHA for insurance and should assign outstanding conditional commitments to a HUD-FHA approved Mortgagee in good standing. The Department will not endorse any mortgage unless, prior to the date of suspension or withdrawal, a firm commitment has been issued or unless a Direct Endorsement underwriter has approved the mortgagor for the mortgage.

The suspension nevertheless does not relieve the Mortgagee from any obligation to pay all amounts due HUD. In fact, any action taken by HUD to impose or rescind suspension or withdrawal of approval does not settle or resolve any criminal or civil liability of the Mortgagee. 

I urge you to contact us to discuss this matter immediately.

You can reach us by completing the information HERE or emailing us at compliance@lenderscompliancegroup.com, which we monitor 24 hours a day.

Jonathan Foxx

Managing Director

Lenders Compliance Group

HMDA Data Resubmissions

QUESTION

We know that you do HMDA and Fair Lending reviews. Recently, we realized that we will need to refile our HMDA data. So, our question is, do we have to disclose why we are refiling? Also, can we just refile part of the HMDA data that needs update rather than the entire HMDA data file?

ANSWER

We have conducted many HMDA, CRA, and Fair Lending reviews, so please be assured that your questions are entirely appropriate. If you need assistance with this matter or any other HMDA-related matter, please feel free to contact us HERE.

Institutions are expected to submit Loan Application Registers that contain valid and accurate HMDA data. However, if an institution discovers errors or omissions in connection with submitted HMDA data, the institution may resubmit the HMDA data.

If a data submission involves revisions or deletions of previously submitted data, it must state the total of all line entries contained in that submission, including both those representing revisions or deletions of previously submitted entries, and those that are being resubmitted unchanged or are being submitted for the first time.

When an institution resubmits HMDA data it must resubmit all the HMDA data. Partial resubmissions of data are not permitted.

A resubmission of data must indicate the reason for the resubmission.

Jonathan Foxx

Managing Director

Lenders Compliance Group

Loan Officers: 1099 or W-2

QUESTION

I want to hire a mortgage loan officer. I’ve been told it may be to my benefit to classify the loan officer as a 1099 independent contractor versus a W-2 employee. Am I able to do that? What are the benefits?

ANSWER

I am answering this question strictly from the human resources point of view. As the subject more broadly relates to whether a loan officer - based on being an 1099 independent contractor or a W-2 employee - meets specific guidelines set forth by the Fair Labor Standards Act and the issuances of the Department of Labor with respect to classifying mortgage loan originators or the GSEs, various federal agencies, and Department of Housing and Urban Development guidelines for the purposes of originating certain types of loan products, such as FHA loans, I suggest you contact us for a consultation or speak to your compliance department for more details.

It may seem a benefit to the employer to classify a loan officer as a 1099 independent contractor because the employer does not pay employee benefits or certain payroll taxes. However, the question is not whether it is to the employer’s benefit, but rather, does the person’s position and work qualify as an independent contractor under IRS rules? The IRS has specific guidelines regarding whether a person can be classified as a contractor (1099). The IRS can levy significant penalties to employers who misclassify employees. 

Generally, an employee with a W-2 is paid on an hourly or salaried basis, while a 1099 independent contractor is paid based on a contract that has a defined end, although the duration of employment can last anywhere from several weeks to years. Typically, a 1099 independent contractor is hired to work on a specific project or to provide support during a W-2 employee’s leave of absence.

The IRS guidelines basically say, “If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.” The IRS focuses on three main areas when determining employment status:

• How much control the employer has over the worker’s behavior and work results. (Who controls training, where and when the person works, what equipment they use?)
• How much control does the employer have on finances? (Does the employer have primary control over the person’s profit or loss?)
• What is the relationship between parties? (Does the worker receive benefits and is it a long-term relationship?)

Here is the 20-point checklist from the IRS, which may be used as guidelines in determining if a worker can be legally paid as a contractor:

1. Must the individual take instructions from your management staff regarding when, where, and how work is to be done?
2. Does the individual receive training from your company?
3. Is the success or continuation of your business somewhat dependent on the type of service provided by the individual?
4. Must the individual personally perform the contracted services?
5. Have you hired, supervised, or paid individuals to assist the worker in completing the project stated in the contract?
6. Is there a continuing relationship between your company and the individual?
7. Must the individual work set hours?
8. Is the individual required to work full time at your company?
9. Is the work performed on company premises?
10. Is the individual required to follow a set sequence or routine in the performance of his work?
11. Must the individual give you reports regarding his/her work?
12. Is the individual paid by the hour, week, or month?
13. Do you reimburse the individual for business/travel expenses? 
14. Do you supply the individual with needed tools or materials?
15. Have you made a significant investment in facilities used by the individual to perform services?
16. Is the individual free from suffering a loss or realizing a profit based on his work?
17. Does the individual only perform services for your company?
18. Does the individual limit the availability of his services to the general public?
19. Do you have the right to discharge the individual?
20. May the individual terminate his services at any time?

No one question determines the worker’s status. Agencies and courts typically look at the totality of the employment circumstances when determining whether a worker qualifies as an independent contractor. 

Kimberly Braman

Director/Human Resources Compliance 

Lenders Compliance Group