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.
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
