QUESTION
One
of our loan officers wants to participate in a joint marketing program with a
realtor in which the two of them hand out “vouchers” bearing both of their pictures
and contact information and offering $500 off closing costs “courtesy of” the
LO, the realtor, and our mortgage company to employees of certain school
districts that are highly regarded in our area. Do you see any potential
problems with this kind of marketing?
ANSWER
I
think you right to be concerned about these vouchers, for a number of reasons,
including possible violations of RESPA, Fair Lending laws, and the provisions
of the Dodd-Frank Act prohibiting Unfair, Deceptive, and Abusive Acts and
Practices (UDAAP) (as well as similar state laws).
1.
RESPA Sections 8(a) and 8(b)
Joint
marketing pieces like this are problematic in and of themselves because they
can often be characterized as mutual endorsements and hence, as implied mutual
referrals. Both the realtor and the loan officer are providing
“settlement services” as that term is defined in RESPA’s implementing
Regulation X (12 CFR 1024.2). So RESPA Section 8 is applicable to both
of them. If either party pays more than their fair share of making or
distributing the advertisement, that differential itself could potentially be
characterized as the payment of a thing of value for purposes of obtaining the
referral of a settlement service.
In
that regard, all three elements of a RESPA Section 8(a) violation would appear
to be present:
- The payment
or receipt of a “thing of value”
- Pursuant to
an agreement or understanding
- For referral
of “settlement service” business involving a federally related mortgage
loan.
Adding
the monetary inducement of “$500 off closing costs” makes the vouchers even
more problematic. While offering a financial inducement directly to a
prospective borrower is probably not itself
a RESPA Section 8(a) violation, splitting the cost of that financial inducement
may violate RESPA Section 8(b) which prohibits not only “referral fees,” but
also “splits” of any charge “made or received” for the rendering of a
settlement service on a federally related mortgage loan “other than for
services actually performed.”
The
applicable language in Regulation X (12 CFR §1024.14) reads as follows:
(c) No split
of charges except for actual services performed. 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 settlement service in connection with a transaction
involving a federally related mortgage loan other than for services actually
performed. 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 this
section. The source of the payment does not determine whether or not a service
is compensable. Nor may the prohibitions of this part be avoided by creating an
arrangement wherein the purchaser of services splits the fee.
Here,
splitting the cost of the $500 borrower inducement would appear to fall
squarely within the above prohibition, since no services performed by either
the LO, the lender or the real estate broker with respect to each other are
identified.
2. Possible Fair Lending/ Discriminatory
Impact/redlining
Federal
regulators have encouraged mortgage lenders to be careful about advertising patterns or practices that a
reasonable person would believe
indicate the existence possible discrimination against members of protected
classes (i.e., disparate impact). By offering the vouchers only to employees of
elite schools, you may be engaging in exactly that kind of prohibited pattern
or practice. This means that if you were to go forward with this voucher
program, it would need to be carefully drawn to make sure that no protected
class of persons is excluded from access to participation, either intentionally
or statistically.
3.
Possible UDAAP Violation
Discriminatory
practices are inherently UDAAP violations. But there are also potential UDAAP
issues if the vouchers ARE offered to everyone equally, but some prospective borrowers
are led to believe that the incentive is offered only to them because of their
special status as employees of one of the elite schools. That is deceptive on
its face and invites further regulatory scrutiny and/or enforcement action.
In
short, if your company wants to offer buyer incentives such as discounts off
closing costs, it may be best to offer the incentives to all prospective
borrowers on your own and not attempt to also incorporate such efforts into a
joint marketing campaign with another settlement service provider. Otherwise,
the potential for regulatory violations tends to multiply exponentially.
Michael R. Pfeifer
Director/Legal & Regulatory Compliance
Lenders Compliance Group
