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Thursday, November 19, 2020

Housing Counseling Agency: RESPA Section 8

QUESTION
We ran into a problem with our banking department. They claimed that we violated RESPA when we paid a fee, equal to the borrower’s fee, to a Housing Counseling Agency. The HCA refers borrowers to us. We are being cited for a violation of RESPA Section 8. This seems unfair to the borrower, since the money is being paid to the agency on behalf of the borrower.

Is it permissible to pay a Housing Counseling Agency a fee that is commensurate with the HCA fee it charges the borrower?

ANSWER
There are myriad convoluted ways that Section 8 of RESPA may get triggered. Referrals are one of the booby traps of relationships between the parties to a loan transaction.

I suppose there is a workaround for your scenario, such as directly reimbursing the borrower (rather than the Housing Counseling Agency, or “HCA”) for payments the borrower makes to the HCA. But I would venture that you have already thought of that possibility. However, my hunch is that you want to continue the current relationship with the HCA, which is probably why you’re asking the question in the first place.

Section 8(a) of the Real Estate Settlement Procedures Act (RESPA) prohibits the transfer of a thing of value pursuant to an understanding that business will be referred to any person:

“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.”

Thus, as a general proposition, no participant in a loan transaction covered by RESPA may pay anyone else for referring business to them. That said, the CFPB has provided some guidance that could – emphasis on the word “could” – possibly support a way to tiptoe past the booby trap, based on a similar scenario on which it opined recently. 

Keep in mind, however, that a “similarity” does not mean the “same” – it just means that there are overt facts that show similarity, though each scenario has to be understood not only within its context but also, on its own, to ensure it is entirely in compliance with RESPA.

On September 10, 2019, the CFPB issued a No-Action Letter Template in response to HUD’s request for a No-Action Letter regarding lender participation in its Housing Counseling Program.[i] The CFPB stated that it intended to grant applications from mortgage lenders for No-Action Letters based on its No-Action Letter Template, which specified the certifications applications should contain.

Then, on January 10, 2020, the CFPB issued a No-Action Letter (“Letter”) in response to an application filed by Bank of America using the No-Action Letter Template.[ii] The bank's request stated that it operated a “Connect to Own” program in which it entered into arrangements with HCAs that participated in HUD’s Housing Counseling Program for funding housing counseling services to consumers subject to specified conditions.

The request confirmed that the terms of the bank’s existing Housing Counseling Funding Agreements were formalized in memoranda of understanding (“MOUs”) between the bank and the participating counseling agencies, that (a) these MOUs and the bank’s related practices were compliant with applicable HUD requirements, and (b) any future housing counseling funding agreements would be formalized in MOUs between the bank and the participating housing counseling agencies, and (c) that those MOUs and the bank’s related practices would comply with the applicable HUD requirements.

The CFPB’s Letter to the Bank of America approved the bank’s request. The Letter stated that, unless or until terminated by the CFPB, the CFPB would not make supervisory findings, or bring a supervisory action against the bank under RESPA § 8 or Regulation X § 1024.14, or its authority to prevent unfair, deceptive, or abusive acts or practices, for including and adhering to a provision in the MOUs for conditioning the bank’s payment for the housing counseling services on the consumer applying for a loan with the bank – and here’s the “tiptoe past the booby trap!” – with respect to which the bank received proof of completion of housing counseling services from the participating counseling agency, even if that provision or the parties’ adherence to it could be construed as a referral under RESPA. Importantly (and dispositively), the Letter provided that the housing counseling services' payment level must not exceed a level commensurate with the services provided, and was reasonable and customary for the area.

My recommendation is to have the subject scenario further evaluated for compliance by a competent compliance professional. You can send them my answer. The specific facts and circumstances in this scenario must be scrutinized for compliance with applicable law. Several procedural, policy, and disclosure requirements need to be reviewed to avoid an allegation of violating RESPA Section 8. 

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group

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[i] No-Action Letter to HUD, CFPB (Sept. 10, 2019), https://files.consumerfinance.gov/f/documents/cfpb_HUD-no-action-letter-template.pdf.
[ii] No-Action Letter to Bank of America, CFPB (Jan. 10, 2020), https://files.consumerfinance.gov/f/documents/cfpb_bank-of-america_no-action-letter.pdf.