QUESTION
We were cited for two RESPA violations. The first thing we supposedly had was an undisclosed referral arrangement. But in our view, there was no increase in our charges, so we do not believe we did something wrong.
The other violation was about fee splitting. I became a mortgage broker a year ago. I am not a compliance person, and I don’t even know what that is, but based on the banking department’s letter, it means we had an arrangement with a company to split the fees on a mortgage loan. Now, I disagree about us even having such an arrangement, let alone splitting any fees. I now have to prove it to the banking department.
I need to know more. I want to understand how these violations could cause such a big response from the banking department. I have other questions, but these are the two that matter most to me. I contacted your Brokers Compliance Group to discuss everything.
Did we actually violate RESPA if there was no increase in our charges?
Are there exemptions to the prohibitions on referral fees and fee splitting?
COMPLIANCE SOLUTIONS
ANSWER
RESPA (Real Estate Settlement Procedures Act) refers to a “thing of value” as including, but not limited to, any payment, advance, funds, loan, service, or other consideration.[i] To broaden this concept, a “thing of value” includes, without limitation, monies, things, discounts, salaries, commissions, fees, duplicative payments of a charge, stock, dividends, distributions of partnership profits, franchise royalties, credits representing monies that may be paid at a future date, the opportunity to participate in a money-making program, retained or increased earnings, increased equity in a parent or subsidiary entity, special bank deposits or accounts, special or unusual banking terms, services of all types at special or fee rates, sales or rentals at special prices or rates, lease or rental payments based in whole or in part on the amount of business referred, trips and payment of another person’s expenses, or reduction in credit against an existing obligation. My firm has come across many types of “thing of value” arrangements at one time or another. You get the point!
By the way, the term “payment” is effectively synonymous with the giving or receiving of any “thing of value” and does not require a transfer of money.[ii]
If you have a particular arrangement for referrals, and you are not sure if the arrangement violates RESPA, contact a competent compliance professional to discuss your plans.
With respect to your view that there was no increase in the charge, therefore, there should be no violation of RESPA, you are 100% wrong. The fact that the transfer of a thing of value does not result in an increase in any charge made by the entity giving the thing of value is irrelevant in determining whether the act is prohibited.[iii]
The answer about exemptions[iv] to the referral and fee splitting prohibitions is both specifically outlined in RESPA with examples. I will provide a brief outline here; however, a compliance evaluation should be undertaken to ensure any plan based on an exemption is thoroughly vetted by a compliance professional.
The RESPA specifically provides seven exemptions to referral and fee splitting prohibitions.
The RESPA exemptions are:
1. A payment to an attorney at law for services actually rendered;
2. A payment by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance;
3. A payment by a lender to its duly appointed agent or contractor for services actually performed in the origination, processing, or funding of a loan;
4. A payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed;
5. A payment pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and real estate brokers;[v]
6. Normal promotional and educational activities that are not conditioned on the referral of business and that do not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or business incident thereto; or
7. An employer’s payment to its own employees for any referral activities.
I would argue that each of these examples requires significant explication by a compliance professional who has core competency in interpreting and applying the requirements of RESPA and Regulation X.
There has been some confusion about different versions of exemptions for payments to employees. The exemptions from the referral fee and fee splitting prohibitions are contained in Regulation X, the implementing regulation of RESPA.[vi] The Code of Federal Regulations includes an Effective Date Note[vii] that sets forth a second version of the same version with different provisions regarding payments to employees. Congress prohibited the Department of Housing and Urban Development (HUD) from implementing the revised version until July 31, 2007, and it required HUD to provide advance public notice if it ever intended to implement the different provisions. But, HUD has never acted to implement the revised version.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
[i] 12 USC § 2602(2)
[ii] 12 CFR 3500.14(d)
[iii] 12 CFR § 3500.14(g)(2)
[iv] 12 CFR 3500.14(g)(1)
[v] The statutory exemption refers only to fee divisions within real estate brokerage arrangements when all parties are acting in a real estate brokerage capacity and has no applicability to any fee arrangements between real estate brokers and mortgage brokers or between mortgage brokers.
[vi] Regulation X § 3500.14(g)(3)
[vii] 12 CFR § 3500.14(g), Effective Date Note
