QUESTION
I am the Compliance Manager of a mortgage lender in the mid-West. Recently, we received a notice from the CFPB after their examination. One of their allegations is that we violated RESPA’s restrictions on referrals involving “gifts and promotional activities.”
Our General Counsel has asked me not to go into the details. However, he approved my request to ask you a generic question about referrals. We need an “advanced warning” guideline to ensure this violation won’t happen.
I want to know how to determine when a referral is a violation of RESPA. Maybe you can provide some guidance on whether an arrangement can be deemed an illegal referral. I want to be able to evaluate the arrangement based on a simple set of criteria to determine if it can lead to a referral violation.
How can I determine if a referral is illegal under RESPA?
COMPLIANCE SOLUTIONS
Advertising & Marketing Compliance
ANSWER
It is possible to provide a generic guideline to act as an “advanced warning” of gifts and promotional activities that would likely trigger a violation of the Real Estate Settlement Procedures Act (RESPA). Under RESPA Section 8(a), gifts and promotions generally are “things of value” and, therefore, could, depending on the circumstances, violate RESPA Section 8(a).[i]
If the gifts or promotions are given or accepted as part of an agreement or understanding for the referral of business incident to or part of a real estate settlement service involving a federally related mortgage loan, they are prohibited.
Here’s an example. A settlement service provider[ii] gives professional sporting event tickets, trips, restaurant meals, or sponsorship of events (or the opportunity to win any of these items in a drawing or contest) to current or potential referral sources in exchange for referrals as part of an agreement or understanding, such conduct violates RESPA Section 8(a). By the way, the agreement or understanding need not be written or oral; a practice, pattern, or course of conduct can establish it.
However, in certain circumstances, gifts or promotions directed to a referral source are not prohibited if they are a normal promotional or educational activity meeting the conditions in Regulation X, RESPA’s implementing regulation.
Regulation X allows normal promotional and educational activities directed to a referral source if the activities meet two conditions:
1.The activities are not
conditioned on the referral of business.
2.The activities do not involve defraying expenses that otherwise would be incurred by the referral source.
First Condition
The first condition is that normal promotional and educational activities must not be conditioned on the referral of business.
Factors that are relevant to whether the first condition is met may include the following:
- Whether the item or activity is targeted to referral sources. If an item or activity is targeted narrowly towards prior, ongoing, or future referral sources, this could indicate that the item or activity is conditioned on referrals of business.
Example A
Suppose a promotional item is provided only to a limited set of settlement service providers who also happen to be current referral sources or an intentionally targeted group of future referral sources. In that case, this may suggest that the recipient is receiving the promotional item because of past or future referrals, and thus, the promotional item may be conditioned on referrals.
Example B
If, instead, a promotional item is provided to a broader set of recipients, such as the general public or all settlement service providers offering similar services in a given locality, then that may indicate that the promotional item is not conditioned on the referral of business.
How often is the item or activity given to the referral source? If a referral source is routinely and frequently provided with an item or included in an activity, and particularly if that referral source is provided with the item or included in the activity more often than other persons, this could indicate that the item or activity is conditioned on referrals.
Second Condition
The second condition is that normal promotional and educational activities must not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or business incident to those settlement services.
Factors
that may be relevant to whether the second condition is met may include the
following:
- Whether the item or activity involves a good or service that the referral source would otherwise have to pay for itself.
Example A
Suppose a promotional activity involves paying for mandatory continuing education expenses, certifications, licenses, or other items that the referral source would otherwise need to pay for on its own. In that case, the promotional item or activity is more likely to defray expenses.
Example B
Similarly, suppose the activity involves paying for the referral source’s office supplies branded with the referral source’s name, contact information, or logo. In that case, this is more likely to defray the expenses of the referral source. But suppose the activity involves providing the referral source with office supplies featuring the name, contact information, or logo of the entity providing the supplies. In that case, this is less likely to defray expenses, since it is unlikely that the referral source would otherwise use its own funds to purchase office supplies featuring the name and information of another entity.
If the particular item or activity does not meet either of these conditions, it is not a normal promotional or educational activity meeting the conditions in Regulation X.
Jonathan Foxx, Ph.D., MBAChairman & Managing Director
[i] 12 CFR §
1024.14
[ii] 12 CFR
§ 1024.2(b)(29)
