Fee Splitting Violations

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 

Brokers Compliance Group 

Policies and Procedures 

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 

Lenders Compliance Group

________________________

[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

Essential Terms in RESPA Section 8

REQUEST THIS ARTICLE

QUESTION
I am involved in updating our policies for RESPA Section 8. I came on board in 2019 as the Compliance Manager. The old policy goes back almost ten years to when there was a different Compliance Manager here. 

I want to provide the basic information about Section 8, but I want it to be an overview rather than an extensive part of the RESPA policy. Since Section 8 is so vast, I wonder if it is even possible to reduce it to mere basics. 

With that in mind, and having followed your articles for years, I know you have a knack for putting complex information into a more understandable explanation. I hope you will choose my question among the many your receive. 

I am particularly interested in the meaning of “settlement services,” “thing of value,” “agreement (or understanding),” and “referral.” 

What do these terms mean under RESPA Section 8?

ANSWER
You are quite correct: Section 8 is vast. It is the subject of so many commentaries, litigations, webinars, panels, criticisms, descriptions, explanations, remarks, Best Practices, reviews, regulatory interpretations, administrative actions, rules, citations, obiter dicta, and precipitous frustration that it often seems to pose a puzzlingly reticulated intricacy beyond the reach of most mortals.   

But, despite its capacious expansiveness, you can begin to build up your Section 8 policy from these essential terms: 

(1) settlement service; 

(2) thing of value; 

(3) agreement (or understanding); and 

(4) referral. 

Section 8 of RESPA[i] (Real Estate Settlement Procedures Act) is one of its most important provisions because it attempts to achieve one of the primary congressional purposes for the statute, specifically, “the elimination of kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services.”[ii] 

Many aspects of mortgage lending have Section 8 implications. Every mortgage lending professional should become familiar with the general requirements of Section 8. Unlike violations of the other RESPA provisions, Section 8 violations may result in criminal penalties as well as substantial civil penalties.[iii] Section 8(d) provides for fines of up to $10,000 and imprisonment for up to one year, in addition to civil liability equal to three times the amount of the settlement charge that is the subject of the violation.[iv] 

In the years preceding the transfer of RESPA authority to the Consumer Financial Protection Bureau, in 2011, the Department of Housing and Urban Development (HUD) left no doubt about the importance of compliance with Section 8. It was often a central facet of HUD’s enforcement initiatives. The transition from HUD to the CFPB does not diminish the importance of Section 8 in RESPA enforcement. 

Section 8(a) specifies three elements for a section 8(a) violation:[v] 

·    The payment or receipt of a thing of value. Section 8(a) is not violated if a referral occurs without any thing of value passing to the referror or elsewhere in return for the referral.[vi] 

·    An agreement or understanding. 

·    A referral of settlement service business. 

Thus, the foregoing three definitions are essential to an understanding of the scope of Section 8(a) vis-à-vis “thing of value,” “agreement,” and “referral.” 

So, let’s take a tour of these the essential terms. 

(1) Settlement Service 

Both subsections (a) and (b) of Section 8 use the term “settlement service.” 

A violation of either section must somehow involve a settlement service. Thus, a mortgage broker may be compensated for referring business to a lender that is unrelated to a real estate transaction, such as automobile loans. So long as the compensation is exclusively related to the automobile loan and does not represent, in whole or in part, compensation for the referral of real estate business, and no lien is placed on a residence to secure the auto loan, the referral would not violate RESPA. 

Under RESPA, “settlement service” has a broad meaning and includes “any service provided in connection with a prospective or actual settlement.”[vii] Section 3 of RESPA defines the term “settlement services” to include: 

“Any service provided in connection with a real estate settlement including, but not limited to, the following: title searches, title examinations, the provision of title certificates, title insurance, services rendered by an attorney, the preparation of documents, property surveys, the rendering of credit reports or appraisals, pest and fungus inspections, services rendered by a real estate agent or broker, the 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 loans), and the handling of the processing, and closing or settlement.”[viii] 

Regulation X lists the following examples of settlement services:[ix] 

·    The 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 loans);[x] 

·    The 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);[xi] 

·    The provision of any services related to the origination, processing, or funding of a federally related mortgage loan; 

·    The provision of title services, including title searches, title examinations, abstract preparation, insurability determinations, and the issuance of title commitments and title insurance policies;[xii] 

Referral Fees and Fee Splitting

QUESTION

We have heard a lot recently about the prohibition against referral fees. Another subject that has come up also is how fee splitting is a violation, too. Please let us know the distinction between referral fees and fee splitting?

ANSWER

Both prohibitions against referral fees and fee splitting are set forth in Section 8(a) and Section 8(b), respectively, of the Real Estate Settlement Procedures Act (RESPA).

Let us define what a “referral” is in the context of RESPA. A referral includes any oral or written action directed to a person that has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business incident to or part of a settlement service when such person will pay for the settlement service or business incident thereto or pay a charge attributable in whole or in part to the settlement service or business.

A referral also occurs when a person paying for a settlement service or a business incident thereto is required to use a particular provider of a settlement service or business incident thereto. [24 CFR § 3500.14(f)]

RESPA provides that 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. [24 CFR § 3500.14(b)] A referral of a settlement service is not a compensable service, except as provided in certain exemptions to Section 8.

With respect to fee splitting, RESPA provides that 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. [24 CFR § 3500.14(c)] (My emphasis.)

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 the fee splitting provision. [24 CFR § 3500.14(c)]

To clarify further, the fee splitting prohibition bars all unearned fees, including, but not limited to, cases in which:

1. Two or more persons split a fee for settlement services, any portion of which is unearned;
2. One settlement services provider marks up the cost of the services performed or goods provided by another settlement service provider without providing additional actual, necessary, and distinct services, goods, or facilities to justify the additional charge; or
3. One service provider charges the consumer a fee where no, nominal, or duplicative work is done, or the fee is in excess of the reasonable value of goods or facilities provided of the services actually performed [Statement of Policy 2001-1, Department of Housing and Urban Development, 66 FR 53052, 53059 (2001)] 

Jonathan Foxx

President & Managing Director 

Lenders Compliance Group

Fee Splitting and Referral Fees

QUESTION:
What is RESPA’s fee splitting prohibition? Also, what is the definition of a “referral fee” and which referral fees are permitted?

ANSWER:
The provisions on prohibition of fee splitting and the definition of a referral fee are set forth in Section 8 of the Real Estate Settlement Procedures Act (RESPA). 

RESPA prohibits fee splitting. Specifically, the applicable section states that “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.” [12 CFR § 3500.14(c)] 

This prohibition has been clarified by the Department of Housing and Urban Development (HUD) a number of times over the years, and it has been the subject of considerable litigation. Essentially, HUD maintains that a fee for which no (or a nominal) service is conducted, or is duplicative of any other fee charged, is an unearned fee, which would therefore violate RESPA’s fee splitting provision. [For but one of numerous citations, see HUD’s Statement of Policy 2001-1]

Intrinsically, a “referral fee” is the giving or accepting of “any fee, kickback or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a settlement service involving a federally related mortgage loan shall be referred to any person.” [12 CFR § 3500.14(b)] The litigation involving this subject is extensive.

Any referral of a settlement service, except for certain exemptions, between one settlement service provider and another, is not a compensable service.

The permitted exemptions are [12 CFR § 3500.14(g)(1)]:

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. (Only to fee divisions within real estate brokerage arrangements when all parties are acting in a real estate brokerage capacity.)

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.

7. An employer's payment to its own employees for any referral activities.

Jonathan Foxx

President & Managing Director
Lenders Compliance Group