Consumer Incentive Campaigns

QUESTION

As a lender, we would like to run a promotion whereby we offer to reimburse the borrower the cost of the appraisal at closing. We would like to know if this is permissible and if there are any parameters that should be considered with respect to such a promotion. If the program is permissible, is it possible to deduct the cost of the appraisal from the individual loan officer’s compensation?

ANSWER

With respect to your first question, neither the Real Estate Settlement Procedures Act and its implementing regulation, Regulation X, nor any other regulation prohibits a lender from “incenting” a consumer to do business with the lender, so long as the “thing of value” (in the case the lender credit for the appraisal charge) is not in exchange for referrals. [12 CFR § 1024.14(g)(1)] 

As to who pays for it (company vs. loan officer), with respect to a forward mortgage or a fixed rate reverse loan, the lender must pay for it as otherwise it would be a reduction in the compensation due to the loan officer which is not permissible. [12 CFR § 1026.36(d)(1)] As the Truth-In-Lending Act’s loan originator compensation rule does not apply to reverses structured as open-end credit, in those instances, it is permissible for the loan officer to reduce his compensation to cover the credit. [12 CFR § 1026.36(b)]

In discussing the parameters of promoting such a program, consideration should be given to whether the program will be offered to all potential applicants or whether it is limited to a certain group of applicants.  If the latter and the program results in a disproportionate number of applicants in non-protected classes receiving the credit as opposed to those in protected classes, the lender may be facing a fair lending issue.

Listed below are additional items to consider in setting forth the parameters of such a promotion:

• Ensure it is clear that the offer is for a closing credit only. If the loan does not close and fund, there is no credit or refund to the applicant for the appraisal fee. 
• Is the amount of the credit limited in any manner? For example, credit for appraisal fee not to exceed $500, with the borrower being responsible for any amount in excess of $500.  Also, ensure that it is clear the credit is only for the actual cost of the appraisal; if the appraisal charge is less than $500, the borrower does not receive the difference between $500 and the appraisal charge.
• Set forth the term of the promotion, including whether the consumer must apply by a certain date or close the loan by a certain date. 
• If there is a certificate that must be physically presented in order to obtain the credit, that requirement should be stated.
• Consider the loan programs to which the offer applies. Does it only apply to purchase money mortgages? Refinances?
• Set forth limitations as to the availability of the program to only new customers, if applicable.
• Consider whether the offer can be used in conjunction with any other loan offer.
• Be clear that the offer is not redeemable for cash. 

Of course, in advertising the promotion a lender needs to include the lender’s NMLS # and state licensing information, and give consideration to the following “typical” general disclosures:

• Programs, rates, terms, and conditions are subject to change without notice.
• Certain restrictions may apply.
• All approvals subject to underwriting guidelines.
• Not all applicants will qualify. 

And, if the advertisement discloses the amount or percentage of down payment for a credit sales transaction, the number of payments, the period of repayment, the amount of any payment or amount of any finance charge, then the lender must also disclose the following [12 CFR § 1026.24(d)]:

• The total down payment as a dollar amount of percentage.
• Terms of repayment.
• The “annual percentage rate” using that term.
• If a variable rate loan, a statement that the rate may change. 

As in all advertising, in promoting a lender closing credit offer, the lender must also ensure that the advertisement meets not only federal regulatory requirements but any additional state laws and regulations. 

Joyce Wilkins Pollison

Director/Legal & Regulatory Compliance

Lenders Compliance Group

Builder Incentives

QUESTION

We have an Affiliated Business Arrangement (AfBA) with a homebuilder. The builder currently discounts the purchase price of its homes if the buyer uses our company to finance the purchase. If the buyer chooses to use another mortgage company, there is still a discount, but it is lower. The builder, who is the majority owner of our company, now wants to offer discounts only to those buyers who use our company to finance the purchase. Is this a compliance problem? 

ANSWER

The issue of builder incentives and preferred and/or affiliate lenders continues to be a controversial one. There are two sides (at least) to the argument. On the pro-builder side is the assertion that a preferred lender or affiliated lender allows for better coordination between lender and builder, and thus a smoother, more predictable financing process, thereby improving the overall experience for the consumer. 

The counter to this argument is that, even if there is no express “requirement” for the buyer to use the builder’s lender affiliate, as a practical matter the buyer is being “required” to do so, in violation of the AfBA exception to RESPA Section 8 (12 U.S.C. §1024.15), one of the conditions of which is that, with limited exceptions:  “No person making a referral has required (as defined in 12 U.S.C. § 1024.2) any person to use any particular provider of settlement services or business incident thereto…” (Emphasis added.) (12 U.S.C. §1024.15(B)(2)). Critics also argue that the builder is “steering” the consumer to the builder’s preferred or affiliate lender, thus preventing the consumer from shopping in violation of anti-steering provisions.

Much depends on the definition of “required use,” which is found in 12 U.S.C. §1024.2 is as follows:

“Required use means a situation in which a person must use a particular provider of a settlement service in order to have access to some distinct service or property, and the person will pay for the settlement service of the particular provider or will pay a charge attributable, in whole or in part, to the settlement service. However, the offering of a package (or combination of settlement services) or the offering of discounts or rebates to consumers for the purchase of multiple settlement services does not constitute a required use. Any package or discount must be optional to the purchaser. The discount must be a true discount below the prices that are otherwise generally available, and must not be made up by higher costs elsewhere in the settlement process.” (Emphasis added.)

Some builders try to address this issue by having a list of preferred lenders. To one degree or another, however, that may still thwart the consumer from shopping outside that list. By excluding other mortgage companies from the builder incentive, the risk of a RESPA violation increases because it could be argued that such exclusivity of the incentive is a de facto “requirement.”