RESPA, Section 8, and Permissible Compensation

Issue/Inquiry

During a recent compliance examination, the Bank was asked whether the mortgage broker who brought the initial application to the Bank had performed the “five things” required in order to receive compensation in conjunction with the transaction. What is this a reference to?

Response Summary

Under Section 8 of the Real Estate Settlement Procedures Act (“RESPA”), a mortgage broker is not allowed to receive a fee other than for services actually performed. HUD identified a number of such services that are normally part of a residential mortgage transaction. To qualify for compensation, a mortgage broker would have to perform at least five of such services.

Response Detail

Section 8 of the RESPA was enacted in 1974 for the purpose of prohibiting so-called “kickbacks” for the referral of residential mortgage settlement services. While official guidance is varied and obscure, the arrangement that the Loan Officer enjoyed before joining the Bank may have been in violation of its requirements.

As implemented by Regulation X, any person who gives or accepts a fee, kickback, or thing of value (e.g., payments, commissions, gifts, tangible items, or special privileges), pursuant to an agreement or understanding for the referral of settlement business involving a federally related mortgage loan, is in violation of Section 8. Any referral of a settlement service is not a compensable service, except as a permitted exception. 12 CFR §1024.14(a),(b).

For the purposes of the RESPA, a “federally related mortgage loan” is a loan made by a federally-insured lender (or insured by HUD or intended to be sold to Freddie Mac or Fannie Mae) and secured by one-to-four family residential structures. 12 CFR §1024.2.

In addition, no person shall give or accept any portion, split, or percentage of any charge made or received for the rendering of a real estate service in connection with a transaction involving a federally related mortgage loan, other than for services actually performed. 12 CFR §1024.14(c).

To violate the RESPA prohibition against fees or kickbacks, there would have to be the granting of a “thing of value” pursuant to an agreement or understanding that results in a referral.

Regulation X provides for exceptions from its prohibition against fees and kickbacks, including:

• A payment by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance
• A payment pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and real estate brokers
• Normal promotional and educational activities that are not conditioned on the referral of business and do not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or a business incident thereto
• An employer’s payment to its own employees for any referral activities. 12 CFR §1024.14(g).

Assuming that none of these exceptions pertain to the arrangement between the Bank and the mortgage brokers, the question is whether there were goods or facilities actually furnished or services actually performed for the total compensation paid to the mortgage broker. While making the determination of whether compensable services are performed, HUD identified the following services as being normally performed during the origination of a loan:

1. Taking information from the borrower and filling out the application
2. Analyzing the prospective borrower’s income and debt and pre-qualifying the prospective borrower to determine the maximum mortgage that the prospective borrower can afford
3. Educating the prospective borrower in the home buying and financing process, advising the borrower about the different types of loan products available, and demonstrating how closing costs and monthly payments could vary under each product
4. Collecting financial information (e.g., tax returns and bank statements) and other related documents that are part of the application process
5. Initiating/ordering Verifications of Employment (“VOE”) and Verifications of Deposit (“VOD”)
6. Initiating/ordering requests for mortgage and other loan verifications
7. Initiating/ordering appraisals
8. Initiating/ordering inspections or engineering reports
9. Providing disclosures (e.g., truth in lending, good faith estimate, others, etc.) to the borrower
10. Assisting the borrower in understanding and clearing credit problems
11. Maintaining regular contact with the borrower, realtors, and lenders between the application, and loan closing to appraise them of the status of the application and gather any additional information as needed
12. Ordering legal documents
13. Determining whether the property was located in a flood zone or ordering such service
14. Participating in the loan closing

In order to qualify for compensation, the mortgage broker would be expected to perform at least five of the identified activities. The services described in b, c, d, j, and k above are typical counseling services. In order for the services to be considered counseling, rather than steering, the mortgage broker would be expected to have the consumer consider products from at least three different lenders, and would receive the same compensation regardless of the lender selected. 64 Federal Register 10080, 10085.

This is the approach adopted by the FDIC, as per FIL-21-99.

In this case, the mortgage brokers have received a fee, which is to say, something of value. Therefore, the records of the Bank should document the services provided by the mortgage broker in return for the fee. The services provided should number at least five of those identified above.

This entry was posted on Monday, February 25th, 2019 at 6:00 am.