Understanding RESPA: Section 8 Regulations

Section 8: Kickbacks and fee splitting By: dimitris rousseas, deputy general counsel KNOWLEDGE. CLARITY. RELIABILITY. www.compliancealliance.com (888) 353-3933

RESPA: A Brief History • Enacted in 1974. (12 USC 2601-2617) • Purpose was to provide transparency for borrowers when shopping for loans and to eliminate kickback and referral fees. • Required specific disclosures. • Specifically, Section 8 of RESPA prohibited kickback and referral fees • CFPB now has rulemaking authority, prudential regulators will enforce

Section 8 history • Passed in 1974 under Section 8 of the Real Estate Settlement Procedures Act • 1976: Added brokerage exceptions and regulatory exception • 1983: Added affiliated business arrangement exception (called “controlled business arrangement” at the time) • 1988 and 1991: Clerical changes • 1996: Changed from “controlled business arrangement” to “affiliated business arrangement” • 2010: Adjusts language to incorporate the CFPB

Original text of section 8 • No person shall give an 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 part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person. • 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. • Nothing in this section shall be construed as prohibiting (1) the payment of a fee (A) to attorneys at law for services actually rendered or (B) by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance or (C) by a lender to its duly appointed agent for services actually performed in making of a loan or (2) the 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. • (1) Any person or persons who violate the provisions of this section shall be fined not more than $10,000 or imprisoned for not more than one year, or both. (2) In addition to the penalties provided by paragraph (1) of this subsection, any person or persons who violate the provisions of subsection (a) shall be jointly and severally liable to the person or persons whose business has been referred in a an amount equal to three times the value or amount of the fee or thing of value, and any person or persons who violate the provisions of subsection (b) shall be jointy and severally liable to the person or persons charged for the settlement services involved in an amount equal to three times the amount of the portion, split, or percentage. In any successful action to enforce the liability under this paragraph, the court may award the court costs

Current text of 12 USC 2607 a) Business referrals: 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. (b) Splitting charges: 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. (c) Fees, salaries, compensation, or other payments: Nothing in this section shall be construed as prohibiting (1) the payment of a fee (A) to attorneys at law for services actually rendered or (B) by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance or (C) by a lender to its duly appointed agent for services actually performed in the making of a loan, (2) the 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, (3) payments pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and brokers, (4) affiliated business arrangements so long as (A) a disclosure is made of the existence of such an arrangement to the person being referred and, in connection with such referral, such person is provided a written estimate of the charge or range of charges generally made by the provider to which the person is referred (i) in the case of a face-to-face referral or a referral made in writing or by electronic media, at or before the time of the referral (and compliance with this requirement in such case may be evidenced by a notation in a written, electronic, or similar system of records maintained in the regular course of business); (ii) in the case of a referral made by telephone, within 3 business days after the referral by telephone,[1] (and in such case an abbreviated verbal disclosure of the existence of the arrangement and the fact that a written disclosure will be provided within 3 business days shall be made to the person being referred during the telephone referral); or (iii) in the case of a referral by a lender (including a referral by a lender to an affiliated lender), at the time the estimates required under section 2604(c) of this title are provided (notwithstanding clause (i) or (ii)); and any required written receipt of such disclosure (without regard to the manner of the disclosure under clause (i), (ii), or (iii)) may be obtained at the closing or settlement (except that a person making a face-to-face referral who provides the written disclosure at or before the time of the referral shall attempt to obtain any required written receipt of such disclosure at such time and if the person being referred chooses not to acknowledge the receipt of the disclosure at that time, that fact shall be noted in the written, electronic, or similar system of records maintained in the regular course of business by the person making the referral), (B) such person is not required to use any particular provider of settlement services, and (C) the only thing of value that is received from the arrangement, other than the payments permitted under this subsection, is a return on the ownership interest or franchise relationship, or (5) such other payments or classes of payments or other transfers as are specified in regulations prescribed by the Bureau, after consultation with the Attorney General, the Secretary of Veterans Affairs, the Federal Home Loan Bank Board, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, and the Secretary of Agriculture. For purposes of the preceding sentence, the following shall not be considered a violation of clause (4)(B): (i) any arrangement that requires a buyer, borrower, or seller to pay for the services of an attorney, credit reporting agency, or real estate appraiser chosen by the lender to represent the lender’s interest in a real estate transaction, or (ii) any arrangement where an attorney or law firm represents a client in a real estate transaction and issues or arranges for the issuance of a policy of title insurance in the transaction directly as agent or through a separate corporate title insurance agency that may be established by that attorney or law firm and operated as an adjunct to his or its law practice. (d) Penalties for violations; joint and several liability; treble damages; actions for injunction by Bureau and Secretary and by State officials; costs and attorney fees; construction of State laws (1) Any person or persons who violate the provisions of this section shall be fined not more than $10,000 or imprisoned for not more than one year, or both. (2) Any person or persons who violate the prohibitions or limitations of this section shall be jointly and severally liable to the person or persons charged for the settlement service involved in the violation in an amount equal to three times the amount of any charge paid for such settlement service. (3) No person or persons shall be liable for a violation of the provisions of subsection (c)(4)(A) if such person or persons proves by a preponderance of the evidence that such violation was not intentional and resulted from a bona fide error notwithstanding maintenance of procedures that are reasonably adapted to avoid such error. (4) The Bureau, the Secretary, or the attorney general or the insurance commissioner of any State may bring an action to enjoin violations of this section. Except, to the extent that a person is subject to the jurisdiction of the Bureau, the Secretary, or the attorney general or the insurance commissioner of any State, the Bureau shall have primary authority to enforce or administer this section, subject to subtitle B of the Consumer Financial Protection Act of 2010 [12 U.S.C. 5511 et seq.]. (5) In any private action brought pursuant to this subsection, the court may award to the prevailing party the court costs of the action together with reasonable attorneys fees. (6) No provision of State law or regulation that imposes more stringent limitations on affiliated business arrangements shall be construed as being inconsistent with this section. 12 USC 2607

Section 8 • 12 USC 2007(a) – referral fees and kickbacks • Lender provides baseball tickets to attorney in exchange for a referral. • 12 YSC 2607(b) – fee splitting • Lender charges a doc prep fee of $1,000 and gives $250 of it to an attorney who did not perform any services.

When it applies • Applies to all “Federal Related Mortgage Loans” which is any loan secured by a 1-4 dwelling or for which the proceeds of the loan will be used to construct a 1-4 dwelling (including condominiums and co-ops) • Exemptions: • Temporary or construction only loans • Business purpose loans • Vacant land NOTE: There is no longer a 25 acre exemption.

Who it applies to • Any “person” giving or receiving something of value for a referral of a “settlement service”. Includes: • Loan officer • Broker • Title agent • Customer • Builder • More • “Settlement services” includes 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; • 12 USC 2602

What is value? (2)the term “thing of value” includes any payment, advance, funds, loan, service, or other consideration; 12 USC 2602(2) • Can really be anything: • Advertising space. • Loan discounts. • Higher rates on deposits. • Below market leases. • Even a contract is a “thing of value”

Prohibitions examples • Free advertising or someone not paying their pro-rata share for an advertisement (e.g. joint marketing brochure, but bank doesn’t pay for space on flyer). • The bank getting a reduced rate for a settlement service in exchange for the bank referring the provider business. • Renting space to a real estate agent at below market rents with the understanding that the agent will refer business to the bank. • Providing a gift card to a customer for referring a friend. • Charging $1200 for doc prep fee and spliting that with an attorney who didn’t perform any services • Paying for access to clients of a real estate agent

What is allowed? • Getting paid for services actually performed. • Any fee that isn’t given or split with another party • Brokers: to get paid, they must take the application and perform at least 5 other loan origination services. • FRB Compliance Corner: Fourth Quarter 2006 https://www.philadelphiafed.org/bank-resources/publications/compliance-corner/2006/fourth-quarter/q4cc2_06

Value given directly to customer • RESPA does not prohibit giving the borrower a direct incentive for doing business with the lender. • Example: lender provides a coupon for $200 the origination fee that is given to the borrower, or the lender provides a $500 gift certificate to any borrower closing a loan in the month of November. • Tricky – Lender giving a $500 discount to a borrower because they are a preferred lender of a builder • Bulider refers customer  bank gives discount  customer • Referral but no kickback/thing of value given (?) to builder for services not rendered • What if builder gets better rates on loans and deposits than other customers?

Section 8 penalties • Up to a $10,000 fine • 3x any charge paid for the service • Court costs and attorney fees • Possible criminal penalties (jail) NOTE: Both the person giving AND the person receiving can be liable

CFPB BULLETIN • Section 8(a) of RESPA: Prohibits giving and accepting of “any fee, kickback or thing of value to any agreement or understanding, oral or otherwise, that business incident to or part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” 12 USC 2607(a). • Doesn’t prohibit payments for “good or facilities actually furnished or for services actually performed.” • CFPB concerned with payments that are actually disguised compensation for referrals • http://files.consumerfinance.gov/f/201510_cfpb_compliance-bulletin-2015-05-respa-compliance-and-marketing-services-agreements.pdf

CFPB BULLETIN As described above, the Bureau has found that many MSAs necessarily involve substantial legal and regulatory risk for the parties to the agreement, risks that are greater and less capable of being controlled by careful monitoring than mortgage industry participants may have recognized in the past... That can be true even where the terms of the MSA have been carefully drafted to be technically compliant with the provisions of RESPA.

Types of msas • Builder Preferred Lender • Trulia, Redfin, Zillow, etc. • Title Company marketing • Marketing with Real Estate Agents • Basically means to provide a “thing of value” to a person in a position to advertise or endorse • “Thing of value” must = FMV of Marketing Services Marketing Services Service provider in position to “refer business” to lender or endorse lender Lender “thing of value” usually $$

If you engage • What to look for in an MSA • Specifically stating that there is no expectation of referrals either way • Determine FMV of services provided, preferably by third party • Detail the scope of the service provided • Pay only for services provided • Continually monitor relationship to ensure that the services are actually performed and that there is no unwritten quid pro quo • Avoid “exclusivity” • Be transparent and disclose relationship to consumer

LIGHTHOUSE TITLE, INC • Agreement between Lighthouse and brokers to provide marketing services to Lighthouse. • CFPB alleged that the payments were actually based on the number of referrals. • Argued that they entered the MSA as a “quid pro quo” for referrals. • How did they get to that conclusion? • Analyzed referral business – brokers who were in an MSA with Lighthouse were far more likely to refer business to Lighthouse than other title companies than were brokers without an MSA • $200,000 fine to the CFPB • https://www.consumerfinance.gov/policy-compliance/enforcement/actions/lighthouse-title/

Lighthouse • Evidence of a violation: • Payments are “connected” with the volume or value of business referred and bears no reasonable relationship to the value of the goods provided • 12 CFR 1024.14€ • Problems in Lighthouse • Entered into MSA because they were worried other parties would refer business to other lenders • Did NOT determine FMV for services • Fees were based on the number of referrals • Note: CFPB stated that entering a contract is, by itself, a “thing of value”

Genuine title, llc • Title company was providing a “thing of value” to loan officers • Genuine provided marketing services to loan officers in exchange for referrals • Purchased leads and paid for marketing letters for loan officers, who did not pay for the services • Genuine paid loan officers for referrals of settlement services; funneled payments through entities • This is a clear example of a section 8 violation • Wells and JP Morgan also involved

Penalties for guarantee • Owner of Guarantee: $130,000 fine and banned from mortgage industry for 5 years • Director of Marketing: $400k and banned for 5 years • Loan Officer: $30,000 and banned for 2 years • President: $65,000 and banned for 2 years • Loan Officer: $37,500 and banned for 2 Years • Wells Fargo and JP Morgan fined $24 million plus $11 million in redress.

Monitoring • A bank in the Guarantee case actually caught some of their LOs engaging in this practice • Lender promptly fired LOs and worked with the regulators to clean it up • No penalties levied on the bank and their name did not show up in the press release

Integrity home funding • Loan officer started a “refer a friend” program. • LO held a monthly raffle for customers who referred business • Entry into the raffle was considered a “thing of value” as well as the prize given to the winner • LO settles for $20,000 fine • NOTE: This would also be a prohibited lottery

Prospect mortgage • Agreements with various RE Brokers (RE Max and Keller Williams) in which payments were tied to the number of referrals made • Had other informal agreements • Paid brokers to require customers to prequailfy with Prospect (exclusivity) • Split fees with a mortgage servicer, Planet, to obtain referrals – Planet referred over to Prospect, they later split proceeds of loan and sold servicing rights back to the Planet • Prospect -- $3.5 Million • RE Max and Keller -- $50,000 and $145,000 • Planet -- $265,000

The 8(c)(2) exemption or defense? • Permissible conduct under Section 8(c)(2): “the 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” • HUD’s longstanding interpretation, 2 part test: • 1) whether there were goods or facilities actually furnished or services actually performed; and • 2) whether the payment is reasonably related to the value of the goods or facilities that were actually furnished or services that were actually performed. RESPA Statement of Policy 1999-1 (http://archives.hud.gov/news/1999/rspntce.html) • To rebut this presumption, plaintiffs would had to show that the fee is not reasonably related to the service or good provided.

CFPB v. PHH Mortgage • Background: • PHH is a mortgage lender • A bunch of mortgage lenders created captive reinsurance companies – PHH owned Atrium • Mortgage companies who created the captive insurance company retain a portion of the premiums paid to those companies (Note that HUD stated that captive reinsurance was permitted under 8(c)(2) in a 1997 letter) • CFPB alleged PHH referred business to mortgage insurers, who paid kickbacks to PHH in the form of premium payments to Atrium (re-insurer)

Premiums $$$ PHH PMI Company Mortgage Insurance Re-insurance Captive owner Profits $ Premiums $$ Atrium (reinsurer)

CFPB v PHH Mortgage • CFPB’s interpretation: • Section 8(c) “clarifies” section 8(a), but does not provide a substantive exemption from 8(a) • In other words, if there is any referral, then 8(c)(2) does not protect you • Implication • Even if you provide a service and get paid only for that service, it is still possible to have a violation • May impact joint marketing, reinsurance arrangements, lease agreements and MSAs

CFPB v PHH Mortgage: Appeal • CFPB and PHH Appeal decision • D.C. Circuit Court rejects CFPB argument • Holds that plain language of RESPA permits captive mortgage reinsurance agreements. • Implication is that it restores 8(c)(2) as an exemption to the kickback rule • Also, that even if the CFPB were correct, it can’t retroactively apply a 2015 interpretation to prior events. • NOTE: Order was vacated and a hearing by the DC appeals court was heard on May 24th, though the focus was on the constitutionality of the CFPB structure rather than the RESPA issue.

Upcharging and split fees • 2001 HUD Statement: “a settlement service provider may not mark-up the cost of another provider’s services without providing additional settlement services; such payments must be for services that are actual, necessary and distinct.” 66 Fed.Reg. 53057 (2001) • Huang v Bank of America, 317 F.3d 832, (8th Circuit) - Permitted • Durr v. Intercounty Title Col, 14 F. 3d 1183 (7th Circuit) - Permitted • Augenstein v. Coldwell Banker Real Estate LLC, 750 F. Supp. 2d 900 (6th Circuit) – NOT Permitted • Santiago v. GMAC Mortg. Group, Inc, 417 F.3d 384 (3rd Circuit) – NOT permitted • Kruse v Wells Fargo Home Mortgage, Inc., 383 F.3d 49 (2nd Circuit) – Not Permitted

Split fees • Really, four different scenarios courts are grappling with: • Fee splitting: • Fee charged to customer and split between Person A and Person B – Person B did not perform any services. • Mark-ups: • Person A charges customer for services performed by Person B, but for more than Person B actually charges Person A. • Overcharging: • Person performs a service but charges an excess of the reasonable value. • Undivided fees: • Person A charges a fee, but no service is actually performed.

Freeman v. quicken loans • Quicken charged discount and processing fees for which claimants said they didn’t “earn.” • Quicken defends by saying that fee needs to be “split” – can’t violate Section 8 by yourself, there needs to be a third party involved. • Issue of whether HID statement had any precedent: • Policy stated that section 8 “prohibit[s] any person from giving or accepting any unearned fees, i.e., charges or payments for real estate settlement services other than for goods or facilities provided or services performed.” 66 Fed.Reg. 53057(2001)

Freeman v. quicken loans • Takeaways: • Statute “does not reach unreasonably high fees” or overcharges. • Statute overrides HUD interpretation – you need someone to give and another to take a fee. Can’t split a fee between one person. • 12 USC 2607(a) requires a “referral” and a “thing of value” whereas 12 USC 2607(b) requires a “split” fee between two or more people. • Rules that undivided fees does not violate RESPA (overcharging likely OK as well). • What about mark-ups?

Final thoughts • MSAs and quid pro quo agreements • Broker relationships: Think about what you want in your contract • Exceptions: Services performed, Affiliated Business Arrangements, etc. • Up charging and fee splitting • Referrals

Questions? Thank you for your participation! We hope you found value in today’s presentation. If you have any additional questions, contact Compliance Alliance at 888-353-3933 or hotline@compliancealliance.com

Understanding RESPA: Section 8 Regulations