Thursday, February 2, 2017

Smorgasbord of RESPA Section 8 Violations

Managing Director
Lenders Compliance Group

Yet another cautionary tale out of the Consumer Financial Protection Bureau (Bureau) about referrals. Yet again, the Bureau took action against a mortgage lender, this time Prospect Mortgage LLC,[i] which happens to be a major mortgage lender, for paying illegal kickbacks for mortgage business referrals.

Not stopping there, the Bureau also took action against two real estate brokers (RGC Services, Inc., (doing business as ReMax Gold Coast) and Willamette Legacy, LLC, (doing business as Keller Williams Mid-Willamette) as well as a mortgage servicer (Planet Home Lending, LLC) that allegedly took illegal kickbacks from Prospect.

So, here we go again! Now there is yet another Consent Order (“Order”) on a subject that has been vetted many times already in litigation. How many such Consent Orders need to be had before there is a strong wake-up call?

Although Prospect has consented to the issuance of this Order by the Bureau, without admitting or denying any of the findings of fact or conclusions of law, why does it have to come to such a sorry state where a punitive action arises in the first place? Does anybody really believe that the alleged RESPA violations are not foreseeable?

Under the terms of the Order, Prospect is now stuck paying a $3.5 million civil penalty for its illegal conduct, and the real estate brokers and mortgage servicer will pay a combined $495,000 in consumer relief, repayment of ill-gotten gains, and penalties.

Take a look at these allegations and let’s put a check where there is a violation of Section 8(a) of the Real Estate Settlement Procedures Act’s (RESPA) prohibition on the payment of kickbacks in exchange for referrals of federally related mortgage loans, 12 U.S.C. § 2607(a), and its implementing regulation, Regulation X, 12 C.F.R. part 1024, as well as by violating RESPA, mutatis mutandis, also then violating Section 1036 of the Consumer Financial Protection Act (CFPA), 12 U.S.C. § 5536.

Here goes! Allegedly steering consumers to Prospect, often with Prospect’s encouragement, by:
  • requiring all consumers to apply for and obtain preapprovals with Prospect before allowing them to submit an offer on a property;
  • paying their agents cash or a cash equivalent bonus each time the agent steers a consumer to Prospect;
  • selectively imposing economic measures to coerce consumers into using Prospect, such as fees that would be waived if the consumer used Prospect, or credits that would be given only if the consumer used Prospect; and
  • directly referring consumers to Prospect. 

Prospect is not some rinky-dink mortgage lender. It is one of the largest independent retail mortgage lenders in the United States, with nearly 100 branches nationwide. And these referral relationships lay out as the real estate brokers being but two of more than 100 real estate brokers with which Prospect allegedly had improper arrangements, and Planet Home Lending, LLC is a mortgage servicer that allegedly referred consumers to Prospect Mortgage and accepted fees in return.

Now let’s take a deeper dive into how these referrals were structured. See if you can catch the violations! I will break down each categorical area that can trigger RESPA violations.

Violating RESPA by Using Lead Agreements to Pay Brokers for Referrals

Lead agreements simply are blatant attempts to circumvent RESPA either in fact or in spirit. Actually, the violations stemming from these types of agreements are easily identified by Examiners. Take a look at this scenario. It is laid out here in a fact pattern.
  • Lender enters into lead agreements with more than 200 different counterparties. Most of these counterparties are real estate brokers.
  • Under these agreements, lender pays the counterparty for each lead it receives. A lead generally consists of a prospective buyer’s name, address, email address, and phone number. Lender then reaches out to the prospective buyer to market its loan products.
  • But the counterparties who receive lender’s lead fees go well beyond simply transferring information about prospective buyers. They also actively refer prospective buyers to lender’s loan officers.