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RESPA Section 8 – What’s a Smart Business Practice and What’s a Violation?

By
Mortgage and Lending with Above All Financial Services -Pennsylvania Mortgage Broker

Just when I think I've seen it all something else comes along to amaze me.  Today's topic: Can a Mortgage Broker give a loan to a Realtor for free or at reduced rates in exchange for the promise of future business?  To myself and some other educated members of ActiveRain this is a clear violation of RESPA Section 8 which prohibits anyone from giving or accepting a fee, kickback or any thing of value in exchange for referrals.  To others, especially those in the state of Texas, this is just smart business.  Well, it may be, but I certainly wouldn't want to chance a $10,000 fine in order to save a 1/2point on my mortgage loan nor would I put this offer out there in writing for the whole world to see.

For those who don't know (which I hope is none of us) RESPA stands for Real Estate Settlement Procedures Act and was first passed in 1974.  The purpose of the law is to help consumers become better shoppers by requiring certain disclosures and forms and to eliminate kickbacks and referrals among those involved in the real estate transaction.  This includes real estate agents, title companies, mortgage brokers, home inspectors and the like.

Here are some FAQ's straight from HUD's website:

Can a lender set up a contest for real estate agents under which the agent who provides the lender with the most business will win a trip to Hawaii?

No. Under RESPA, the trip itself, and even the opportunity to win the trip, would be a thing of value given in exchange for the referral of business.

Can a lender give a borrower an incentive, such as a chance to win a trip or a rebate, for doing business with the lender?

RESPA does not prohibit a lender or other settlement provider from giving the borrower an incentive for doing business with it as long as the incentive is not based on the borrower referring business to the lender.

Can a mortgage banker and a real estate broker advertise their services together, for example, on the same brochure or newspaper advertisement?

Nothing in RESPA prevents joint advertising. However, if one party is paying less than a pro-rata share for the brochure or advertisement, there could be a RESPA violation

Can a lender give a real estate agent note pads with the lender's name on it?

Yes. Such note pads with the lender's name on it would be allowable as normal promotional items. However, if the lender gives the real estate agent note pads with the real estate agent's name on it for the agent to use to market clients for its real estate business, then the note pads could be a thing of value given for referral of loan business, because it defrays a marketing expense that the real estate agent would otherwise incur.

                                                                                                                                                           

 

Now, I know some of you astute observers will correctly point out that HUD doesn't say anything about brokering a loan for free or even less than what the average consumer would pay, but I think if something as minor as notepads with the Realtor's name on it are questionable, and just the opportunity to win a trip and not the trip itself is a violation, then why on earth wouldn't the prospect of saving perhaps thousands of dollars in loan fees in exchange for future referrals not be a violation? After all aren't loan fees something of value?  Personally, losing a license or being fined is not worth it to me, but I guess some people would do anything to make or save a buck. 

I'd wager a free or reduced price home loan that HUD would side that this scenario is indeed a violation.  Any takers?

Show All Comments
Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life

Michelle - The apparent violation of RESPA on that was one thing, but that wasn't my main problemo with the post.  That's for the regulators out there to deal with... or not.  Personally, I found it degrading and the very thing that is helping to erode the industry.  I should point out, if I was new in this business as a loan officer and licensed in that particular state, my eyes would light up at the opportunity.  As it stands, I'm not new and can't do loans in that state.  My eyes looked down...

I made a few smart alleck remarks over there, because I didn't have the time or inclination to address it in any other way.  Here's the two things that really got to me:

-  They are asking for a freebie or a substantially reduced discount on a loan to buy a new home.  To them I would submit a cliche which I dare say still holds true, "You get what you pay for."  It's boggling to my mind that a fellow Real Estate Professional would go about it in that way, in this or any other atmosphere.  It belittles what we actually do for a living that someone would even hint at that.  Most of us are commission based and as long as we are charging a fair & very competitive price for our service, nobody is going to tell me I'm worth less.  I was thinking to myself, throw regulation out the window for a sec, I'll do the loan for free and close the sucker... within 30 days.  May I also list my house with you and you do that for free and I would like that to occur within 30-60 days.  That's fair, right? 

-  The whole 'Promise of Referrals' crap.  Listen, I've been at this for 7 years and am nowhere near as experienced as some, but how many times have you heard that dialogue in your career?  I tell folks today who dare use that as a manipulative device, "This transaction isn't predicated in garnering future business, it's my job to close YOUR loan.  If you want to refer me business because I'm good at what I do or you had a nice experience, that's wonderful and I appreciate it.  To me, referrals make marketing less expensive."   People will say a lot of things to get what they want, I'll never forget that. 

Sep 12, 2008 12:35 PM
Michelle Chamberlain
Above All Financial Services -Pennsylvania Mortgage Broker - Secane, PA
Suburban Philadelphia Mortgage Broker

Jason,

You're right.  There were a number of issues with the original post. However if you can't get the point across to someone that something is a violation, even when referencing HUD's website how are you going to get across the fact that it made no business sense?  I would never refer business to someone simply because they gave me a good deal if I had no confidence in their ability to get the deal done.  Then there's the issue of giving someone a GFE without knowing their income and based on what they say their score is. 

I agree that the "promise of referral is crap", especially on a loan that was supposedly a "no brainer" and she could have gotten a good deal anywhere, especially any lender with whom she already had a relationship.  But to me the violation was also a no brainer, especially when it is in black and white.

Michelle

Sep 12, 2008 03:34 PM
Wayne Frazier
Licensed Public Insurance Adjuster - Hunt Valley, MD

I was actively involved in the post you all are referencing.

My gut tells me that she was looking for a new Loan Officer because she probably burned bridges with her previous loan officers.

As I said before, just because she didn't want it to be so, didn't make it so.

I'd still also be curious to find out how many L.O's violated the TIL, if indeed any did. Once again, my gut tells me probably all that sent just a GFE and or a Rate quote.

Sep 13, 2008 01:21 AM
Anonymous
Diane Cipa

Excellent post, Michelle.  A lender who offers reduced fees or a better deal to a real estate agent in exchange for referrals - even the inference of future referrals is giving an unlawful kickback.  A title agent who waives title commitment cancellation fees for a lender in exchanges for referrals - even the inference of future referrals is giving an unlawful kickback.

Just because people have been doing it for years and getting away with it or don't understand that it's against the rules, doesn't make it right.

The credit crisis has given our regulators - state and federal - all the ammo they need to come into Dodge and clean up the town.

For those of us who carefully try to fly right, it's about time.  Thank heavens.

Sep 13, 2008 02:48 AM
#4
Michelle Chamberlain
Above All Financial Services -Pennsylvania Mortgage Broker - Secane, PA
Suburban Philadelphia Mortgage Broker

Wayne - You're probably right about the burning bridges part, or maybe the current loan officer understood RESPA as well.  It never ceases to amaze me what some people will put in writing members only or not.

Diane - Thanks.  I am just waiting patiently until the rest of the people in the business who make their own rules and ethics are weeded out. 

Michelle

Sep 14, 2008 01:16 PM
Wayne Frazier
Licensed Public Insurance Adjuster - Hunt Valley, MD

Michelle - Also in the post you referenced above that particular Real Estate Agent contends that a Lender can not refuse a loan if someones future income is in jeopardy. When I posted how wrong she was and told her Block 11 on the VOE was there for a reason, the post miraculously disappeared.

I guess the truth was more than she could handle.

So, I hope people don't actually take what she says to be true or grounded in actual knowledge about the subject matter.

Also, I'm glad you did this post. It's apparently needed.

Have a good night.

 

Sep 14, 2008 02:39 PM
Michelle Chamberlain
Above All Financial Services -Pennsylvania Mortgage Broker - Secane, PA
Suburban Philadelphia Mortgage Broker

Wayne- Thanks. I saw your comment and how it disappeared.  Almost posted a link to a copy of the VOE form myself but figured why bother?  Some people refuse to admit that they are wrong.  I guess some people have to learn the hard way.

Sep 14, 2008 03:00 PM
Rick Fitzgerald
AAM Capital - Chattanooga, TN
The MultiFamily Expert

You would be surprised at how few RESPA violations were actually enforced.  Makes it pretty easy unless it is blatant.

Sep 14, 2008 03:29 PM
Scott Geary
Infinity Home Mortgage Company Inc - Allentown, PA
Your Pennsylvania Mortgage Source

Assuming the transaction occurs with the activities following yielding any volume of referrals, yes, I believe its a violation. On the flip side, if I have an individual who currently refers me a volume of business and I elect to close a loan for them that is discounted, or worse yet free (which I don't do, even for family), no, that is not a violation. Just my take Michelle. That Realtor really needed to be called out on this. Most of what I read did an excellent job. Although there were some who certainly showed limited ethical standards by entertaining the post.

Sep 15, 2008 02:13 AM
Richard Sweum
1st Security Bank - Everett, WA

I remember an acquaintance of mine who was a mortgage guy gave the Broker of a large office a "boat" in silent exchange for all of their agents' business.  It worked... when reported and investigated the mortgage guy's response was...

..."What, I can't give a good friend a boat for a gift?"

If you want to roll the dice and see if an action is a violation, go ahead.  Personally, I'm a light sleeper and would prefer not to work with an agent that would ever participate in a kickback.  I'd rather be baggin' fries that working like that.

Sep 15, 2008 02:29 AM
Nancy Larson
I am a licensed referral agent in NJ - Hutchinson Island, FL

Great reminder for some who seem to forget.....

Sep 19, 2008 09:29 AM
Nima Rezvan CT Lender CT Senior Mortgage Broker
Nima Rezvan Prosper First Funding Corporation NMLS#110681 - Fairfield, CT
First Time Home Buyer Expert - CT FHA Loans - FHA

This is a question to all:

If I was to tell my contacts that I would make a donation of $100.00 for each referral of someone in need of a new mortgage and I close and fund it and then I write a check from my checkbook to the referral source's charity of choice, is this against RESPA Section 8 or any other rule/regulation?

I recently lost 3 family members to cancer and my father was diagnosed and beat cancer so I'm just thinking not only about continuing to do a great job in the mortgage business that I have been in but for many years to come and at the same time, make donations to charities.

Is this wrong?  Please let me know!!!

Apr 10, 2009 05:28 AM
Michelle Chamberlain
Above All Financial Services -Pennsylvania Mortgage Broker - Secane, PA
Suburban Philadelphia Mortgage Broker

Nima,

I would guess that this would be a violation since you are offering something in exchange for referrals.  The fact that you are giving the money to a charity and not directly to the referrer probably doesn't make a difference as the donation could be construed as "something of value" if the person chose to support the charity.  (See the first FAQ where just the opportunity to win a trip is considered a thing of value).  However, you could always double check with HUD.

Michelle

Apr 11, 2009 05:22 PM
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