Click on this image or this link to read the entire
consent order detailing the kickback scheme
employed in Texas
This mechanism of policing is reminiscent of the "Broken Windows"1 policies of many urban police departments when attempting to corral the escalation of crime. In this case the CFPB is cracking down on smaller schemes to stop the pervasive use of shams to avoid the law.
When I was breaking into the mortgage business as a loan originator I was regularly offered business conditioned upon matching the referral fee my competitors paid. Fortunately for me, I worked on a very thin margin and the amounts that these individuals demanded often exceeded what I would receive as compensation. But this illustrates the moral and legal problem with the Kickback Scheme: You have to increase your fees to cover the cost of the payment. Who pays for the referral fee? Though indirectly, the borrower pays, through a higher rate or fees charged to offset the higher commission needed to pay the referral.
Anyone who has taken a continuing education course in mortgage lending knows that the creation of affiliated business referral business, while legal, must provide a legitimate service and add value to a transaction. HUD developed a ten point test to determine if an affiliated business was legitimate or a "sham"; an artifice designed to serve as a mechanism for kickbacks.
When you read the findings in this case it would be clear, even to a novice, that the Texas builder's mortgage subsidiary was a sham. It had no employees, did not advertise, did not maintain a separate office and the only business it ever conducted consisted of the referrals the builder made.
The saddest part of stories like this is that, in addition to paying a higher price, these borrowers and real estate professionals were deprived of the real value of the loan officer's services. When I conduct CE or PE licensing, business development or new loan originator training classes I always talk about the value the loan originator adds to the business of his or her referral sources:
- A good loan officer is a pipeline manager: By qualifying prospects, I save my real estate/builder referral source's time by identifying borrowers who can go purchase now so he or she can focus on a qualified customer. This is his or her current business. Many loan originators stop here. More importantly, I can work with those customers who are not capable of acting right now and make sure they get the counseling and help they need to achieve their goals in the future. This is their pipeline of future business.
- A good loan officer helps you close more business: Not just getting to closing, but getting the customer to commit to a transaction as part of the sales process. Often, the major impediment to a customer writing a contract is fear of the unknown. By providing loan options counseling and exposing all of the costs the customer has less fear of the unknown, allowing him or her to write an offer with confidence.
- A good loan officer is a business development resource: For all of the business loan originators develop through referral sources, between 40 and 80% of a loan officer's referrals are self generated from his or her own networks and book of business. We refer our for sale by owner customers and first time buyers to our agents. We refer. A single real estate transaction referral is worth far more monetarily than an 1/2 point kickback, it is much more sustainable relationship as it is built on trust, and it doesn't cost the customer a thing.
1 The Broken Windows theory was introduced in a 1982 article by social scientists James Q. Wilson and George L. Kelling. The theory states that maintaining and monitoring urban environments in a well-ordered condition may stop further vandalism and escalation into more serious crime.