Friday, January 17, 2014

The Anti-Kickback Rule - Payment or Receipt of Non-Approved Fees


With the recent spate of enforcement actions surrounding kickbacks, take the time to re-visit your explicit policies and procedures surrounding the anti-kickback rules.

4/30/2015 - Updated filing shows actual money penalties by participants
1/22/2015 - Baltimore CFPB Action
St. Louis CFPB Action
Kentucky CFPB Action
Baltimore Referral Fee Lawsuit

Kickbacks are a problem because they tend to inflate the cost of a transaction.
Kickbacks tend to inflate the cost to the consumer due to the fact that someone else has to get paid for the referral. 

Prohibited - Kickbacks and Referral Fees

Section 8(a) of RESPA prohibits anyone from giving or receiving a fee, kickback, or “anything of value” pursuant to an “agreement or understanding” for the referral of business related to the purchase or financing process. The purpose of the prohibition is to protect consumers from the payment of fees when no additional work is actually performed. Kickbacks tend to increase the cost of the transaction, since the borrower will have to be charged more in order to cover the cost of the referral fee.

All personnel should avoid even the appearance of accepting or paying for non-approved services.

An “Agreement or Understanding” does not have to be a formal agreement, but can be a verbal agreement or even an agreement established through a practice, pattern, or course of conduct.

Prohibited Payment – “Anything of Value”

Payments include, but are not limited to

  • A “Thing of Value”
  • Money
  • Discounts
  • Commissions
  • Salaries
  • Stock
  • Opportunities to participate in a money-making program
  • Special or unusual banking terms
  • Tickets to theater or sporting events
  • Services of all types at special rates
  • Trips and payments of another’s expenses

Prohibited - Fee Splitting 

Fee splitting is when a service provider inflates charges and splits the excess funds with another service provider in exchange for the referral of business.  This is tantamount to a kickback and is a prohibited practice.  Service providers may attempt to circumvent this prohibition by establishing joint ventures or entering into business arrangements that allow referrals between organizations and conceal the fee splitting arrangement.

Permitted – Approved Affiliated and Controlled Business Arrangements

In some cases, there can be fee splitting or referral fees paid under what is known as an “affiliated business arrangement”.  An affiliated business arrangement is where a person who refers settlement services has an “affiliate relationship” or “an ownership interest of more than one percent in a provider of settlement services.”

The payment of reasonable fees is acceptable as long as the relationship is disclosed to the borrower and the referrer actually performs a service – or somehow adds value.  The referral service provider may NOT be a REQUIRED provider of services, such as an appraiser or credit bureau that the lender must select.  An affiliate relationship structured simply to legitimize the payment of a fee is referred to as a “sham”. Affiliates must be a “Bona Fide Provider of Services” to receive a referral fee legally.

Approval Required - Desk Rental Arrangements

Because of the level of oversight, and the potential for the payment of desk rental to masquerade as payment for a referral, all Desk Rental Arrangements must be approved in advance. Provide the following:

·         Copy of the lease/rental agreement
·         Document market value of desk rental services through Craig’s list, square footage analysis or other verifiable source

Approval Required – Joint Marketing Arrangements

Similar to a Desk Rental, partnering with referral sources to advertise or market must also be evaluated for potential conflicts and approved by management. Particularly when this relates to commercial communication, the material must also be reviewed against the Provide:

·         Any advertising agreement
·         Copy of publication or proposed media

Approval Required - Marketing Vendors

Payments to marketing vendors, such as lead generation companies, may create problems if we base the payments on anything but the lead itself.  If there is a payment conditioned upon a certain criteria or threshold, such as confirmed application, underwriting approval or closing, the arrangement may be considered illegal.  For approval provide:

  • Marketing Agreement
  • Fee Schedule for Leads

In addition, the agreement and vendor must be approved to ensure the vendor complies with Fair Lending, Information Security, Customer Privacy and other consumer-facing regulation.

Approval Required - Payments to Counseling Agencies

Payment for services to a non-profit agencies for counseling services performed are permitted.  Provide:
  • memorandum of understanding between the lender and the non-profit agency 
  • establish how payments to vendor are not based on referrals .

Required Disclosures

·         Affiliated Business Arrangement Disclosure (AfBA) – if Applicable
·         Required Provider Disclosure – From LOS
·         Approved Settlement Services Provider List

Operating Areas Affected

·         Origination - Production
·         Compliance

Penalties for Non-Compliance

Penalties for violations of the anti-kickback provision include fines of up to $10,000 and up to one year in prison.


  1. This is a big bunch of Bull Shit. The one thing that is most prolific in our world is B of A and Wells Fargo paying HUGE KICKBACKS to major RE/MAX offices in Southern California. The agents ARE FORCED to use these banks or the banks threaten the broker to stop the "Affiliated Arrangement" Until the CFPB can take a serous look at the BIG players they will never make a difference

    1. Your point is well taken. The pressure to refer to ABAs has warped the market. Unfortunately, the last time major market research was undertaken, the "bundled service" did save consumers money compared to "a la carte" offerings.

      You may take some comfort in the fact that the CFPB is "secret shopping" these players right now to determine if they are playing by the rules.

      PS - I posted this comment because it reflects a dominant sentiment in the industry. In the future please refrain from using explicit profanity as they violate our editorial policy.

    2. You are absolutely Movement Mortgage pays huge monthly checks for "joint advertising", and to only allow themselves to market within the place of business for KellerWilliams - Nevada, and a few others. All other lenders must adhere to a closed door policy whether they have other valuable loan product for the consumer that could be more beneficial.

    3. There's a firm we use to provide third-party valuations of our marketing arrangements, and they do a pretty good job. We give them info on what the arrangement will be, and they provide us a set of dollars amounts that we can't exceed to be compliant. Works pretty well. Our attorney even recommends them. Their name is MLinc.

    4. Well, I think you got your response, at least to the title side of the business.

  2. Thanks for the informative article. The profane gentleman is right on point. Agents are not incentivized to recommend that their buyers shop for the best rate/lender fees/closing fees with other sources (in fact, they avoid recommending this approach) because they are pressured by management and because they are in fact getting something out of it in some way, even if indirectly. the CFPB will have a hard time proving this just through secret shopping.

  3. Question...You have a Lender who "requires" or "mandates" all of their retail chain as well as wholesale brokers that do business with them to utilize an AMC that the owners of the lender also own. Would this be classified as a "sham" business agreement?

    1. Great question. This strikes at the core of the affiliated business arrangement protocol. The key to whether or not an affiliate business arrangement is a sham lies in whether the business adds value to the transaction by providing a service. In this case the AMC is in fact providing a service. If the affiliated business provider existed solely as a vehicle to pay referral fees then it would be a sham. The fact that the lender controls who the borrower must use as a service provider means simply that the price for that service, as disclosed on the GFE, cannot change.

    2. It occurs to me that the AMC thing IS another issue, and I am surprised that I haven't encountered this before. It seems to defeat the purpose of an AMC if the lender owns the AMC, doesn't it? Independence?

  4. The whole AMC thing is another subject. On a recent deal, the AMC got $150, while the appraiser got $360.

  5. CFPB should look at Guaranteed Rate in Chicago. They are paying agents, providing HUGE incentives for the agents. 1 location gave all the realtors new winter coats, how's that for a violation

    1. You realize that the CFPB has set up a Whistleblower line. If you are really torqued about this, you should go there. Turning a blind eye is conspiracy.

  6. I just feel there is far too much exposure for the lender in building a business strategy around one-on-one realtor referrals. This article just confirms my concerns. RESPA violations have inherent risks. But what concerns me more is the fact that a over time there have been more and more work-around to RESPA which are at best questionable. And now we have a new sheriff in town int he form of the CFBP...AND the penalties for violations have been toughened to even include a potential of 1 year in prison.

    But a recent Supreme Court decision gives some important guidance on who to completely eliminate the RESPA risk for lenders. The Quicken Loans case dealt directly with a claim that Quicken Loans had receive unearned fees from two borrowers. The complainants had claimed that this was a RESPA violation. But the Supreme Court found in favor for Quicken Loans...not because the fees in question were earned...but because RESPA did not apply to the situation. The Court stated that was no RESPA violation because there was no sharing of the fees between two SETTLEMENT SERVICES PROVIDERS. The court stated that for RESPA to apply there there had to be TWO settlement services providers involved in the transaction. Because Quicken charged the fees and kept 100% of the fees there was no violation...because RESPA did not apply.

    I have developed a system to take advantage of this Court ruling. What we do is establish joint marketing agreements with Realtors to help them use their listings to generate leads. We also provide them with an IMMEDIATE follow service that insures that every lead is contacted within minutes of being generated. As a result the Realtor receives details identifying which leads are serious and which are a waste of their time. we provide the marketing system and the follow up service to the Realtor at no return for being able to provide the leads to lenders and other types of companies a home buyer is likely to need while purchasing a home. We focus on building exclusive lender sponsorships of the leads generated by a single Realtor's listings. Because we are NOT a settlement services procedure our arrangements with the Realtor are not subject to RESPA restrictions...and the same is true with our arrangements on the lender side. Essentially we are doing the same thing Zillow does when they use the listings of Realtors to generate traffic and leads they sell to lenders.

    These leads are as close as a lender can come to Realtor referrals...without having to talk with the Realtor. But there are some important differences. Instead of getting an occasional referral the lender has access to ALL the leads being generated. National averages show that a referral relationship generates about 5 loans every month if the originator has relationships with 10 Realtors. With this system we typically generate between around 150 leads per month from 10 Realtors. More importantly, since the originator is not spending TONS of time sustaining relationships with 10 Realtors, they actually have time to deal with 150 (or more) leads per month.

    I would appreciate any feedback about this strategy to eliminate RESPA risk from Realtor/lender relationships.

    1. Steve - That's a very interesting construction of the arrangement. I try to simplify it:

      If a referral has no intrinsic value, to the point where I cannot financially compensate someone who sends me a referral, then a return referral (reciprocal or not) cannot have a value.

      I worry with your interpretation of a settlement service provider. Lead generation/marketing, where you are representing yourself as a lender, does have settlement service implications, because if the ultimate lender is adjusting costs as a consequence of a closing, the arrangement does impact the customer. So marketing, by itself, when properly disclosed, is not a problem. Where you run into danger is if your system has rewards for "closed/consummated" referrals different than those which are generic "leads" - that could be a violation in two areas: 1.) unlicensed originators and 2.) RESPA kickback violation

      Your marketing system sounds promising. I concur with the idea that, as a lender, assisting a real estate agent in culling "suspects from prospects" does not, in itself, represent a violation, particularly when the system is open to ALL agents and ALL lenders, like Zillow.

      Another area of concern, which you don't address here are potential fair lending/housing issues in the determination of which leads are good and bad. You want to make SURE ALL inquiries are afforded consideration, and that there are no prohibited bases used in the determination.

      Thanks for your thoughtful post.

    2. Thomas-Thanks for your feedback.

      I am confident we do not have any concerns related to what is a settlement services provider. We do not represent ourselves as the lender to the Realtors. That would make us a settlement services provider. Marketing is NOT a settlement service. We make sure that we are ONLY a marketing company...on both the Realtor and the lender sides.

      In fact when I speak with a Realtor I tell them that we are not a lender. I tell them that we expect they will continue operating their business the same as they were before we start working together. I use as examples that if they have a spouse that is in the mortgage business or their company also owns a mortgage business I would not expect that they will change who they are sending their deals to for financing. I go on to explain that we are not expecting them to assist the lender at all. If the lender cannot convince the home buyer to do business with them...why should I expect the Realtor to do their job for them. What I tell the Realtors is that we are trying to help them build a pool of qualified prospects who are truly READY to purchase a home.

      Most Realtors simply want to be dealing with buyers who ARE working with a lender. During our screening process we identify those prospects that are already working with a lender or have requested we connect them (live transfer) to a lender. For the Realtor these are clearly PRIORITY leads because the prospect is taking actions to be prepared for when they find a home they want to purchase.

      I also have few concerns about any unlicensed origination issues. Our business model provides three levels of leads to the participating lenders. The basic leads are screened to cull out the prospects who are not expecting to buy a home in the next few months. Our premium lead level is live transfers where the prospect--at the prospects request--is connected directly to the lender. A third level of leads is based on if the prospect INITIATES an application. This last scenario invites deeper scrutiny but passes since we get paid for the leads regardless of whether the person gets a mortgage or not...just like any of the other leads we sell. There is no issue with fee splitting regulations.

      This structure allows us to be compensated based on how HIGH the prospect has raised their hand to identify themselves as a purchase mortgage prospect. At the base level--screened leads they have identified that they are actively looking for a house to purchase. At the live transfer level they are indicating they are ready to look at their financing (mortgage) options. These leads are more valuable to the lender than the screened leads. At the application level they are stepping up to the plate and saying they are ready to start the process of getting a mortgage...making them much more valuable to the lender. We get compensated based on the quality level of the lead...not on any other condition (like if the deal is funded).

      We do also offer a follow on service to the lenders. Each lead we generate is delivered exclusively to one lender. If there is a credit denial we will take back the lead and offer to help the prospect deal with what is keeping them from being approved for financing. (There is a fee to the prospect for this service.) Then if the prospect goes thru the process we return that lead back to the no additional charge If the lead was delivered to more than one lender then this process would become far more complex.

      Our objective is to work with both the Realtors and the lenders to assist EACH of them to build a pool of qualified purchase prospects. We want to make sure that we are never looked at as a settlement procedures supplier...only as a marketing services company offering services to both Realtors and lenders. If anything I have described here would cause an issue with that objective...I will greatly appreciate any feedback so we can take corrective actions

    3. Steve:

      As someone who is a RESPA attorney let me clear up your misconception that marketing companies are outside of the CFPB's jurisdiction. They AREN'T. We represent several marketing companies right now who are involved in CFPB enforcement actions for their roles in MSAs.

  7. This is a quote taken directly from a RESPA FAQ which HUD prepared in 2010 which addresses your interpretation of settlement service provider:

    Q: The definition of ―Origination service does not explicitly include all of the services provided by mortgage brokers in the definition of ―Settlement services. Are all ―Settlement services considered ―Origination services?

    A: No, all ―Settlement services are not considered ―Origination services. However, all ―Origination services are ―Settlement services.

  8. For some transparency, I want to first state that I am in the mortgage business.
    Many of the comments here are pointing the finger at specific mortgage banks and companies (BOA, Wells, Movement Mortgage...), and I'm not defending them, but believe me, these companies have no interest to just write big checks to real estate offices. It is the real estate agents that have their hand held out looking for this money. Agents have very little regulation and accountability. I always wonder..."Who taught the real estate agents to try and get these kickbacks? I assume it started with home warranty companies. You rarely see a contract that does not have a home warranty on it. Agents are paid for every home warranty they sell. Do you think the consumer, buying the home warranty, knows the agent is getting paid on the sale of the home warranty? No way. How is that not illegal?

    I don't think it has always been the case, but now most agents have some kind of thought that they are privileged, and vendors should be soliciting them with monetary incentives. Zillow is now leveraging this taste for agent greed and making a HARD sales push to get the agents preferred vendors to pay for Zillow's service, under the disguise of co-marketing. The vendors get nothing off the Zillow advertising! Zillow is just trying to create a legal way for agents to solicit money from the agents preferred vendors... AND Zillow is even the one to make the hard sell to the vendors... It's very clearly a threat... "Hi, we're Zillow. The agent wants to use you as their preferred partner, but if you can't share in these marketing cost, then we'll let the agent know you are not interested in supporting their business, and will go down the list and call the next preferred partner and see if they are interest in supporting the agent". It's a boarder line Mafia tactic.

    Please don't get me started on the scam that builders got going! They are the worst! They offer a false monetary incentive to the buyer, to use their preferred mortgage/title/attorney. "Use our preferred mortgage/title/attorney and we'll give you a $3,000 credit". Sounds great, right? Problem is, the buyer agrees to use their preferred mortgage company today, but since the house won't be built for 3 months, the buyer can't comparison shop to see if that's a good deal or not. So the buyer gets roped into a contract stating they agree to receiving the $3,000 by using the builders preferred mortgage/title/attorney, but then cut to 3 months later, the interest rate is 1/8%-1/4% higher than the market, the attorney fees are $100 - $200 higher than an outside title/attorney...because that $3,000 has to come from someplace. But, at that point, it too late for the buyer, because it's time to close, they already feel they agreed to it in the contract, and these vendors already performed work the buyer paid for, and they don't want to lose that $3,000 incentive. Bam! The builders got them by the short hairs! What a great racquet!! Again, I blame this on agents, because buyers put their faith that the agent are looking out for their best interest

  9. I'd like to address the comment by Anonymous on Feb 20th at 10:45am. He wrote... "Agents are not incentivized to recommend that their buyers shop for the best rate/lender fees/closing fees with other sources (in fact, they avoid recommending this approach)". My question is, why should agents be "incentivized" to recommend that their buyers shop for the best rate/lender fees/closing cost??? Why not have agents refer business to the vendors they know do a good job, have a track record of successful closings and offer competitive terms? When a buyer or past client comes to me and ask my recommendation for an agent, I don't give 3 business cards and say call each agent and ask them for their "Agent GFE". Mary Agent may charge you 3%, but Chuck Agent has been known to charge only 2.5%, and although Carol Agent is probably the least experienced and she not the most responsive, I bet she'll drop her price to only 1.9%. My point is... You get what you pay for and the lowest isn't always the best.