Monday, January 27, 2025

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

Background


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.

12/23/2024 - CFPB Sues Real Estate Firm for Referral Fees
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.

Tuesday, January 7, 2025

Unethical or Illegal? Dual Agency/Dual Capacity, Double Compensation in Loan Origination

Updated 1/6/2025

It seems obvious, but the fact that an originator might represent someone else's interests in a transaction creates an inherent conflict of interest. The real estate agent works for the seller, and the loan officer owes his fiduciary responsibility to the borrower. Conflict occurs when the loan originator can receive compensation elsewhere in a transaction besides the mortgage, such as:

  • real estate commission
  • insurance sale
  • title/closing/escrow transaction
  • appraisal/valuation
  • financial services
  • accounting
The question at issue: whether it's merely unethical to "double-dip" or illegal and prohibited? The answer lies in the location of the property. If your state prohibits dual agency or has rules against dual compensation, then it's illegal. 

Since acting as a real estate agent (where you represent the seller) and a loan officer (where you represent the buyer) is a conflict, you should not allow both. However, it may be acceptable for you to have a business where you actively sell real estate as a licensed real estate agent and separately originate loans as a licensed mortgage loan originator. There is no conflict if you recuse yourself from participating in the transaction. 

Loan Originator Compensation Rules


In a conundrum for "true" buyer brokerage (where the buyer pays the agent's commission), dual agency cannot exist due to the requirement that the borrower cannot pay the loan originator anything outside of the commission on the loan. If you recuses yourself from the fee, it appears this would be acceptable. 

Is it acceptable to Have a Real Estate License?


Mortgage originators with a real estate license sometimes find it easier to generate business because their experience in real estate adds professional credibility to real estate agent referral sources. However, this does not mean the mortgage company or bank finds this acceptable. The POTENTIAL for conflict creates enough possible risk to lead the mortgage company to create a hiring policy that prohibits this arrangement unless the license is affirmatively inactive. 

This stems from the fact many secondary market contracts and loan purchase eligibility warranties often cite the requirement for no conflict of interest in the loans sold or purchased. The mere existence of a conflict can require a lender to repurchase a loan, regardless of whether there was a negative outcome. 

FHA Allows it - USDA Does NOT


Recently, FHA clarified that it WOULD allow non-credit (not underwriters, valuations, quality control, etc.) related parties to act as both agents and loan originators. However, on 3/31/23, USDA clarified this was a conflict of interest and specifically DISALLOWED this. 

Dual agency in Real Estate Transactions Prohibited


Eight states have made dual agency in real estate illegal: Alaska, Colorado (although dual capacity for LO is allowed), Florida, Kansas (allowed for broker), Maryland (Prohibited from receiving finder's fee -aka broker fee), Texas (Dual Capacity For LO allowed), Wyoming, and Vermont. Dual Agency refers to the real estate agent representing both the seller AND the buyer. This is one indicator that, regardless of role, a loan originator who is also a real estate agent could run afoul of this. Some states allow what is known as "Dual Capacity."

Real Estate Rules Where Undisclosed Dual Capacity is a Violation

Massachusetts, Massachusetts, also does not allow acting as a real estate attorney and a broker on the same transaction. 

States that may specifically disallow Dual Capacity

North DakotaNot Allowed
Examiner - Ownership okay, but cannot be agent and MLO on same transaction
IllinoisNot Allowed (must be separate)
LouisianaNot AllowedLa. Rev. Stat. §6:1090(I)
UtahNot AllowedProhibited per 61-2c-301 (1)(i)
RINot AllowedCommentor

Maryland - No "double dipping"

States that do not specifically disallow Real Estate Agents and Originators to Receive Commissions on Both Transactions - known as "Dual Capacity."

Arizona (Mortgage Broker License)
Kansas - If properly disclosed
North Carolina (maybe) - Strong advisory against it because of possible RESPA/TILA violations
Texas - With proper disclosure

We will add it to this list, or you can send your citations as we collect more information.

Regulatory Guidance - Appraiser Independence Rule (AIR) Violation Minefield

The most frequently overlooked problem with this arrangement is the possible influence of the appraiser. The real estate agent (particularly the listing agent) meets the appraiser at the inspection of the property and has a vested interest in obtaining the highest possible value to support the sales price. The company could be liable for undue appraiser influence if the agent is also a loan originator. The lending company can put guardrails in place, but there is no such fail-safe for real estate agents. 

Affiliated Business Arrangement Disclosure

Many states have their own language for Dual Authority, but RESPA rules require that the relationship be disclosed using the Affiliated Business Arrangement Disclosure (AfBA). Further, there should be a prominent disclosure that the customer receives services and pays fees to the same individuals for multiple services. 

This is also true if the agency owns a part of the lender, or any related settlement service. 

Unless it's Specifically Codified - Best Practices Dictate "Don't Do It."


Sources

“Required Disclosures by State - American Mortgage Network.” American Mortgage Network - Funding The American Dream, 22 Nov. 2022, https://www.amnetmtg.com/required-disclosures-by-state.