Unveiling RESPA Violations in the Mortgage Industry: Recent CFPB Action and the Cost of Ignoring Regulations
It always astounds me when I learn about sanctions imposed against mortgage industry players who ignored the rules and got caught. In the current climate of regulatory oversight, violating the laws that govern the mortgage industry encapsulates shortsighted stupidity that practically begs for punishment.
Prior to 2008, rules and regulations governing the mortgage industry were rarely enforced. Mortgage industry behavior was likened to the “Wild Wild West.” With mortgage companies and professionals practically doing whatever they wanted to do in order to get themselves paid, what happened to the customer became secondary to earning a commission. And, more times than not, they got away with their unscrupulous behavior scot-free. It wasn’t until the U.S. mortgage industry’s overwhelming greed and utter disregard for the rules practically brought the world’s’ economy to its knees, when the United States government was finally compelled to intervene and hold mortgage companies, along with their personnel, accountable for their actions.
One particular prohibition that was rarely enforced was the exchanging of “things of value” between actual and potential referral sources. By not enforcing this rule of law, the mortgage industry evolved condoning and normalizing criminal activity. Paying for referrals and exchanging things of value with those who were prohibited from participating in the exchange became commonplace and customary.
RESPA PROHIBITION
With minimal exception, the Real Estate Settlement Procedures Act (RESPA) specifically prohibits the exchange of anything of value between actual and potential referral sources. Doing so constitutes a crime punishable by up to a year in prison and/or a fine of up to $10,000 for both the giver and receiver.
RESPA 12 CFR § 1024.14(b) states, “No person shall give and no person shall accept any fee, kickback, or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a settlement service involving a federally related mortgage loan shall be referred to any person. Any referral of a settlement service is not a compensable service, except as set forth in § 1024.14(g)(1). A company may not pay any other company or the employees of any other company for the referral of settlement service business.”
RESPA 12 CFR § 1024.14(c) states, “No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed. A charge by a person for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee and violates this section. The source of the payment does not determine whether or not a service is compensable. Nor may the prohibitions of this part be avoided by creating an arrangement wherein the purchaser of services splits the fee.
RESPA 12 CFR § 1024.14(d) defines a “thing of value” as including, “… without limitation, monies, things, discounts, salaries, commissions, fees, duplicate payments of a charge, stock, dividends, distributions of partnership profits, franchise royalties, credits representing monies that may be paid at a future date, the opportunity to participate in a money-making program, retained or increased earnings, increased equity in a parent or subsidiary entity, special bank deposits or accounts, special or unusual banking terms, services of all types at special or free rates, sales or rentals at special prices or rates, lease or rental payments based in whole or in part on the amount of business referred, trips and payment of another person’s expenses, or reduction in credit against an existing obligation. The term “payment” is used throughout §§ 1024.14 and 1024.15 as synonymous with the giving or receiving of any “thing of value” and does not require transfer of money.
RESPA 12 CFR § 1024.14(e) states, “An agreement or understanding for the referral of business incident to or part of a settlement service need not be written or verbalized but may be established by a practice, pattern or course of conduct. When a thing of value is received repeatedly and is connected in any way with the volume or value of the business referred, the receipt of the thing of value is evidence that it is made pursuant to an agreement or understanding for the referral of business.”
RECENT CFPB ACTION
On August 17, 2023, the Consumer Financial Protection Bureau (CFPB) announced action that it took against Freedom Mortgage Corporation by fining it $1.75M for repeatedly and illegally providing incentives to real estate agents and brokers. Additionally, the CFPB fined Realty Connect USA Long Island $200,000 for accepting those incentives.
Both companies should have known better yet they ignored the law and ultimately paid a hefty price. Any company or individual focused on the shortsighted gains of illegal activity is ultimately treading over a very slippery slope while assuming enormous risk. More times than not, conducting illegal business activities will be discovered and the consequences can be, and often are, staggering.
Complying with the law may not make you expediently rich, but operating compliantly will certainly keep you actively operating.
You may access the CFPB’s press release describing the action that it took against Freedom Mortgage Corporation and Realty Connect USA Long Island here.