VIDEO: RESPA Concerns for Gifts and Promotions
In this Compliance Clip, Adam tells the story of a lender who basically bought her way into the hearts of the Realtors in her area. And the CFPB answers the question of whether gifts and promotions are appropriate for federally related mortgage loans. This is a must see video for lending teams.
Video Transcript
The following is a transcript of this video:
This Compliance Clip is going to talk about RESPA concerns for gifts and promotions. The reason I want to talk about this topic in particular is because I've received a lot of questions over the years regarding RESPA Section 8.
RESPA Section 8, of course, prohibits unearned fees and kickbacks, but there's been a lot of questions about gifts and promotions over the years. In fact, a couple of years ago, I went into a financial institution. I was talking to a bank president who used to be a mortgage lender and he explained to me how there's an area mortgage lender who was taking, on an annual basis, the area realtors on an annual trip. This was a big deal. This president was explaining how it's tough to compete against that lender because that lender has all the realtor business, because the realtors love this lender, of course, because she takes them on a free trip. They were going to places like casinos overnight and overnight to a party island and other trips to area destinations where this lender was paying for these realtors to go. It was a big deal. It was an annual thing and every realtor in town would go to it. The president of course asked me, he said, is this permissible?
Of course, under RESPA Section 8, there is a prohibition to this and it doesn't just apply to financial institutions. It applies to all lenders and even those realtors, it would apply to them as well. Now what's interesting is over the years, it seems a lot like a lot of lenders and even financial institutions have sort of forgotten about RESPA Section 8 to some degree because there has not been a lot of enforcement relating to RESPA Section 8.
Over the last decade, we've started to see a little bit more enforcement, some enforcement actions and fines and penalties against non-bank institutions, like title companies and realtors and other types of lenders and brokers, because the CFPB has been cracking down on that. Just this week, as the time of this recording, what we actually saw was that CFPB released several Frequently Asked Questions related to Section 8. I've said for years that RESPA Section 8 is going to come full circle. It's going to come back down and the regulators are going to start cracking down on this again. They had done so decades ago, but over the last several decades, it seems like enforcement has been down. We've seen a resurgence of UDAAP or the Unfair and Deceptive or Abusive Acts and Practices so it makes sense that RESPA Section 8 violations would also come up because there's typically consumer harm when you have unearned fees and kickbacks in relationship to a mortgage.
There were Frequently Asked Questions released by the CFPB and I want to go over one of these because it really does relate to that lender who is taking all of these realtors on this yearly trip that they would pay for everything. Let's take a look at this Frequently Asked Question. The question says, “Are gifts and promotions allowed under RESPA Section 8?”
The answer is quite long so let's take a look and see what it says. The answer says, “Gifts and promotions generally are things of value and therefore could, depending on the circumstances, violate RESPA Section 8. If the gifts or promotion are given or accepted as part of an agreement or understanding for referral of business incident to, or part of a real estate settlement service involving a federally related mortgage loan, they are prohibited.” So really any of the mortgage loans that you're doing, it would be prohibited.
They go on to give us an example. They say, “For example, if a settlement service provider gives current or potential referral sources (like realtors) tickets to attend professional sporting events, trips, restaurant meals, or sponsorship of events, or the opportunity to win any of these items in a drawing or contest in exchange for referrals as part of an agreement or understanding, such conduct violates RESPA Section 8(a).” I could see this lender who takes these trips or the realtors who go on these trips saying, “Hey, wait a second. That specifically says it has to be part of an agreement or understanding. We don't have a written agreement so that doesn't apply to us.” Well, that Q&A from the CFPB that was released on their site this week at the time of recording says this, “Such an agreement or understanding need not be written or oral and can be established by practice, pattern or course of conduct.” It does not need to be written, if you're doing it, that is a problem.
It does go on to say this. It says, “However, in certain circumstances, gifts or promotions directed to a referral source are not prohibited if they are a normal promotional or educational activity meeting the conditions in Regulation X.” The CFPB actually gives us several very specific examples. This would be something like professional education, where you charge everybody the same and they pay for it. You're not giving it for free, or maybe a title company gives some education on what's going on in the real estate market and it's open to everybody and they never charge for it. In that case, that could be permitted. You have to be extremely careful when you're giving something of value. It's very important that you understand that any gifts or promotions could easily, easily, easily, easily, easily be a violation of RESPA Section 8. You definitely don't want to be giving these all-inclusive trips to realtors, taking them up to casinos and other party islands so that they refer your business because that would absolutely be a problem.
That's all I have for you in this Compliance Clip.