VIDEO: RESPA Section 8 Violation Example
In this Compliance Clip (video), Adam discusses a recent hot topic pointed out by the FDIC: RESPA Section 8. This discussion provides a background on why Adam believes that RESPA Section 8 is once again, a hot topic. This video would be great to share with your compliance team who may have responsibilities for monitoring for RESPA Section 8 risk.
Video Transcript
The following is a transcript of this video:
This Compliance Clip is going to talk about RESPA Section 8 violation example, really just one specific example. This comes from the Spring 2021 Quarterly Compliance Update that I just finished recording and I thought I would share this with you. We actually covered a lot of material in that program and these are exact slides that come from that program.
What we were talking about in that program is the FDIC’s Consumer Compliance Supervisory Highlights Publication. The FDIC released its publication on March 31st, 2021 and it was the third edition of this publication that focuses on consumer compliance and what the regulators have highlighted as things that they want to share with financial institutions. This is a really good document to pay attention to and what we focused on in our Spring 2021 Quarterly Compliance Update was on some of the violations the regulators mentioned. They mentioned three topics - mentioned TRID, Fair Lending and RESPA Section 8.
We're going to talk about RESPA Section 8 but what I want to point out is they’re essentially calling RESPA Section 8 a high risk area. Over the last couple of decades, we haven't seen the regulators cite a lot of banks for RESPA Section 8. Back in the nineties, and before then, we saw a lot of RESPA Section 8 violations but with the influx and changes and additions of regulations and rules in the early 2000’s, mid 2000’s, late 2000’s and so on and so forth up to today, we really started to see a drop off with Section 8 violations and started to see some practices that were concerning, but the regulators weren’t bringing them up. Well, about five or ten years ago, I started noticing the CFPB was hammering title companies and mortgage lenders, non-big mortgage lenders for Section 8 violations. That time I said, you know what? I know that RESPA Section 8 is gonna come full circle and examiners are again going to start to focus on this. And here we have the FDIC essentially saying that RESPA Section 8 is a high risk area. So let's talk about it.
RESPA Section 8 covers unearned fees and illegal kickbacks. So kickbacks and unearned fees basically in relationship to a settlement service provider related to a real estate mortgage. So you can’t give a realtor a referral fee. They get their commission but you can’t give them a referral fee for sending a referral to you. That will be an illegal kickback or an unearned fee which is prohibited by RESPA Section 8.
What the FDIC saw was illegal kickbacks that were disguised as above-market payments for things like lead generation, marketing services, and office space or desk rentals. Essentially, they were saying that it looked like they were seeing a transfer of funds on illegal kickback or referral fee being disguised as above-market payments for lead generations or paying way too much for lead generation, or paying way too much for marketing services, or way too much for office space and desk rental. In fact, I saw a couple of enforcement actions that I read several years ago, where the regulators actually looked at office space or desk rental and what they did is they did a square-foot comparison of rental space in the area, compared it to what a bank was renting out to a realtor or a title company, and basically said it was a problem for RESPA Section 8 because it didn't line up with the going rate.
The problem is if you're charging too much, then you're getting an unearned fee and a kickback. If you're not charging enough, they might be getting one, so it can go both ways. You have to be extremely careful about this.
Also with marketing services, if you’re doing joint marketing with a realtor, you have to be extremely careful not to overpay or underpay ‘cause that could be considered an unearned fee or a kickback based on going rates and based on the regulators doing a statistical data analysis of your costs. So it's a big deal and the regulators, especially the FDIC, found this as an issue.
The FDIC shares this publication, that there are some risk mitigation efforts that financial institutions can take. Those include, number one, training your team on RESPA Section 8. So training your marketing team to understand the rules, training your CFO who might be responsible for office space or desk rentals, and those contracts to help them understand RESPA Section 8 rules. So providing training is the first thing. Secondly, you should have third party due diligence to make sure your contracts with third parties don't have unearned fees or kickbacks and to make sure your third parties aren’t engaging in unearned fees or kickbacks. And finally, your financial institution can develop a monitoring process to identify risks and report to senior management. So this is your compliance audits and your compliance reviews and your compliance monitoring to look for RESPA Section 8 and I would do that by looking for above or below market payments for lead generation, marketing service, and office space or desk rentals.
That's all I have for this Compliance Clip.