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RESPA Cracking Down On Kickbacks and Referral Gifts


Written By: Karen Deis

“RESPA Reform Is Dead” has been in the news, the Internet and both mortgage association and Realtors ™ heralded its demise. Even if it would have passed, the one thing that would not have changed is “Section 8: Kickbacks, Fee Splitting, Unearned Fees”.

Do a Google search (RESPA Kickbacks) and you will find 3,960 articles on the subject—half of which are about kickback schemes and fines levied by the RESPA Police. (We have published some of them in this article.)

HUD has made an example out of the large mortgage companies, title companies and real estate firms.

What you don’t know is they are now investigating individual loan originators—especially speakers who are on the mortgage speaking circuit—for referral and kickback practices.


Here are some of the things that you might have heard mortgage speakers saying what they have done to generate business—which is specifically prohibited by RESPA:

  • Taking real estate agents (who have referred you business) to real estate seminars and paying for their admission ticket!

  • Paying for RealtorsTM listing ads in real estate magazines and newspapers.

  • Providing toll-free numbers and call-capture numbers in exchange for referrals.

  • Holding a Referral Contest (where everyone who referred a lead to you is entered into a drawing for a gift or a dinner).

  • Giving sporting event or theatre tickets in exchange for referrals.

  • Giving a party for everyone who has referred you business.

Now, please note that the key word here is “referrals”. If you hold a client appreciation party for ALL of your clients, regardless if they gave you a referral or not, you are NOT in violation of RESPA.

The key to this whole thing is the discriminatory practice—that you are giving a reward—any reward, to a group who is referring business to you.

While I don’t claim to be an expert on the subject by any means, I wanted to let you know that HUD has increased its police force and if you have heard a speaker or read an article about client referral gifts, or rewards to affinity partners, Realtors ™ or builders for referring clients, it’s pretty much illegal under RESPA.

I have to admit that when I owned my mortgage company, I sent out a bag of popcorn and a Blockbuster Video Rental card to clients who referred someone to me. I thought I was “safe” because I had always heard about a $25-threshold, that you could spend and still be legal. In fact, the mortgage associations right now are still touting this “safe dollar amount”.

However, I have published the “rule” below—and I don’t see anything about a $25 rule, do you?

Section 8: Kickbacks, Fee-Splitting, Unearned Fees

Section 8 of RESPA prohibits anyone from giving or accepting a fee, kickback or anything of value in exchange for referrals of settlement service business involving a federally related mortgage loan. In addition, RESPA prohibits fee splitting and receiving unearned fees for services not actually performed.

Violations of Section 8's anti-kickback, referral fees and unearned fees provisions of RESPA are subject to criminal and civil penalties. In a criminal case, a person who violates Section 8 may be fined up to $10,000 and imprisoned up to one year. In a private law suit a person who violates Section 8 may be liable to the person charged for the settlement service an amount equal to three times the amount of the charge paid for the service.

The Internet is full of RESPA violations and crackdowns,
and I wanted to print a few of them for you to read.

Thousands of homeowners could benefit from a class action lawsuit filed recently in Augusta, Ga. Four mortgage insurance companies have been named in the suit, which alleges illegal kickbacks to lenders. Specifically, the lawsuit alleges that the companies provided mortgage lenders with products and services, such as pool policy coverage and underwriting, at below market price. Pool policy coverage is a type of insurance that mortgage companies are required to purchase to help safeguard the pool of loans they make.

Tuesday morning, as many as 20 federal agents from HUD and the U.S. Postal Inspector raided the home office of Titleserv Inc., at Plainview (Long Island), New York. The action was pursuant to a search warrant accusing the title company of paying kickbacks to attorneys for referrals of business, in violation of RESPA section 8(a) (12 U.S.C. section 2607[a]).

ARVIDA/JMB was accused of charging a percentage of home sale prices for closing costs, and pocketing excess over actual costs. It was also alleged to have charged homebuyers an extra $300 fee if they declined to use ARVIDA's affiliated title company for settlements. ARVIDA will refund $45,750.

Transamerica Corp. was accused of running a referral scheme on flood and tax services for local lenders similar to that of First American's. It agreed to pay $500,000 to nonprofit housing groups, and $113,000 to the federal Treasury.

HUD's investigation found that Znet represented the ReMax of Atlanta agents as "employees," paying them $400 for each consumer referred to Znet. The real estate agents are actually "sham employees" after investigators found the agents performed little or no origination work other than filling out loan application forms. Under the terms of the settlement, the companies, their officers and the real estate agents agreed to stop this bogus employee compensation program. Further, the ReMax agents will refund $400 to each consumer referred to Znet for a total of $9,200. In addition, Znet will make a settlement payment to the U.S. Treasury of $15,000.

World Savings Bank, a large California-based lender with operations nationwide, paid up to $100 to real estate agents for filling out and submitting on-line loan applications for prospective borrowers. HUD has long considered that a real estate agent may not be compensated for merely filling out a loan application. This compensation may even be considered a fee for the referral of business in violation of Section 8(a) of RESPA. World Savings agreed to discontinue the program and made payment of $7,557 to the U.S. Treasury.

I started in the mortgage business in 1972, prior to RESPA in 1974. Kickbacks were rampant! Not only was RESPA meant to protect the consumer from paying higher fees, but also was meant to level the playing field between lenders.

While we all know that things are not always FAIR—there is one way you, as a loan officer or mortgage company can level the playing field. Make sure that your fellow lenders are playing by the same rules as you are. If you know of kickbacks that are going on in your playing field, by all means—report it! Contact your Regional HUD office.

Competition is competition—but let’s as a group, cut back on steroid abuse—I mean kickbacks-for-referrals!

Karen Deis
Referee

Copyright, 2004, LoanOfficerMagazine.com

Written By: Karen Deis

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