FDIC RESPA Section 8 Supervisory Highlights
In March, the Federal Deposit Insurance Corporation (FDIC) issued its most recent version of its Consumer Compliance Supervisory Highlights. While FDIC does not have supervisory authority over credit unions, the patterns it notices during its examinations can demonstrate what areas have been problematic for other financial institutions and can help credit unions look out for areas that may present risk in their own operations. The observations came from the FDIC’s supervision of state-chartered banks and thrifts that are not members of the Federal Reserve System during 2020. The highlights focused on several areas, including the Coronavirus Aid, Relief, and Economic Security Act, fair lending, and compliance with TRID requirements. Today’s blog will focus on the FDIC’s observations related to lead generation and section 8(a) of RESPA.
In general, section 8(a) of RESPA prohibits giving or accepting a thing of value under an agreement or understanding for the referral of settlement service business involving a federally related mortgage loan. Section 1024.14 of Regulation X explains that thing of value is broadly defined and encompasses, among other things, payments, commissions, fees, distributions of profits, and special rates for services. Referral is specifically defined under section 1024.14(f)(1):
“A referral includes any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business incident to or part of a settlement service when such person will pay for such settlement service or business incident thereto or pay a charge attributable in whole or in part to such settlement service or business.”
Over the past year, the FDIC identified section 8 violations that “involved the payment of illegal kickbacks, disguised as above-market payments for lead generation, marketing services, and office space or desk rentals.” The FDIC explained that a common issue in these violations was whether a settlement service provider was paying for a lead or for a referral. The FDIC suggested that paying for a lead might not be prohibited by section 8 if it did not cross the line and become a payment for a referral. The FDIC distinguished between the two by focusing on whether the person getting paid was just giving information about a potential borrower to a settlement service provider or the person getting paid was affirmatively influencing a consumer to select a particular settlement servicer provider. The FDIC provided an example of what it felt might be permissible under section 8:
“True leads permissible under RESPA are often lists of customer contacts that are not conditioned on the number of closed transactions resulting from the leads, or any other considerations, such as endorsement of the settlement service.”
But if a person receiving payment recommended, directed, or steered a consumer to a particular settlement service provider, that would constitute a referral as defined in Regulation X. Those are the types of payments that would be prohibited under section 8 of RESPA.
Section 1024.14(e) explains what may constitute an agreement or understanding for purposes of the prohibition: “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.” If a thing of value is exchanged and is tied to the volume or value of business, Regulation X suggests that the conduct evidences an agreement or understanding for the referral of settlement service business. The example of the customer contact list provided by the FDIC appears to fall outside of the scope of the prohibition because the payments for these leads are not tied to the volume or value of the business or the exertion of affirmative influence. And this seems to distinguish these true leads from the types of lead agreements that the CFPB took issue with in several 2017 consent orders involving a mortgage lender and real estate brokers. There the CFPB found violations of section 8(a) of RESPA where the lead agreements at issue included exclusivity clauses in which the lead information could not be shared with the lender’s competitors and lead fees went to parties who “went well beyond simply transferring information about prospective buyers.”
Credit unions that pay for leads may want to review the FDIC’s guidance to determine whether its conduct looks more like the payments for leads that the FDIC suggested might be permissible under section 8 of RESPA or whether they look more like payments for referrals that might be prohibited by RESPA.