Compliance Blog

Written by Elizabeth M. Young LaBerge, Senior Regulatory Compliance Counsel

Last week the FDIC released its Consumer Compliance Supervisory Highlights, which included an article on RESPA Section 8 Violations. Specifically, “the FDIC identified concerns with institutions’ office/desk rental programs.” These suspect programs involved payments that did not reflect fair market value or which appeared to be sham arrangements to disguise the payment of impermissible mortgage referral fees. While the FDIC does not supervise credit unions, when one regulator raises an issue it is not unusual for other regulators to notice, so it is worth reviewing the FDIC's take on the topic.

Long-Standing Guidance

This is not a particularly new issue. In 1996, HUD issued Statement of Policy 1996-3, Rental of Office Space, Lock-outs, and Retaliation. 61 Fed. Reg. 29264 (June 7, 1996). In that policy statement, HUD indicated that it was aware of many lenders leasing desks or office space to settlement service providers at above-market rates — the extra rent money being provided in exchange, explicitly or implicitly, for referrals of settlement business.

HUD further affirmed that lenders could accept market value payment for facilities actually furnished. The “market value” of rent does not have to mean dollar per square foot. HUD stated “The market value of the rental space may include an appropriate proportion of the cost for office services actually provided to the tenant, such as secretarial services, utilities, telephone and other equipment.” The market rate is determined by the “general market value,” or the market value to non-settlement service provider tenants who would not see any extra value in renting with a mortgage lender in particular. Payments higher than that general market value would be viewed as a kickback in violation of the rule. 61 Fed. Reg. 29265. This would be true regardless of whether the lease was a yearly or monthly rental of a desk or a transaction-by-transaction rental of a conference room to facilitate closings. 61 Fed. Reg. 29266.

Creative Interpretations

Although RESPA’s implementing regulation, Regulation X, was ported over to the CFPB following the implementation of Dodd-Frank, the Bureau has repeatedly cited to Statement of Policy 1996-3 in Consent Orders. For example, in In Re: Fidelity Mortgage Corporation, the Bureau found a violation because the rental arrangement involved “an exclusive quid pro quo” relationship and monthly rent that was $200 to $1,100 over comparable rental space “not located in the middle of a bank,” citing to this 1996 guidance.

The issue is not completely straightforward though. In In Re: Prospect Mortgage LLC, the Bureau cited both marketing services agreements and desk licensing agreements between various parties as representing Section 8 violations. The Bureau did not provide any discussion of the rental space’s general market rate, and instead noted as evidence of a kickback arrangement that Prospect’s board analyzed the value of these rentals with regard to the number of referrals produced, rather than by comparing market rates. However, the kickbacks rule does not prohibit bona fide payment for goods or facilities actually furnished if they were chosen in the hopes of generating business. See, 12 CFR §1024.14(g)(iv). Concluding that Section 8 requires settlement service providers to make business decisions that are agnostic to whether new business is generated is a befuddling position. However, this critique of the Bureau is not new, and a similar interpretation by the Bureau was overturned in the past.

FDIC on Risk Management

In its Consumer Compliance Supervisory Highlights, the FDIC provided several recommendations to mitigate risk surrounding this issue:

• Providing training to executives, senior management, as well as staff responsible for and involved in mortgage lending operations;
• Performing due diligence when considering new third-party relationships entered into by the bank, or any individuals employed at or under contract to the bank, that generate leads or identify prospective mortgage borrowers;
• Reviewing applicable law, guidance, and statements from regulatory agencies and authorities on RESPA Section 8; and
• Staying abreast of RESPA Section 8 regulatory requirements through training resources.