RESPA Section 8 & Hosting Lending Events
In this Compliance Clip (video), Adam discusses the compliance challenges when a lender wants to host an event and invite Realtors, title companies, or other settlement service providers. Networking, of course, is essential to the lending function of any creditor, but RESPA Section 8 provides some strict prohibitions that every lender should be aware of as significant fines can be assessed when the rules are ignored or not followed.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to focus on RESPA Section 8 and hosting events like educational customer luncheons or first time home buyer programs.
Over the years, I've received questions relating to this. Specifically, I've received questions like this: Is a creditor permitted to invite realtors and appraisers to first time home buyer educational luncheons? The answer to this, of course, comes from RESPA Section 8. And unfortunately it is a very difficult rule to understand and you have to understand exactly where the line is because being on the wrong side of the line can cause significant consequences. So let's take a look at this.
RESPA is the Real Estate Settlement Procedures Act and it's implemented by Regulation X which is actually 1024.14. In 1024.14 of Regulation X there is a prohibition against kickbacks and unearned fees. Specifically under this prohibition, there's a section that talks about not giving referral fees. There's a lot of text here but I want to take a look at this.
What the text says is that no person shall give and no person shall accept any fee, kickback, or other thing of value. So let's break that down before we move on.
First of all, no person shall give and no person shall receive. What we have there are two sides of the coin. Those who give can be in trouble and those who receive can be in trouble. So it's both sides of the coin in a referral relationship. Now, what they talk about here is you cannot give a fee, a kickback, or other thing of value. We'll break down “other thing of value” in just a minute.
Now, what can you not give a referral for? You cannot give it pursuant to any agreement or understanding, it can be oral or written, that it has to do in part with a settlement service that involves a federally-related settlement. Let's talk about this, let's break this down a little bit. The settlement service includes things like appraisals, and credit reports, and title companies, and even realtor work, realtor services. Entitled companies and realtors are all included in the definition of a settlement service provider, and are prohibited from giving or receiving kickbacks or unearned fees. That's what we're talking about here in section 8.
We also have to break down a few more things. We need to understand what a thing of value is. Well, a thing of value includes pretty much anything. It includes, of course, cash payments. Also includes things like tickets to sporting events, tickets to museums, wherever you would give a ticket to. It includes discounts, salaries, commissions, even benefit packages, if you let a realtor be on your credit, your bank's or mortgage company's benefit plan by getting health insurance. That's a thing of value. Fees, duplicate payments, stock, dividends, opportunities, and pretty much anything. I've even seen a RESPA Section 8 violation where a creditor had offered one of their offices to a real estate agent. And that was considered a Section 8 violation because while they were paying rent, they weren't paying as much rent as they would have had to pay across the street. And the difference was only something like 15 or 20% difference, but they called that a kickback and an unearned fee And both the realtor and the financial institution, which was the creditor, received big penalties from this. So this is a very, very big deal.
Now, what is a referral? There's a technical definition for this, of course. It refers to any oral or written and action directed to a person who, this is key here, who has the effect of affirmatively influencing the selection by any person of a provider of a settlement service. So anybody who can influence that referral. For example, let's say I am a lender and I am hosting an educational workshop about different types of credit that are available to home buyers and a realtor comes to me, my friend Troy, comes to me and says, “Hey, I would be happy to sponsor that event for you because that'll be good business for me because I'll get exposure.” Well, if he sponsors that luncheon and pays for the lunches for everybody who's there, what that is, is that's actually a kickback or unearned fee because he's doing that with the expectation that he's going for you. So you need to get some referral business out of that. That is a problem when you have that expectation of a referral.
You have to be very careful in giving referrals on a RESPA Section 8. Now, that said, RESPA Section 8 does permit some things. It permits normal promotional and educational activities. So it does permit some, but there's a catch here that these activities cannot be conditioned on the referral of business and they do not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services. So the key there is that they cannot involve defraying of expenses. Basically, what this means is if you were to have rates on a realtor's open house, you want to have a rate sheet in there, you can't let the realtor print this because that's a cost it would have been yours. You need to print that. If you're doing a joint advertisement with a realtor for whatever reason, you have to split the cost down the line. And that's not just the printing cost that includes design costs and travel costs and anything and everything that's a thing of value and it becomes very, very complicated.
I guess the bottom line here is while it is technically permitted, you have to be very, very careful and take what I say as extreme caution in dealing with any type of joint effort with an appraiser, a realtor, or even a title company.
RESPA Section 8 is one of the highest risk areas and the penalties are huge. Penalties go against both creditors and real estate agents and mortgage companies and individual realtors and lenders. There's personal liability as well. So it's very important that you take Section 8 extremely, extremely very seriously.
That's all I have for you today.