RESPA Section 8 Joint Advertising

The rules surrounding RESPA Section 8 prohibitions against kickbacks and unearned fees have been around for decades.  These rules, however, seem to be easily forgotten and overlooked by lenders and Realtors alike. In fact, the regulators often tend to go through dry spells where they don’t issue any public enforcement actions relating to Section 8 violations, though it is doubtful that such violations don’t continue to occur.  

The reality is that the RESPA Section 8 prohibitions still exist and the we have even seen some recent enforcement actions from the CFPB relating to kickbacks and unearned fees.  That said, I am often amazed at how easily these rules can be forgotten given the fact that consequences for violations of these rules can be substantial.

For example, one topic of discussion I have seen a few times over the last year relates to how RESPA Section 8 relates to joint advertising, such as a shared advertisement between a lender and a Realtor.

Understanding the RESPA Section 8 Prohibition

In simple terms, the Real Estate Settlement Procedures Act (RESPA) prohibits any person from giving or receiving any type of fee, kickback, or any other “thing of value” in relationship to any part of a settlement service involving a federally related mortgage loan.  In addition to this, RESPA prohibits fee splitting when appropriate services are not actually performed.

The reality is that these rules are fairly complex - and strict - meaning that this rule must be taken seriously as the penalties for noncompliance can be significant.

For example, the actual Section 8 Prohibition is found in 1024.14 of Regulation X as follows:

“(b) No referral fees. No person shall give and no person shall accept any fee, kickback or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a settlement service involving a federally related mortgage loan shall be referred to any person. Any referral of a settlement service is not a compensable service, except as set forth in §1024.14(g)(1). A company may not pay any other company or the employees of any other company for the referral of settlement service business.”

Furthermore, Regulation X expands upon this prohibition when it talks about splitting of charges as follows:

“No split of charges except for actual services performed. No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed. A charge by a person for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee and violates this section. The source of the payment does not determine whether or not a service is compensable. Nor may the prohibitions of this part be avoided by creating an arrangement wherein the purchaser of services splits the fee.”

In addition to these rules, it is important to understand that 1024.2 of Regulation X spreads a wide blanket as to which persons are subject to these rules.  Specifically, the Section 8 prohibitions apply when a settlement service is involved. Section 1024.2 of Regulation X provides a large and complex definition of a “settlement service,” which includes services like (but not limited to) loan applications and originations, mortgage broker services, title services, attorney services, documentation preparation, rendering of credit reports and appraisals, rendering of inspections, conducting of settlement by a settlement agent, services involving mortgage insurance, provisions related to insurance (including hazard, flood, casualty or other homeowner’s warranties - and even mortgage life, disability, or other similar insurance), services involving real property taxes, rendering of services by a real estate agent or broker, and any other service for which a settlement service provider requires a borrower or seller to pay.   

Joint Advertising & “Thing of Value”

One of the main challenges in realizing how RESPA Section 8 prohibitions relate to joint advertising is understanding the definition of a “thing of value.”  Section 1024.14(c) of Regulation X explains that a “thing of value” can be almost anything. The rule provides a number of obvious examples such as money, discounts, things and fees, but also includes a number of less obvious examples like the opportunity to participate in a money-making program, discounts of rental rates, or a reduction in credit against an existing obligation.  Furthermore, RESPA enforcement actions have even cited things like allowing a Realtor to participate in a bank’s health care program as a “thing of value.”

The bottom line is that almost anything can be considered a thing of value.

Section 1024.14(d) explains the term “thing of value” this way:

“This term is broadly defined in section 3(2) of RESPA (12 U.S.C. 2602(2)). It includes, without limitation, monies, things, discounts, salaries, commissions, fees, duplicate payments of a charge, stock, dividends, distributions of partnership profits, franchise royalties, credits representing monies that may be paid at a future date, the opportunity to participate in a money-making program, retained or increased earnings, increased equity in a parent or subsidiary entity, special bank deposits or accounts, special or unusual banking terms, services of all types at special or free rates, sales or rentals at special prices or rates, lease or rental payments based in whole or in part on the amount of business referred, trips and payment of another person's expenses, or reduction in credit against an existing obligation. The term “payment” is used throughout §§1024.14 and 1024.15 as synonymous with the giving or receiving of any “thing of value” and does not require transfer of money.”

In relationship to joint advertising between a lender and a Realtor (or any other settlement service provider) it becomes difficult to fully account for every little “thing of value” that could occur in a joint advertisement.  For example, obvious advertising costs would include things like printing costs and fees to purchase ad space. Less obvious “things of value” included in advertising costs, however, could include things like design costs, delivery costs, ad space (such as room on vendor table), labor, and even administration costs associated with posting advertisements on social media.

Again, pretty much anything can be considered a “thing of value” subject to RESPA Section 8 prohibitions, which makes joint advertising arrangements a tricky thing.

Avoiding RESPA Section 8 Violations in Joint Advertising

At this point, you might be thinking that it is probably just easier to forego any joint advertising arrangements that could have potential RESPA Section 8 implications.  

I wouldn’t disagree with you - at all.

The best way to reduce risks (such as huge fines and other penalties) related to RESPA Section 8 Violations in relationship to joint advertising arrangements is to just not do them altogether.  

That said, joint advertising arrangements can technically be completed; through careful consideration of each arrangement and the applicable prohibitions.

In fact, HUD released a number of Frequently Asked Questions in July of 2016 which specifically included a question relating to joint advertising arrangements between a mortgage banker and a Realtor.

From HUD’s July 2016 FAQs:

“18. Can a mortgage banker and a real estate broker advertise their services together, for example, on the same brochure or newspaper advertisement?

Nothing in RESPA prevents joint advertising. However, if one party is paying less than a pro-rata share for the brochure or advertisement, there could be a RESPA violation.”

As you can see, HUD carefully crafted their response to say that violations could occur if one party does not pay their “pro-rata share” of applicable advertising expenses.  Of course, Pro rata is a Latin term meaning "in proportion," implying that something is being distributed or done in equal or fair proportions.

In other words, HUD is saying that lenders must equally distribute applicable expenses in a joint advertising relationship so that neither party receives a “thing of value” which would be considered a kickback or unearned fee subject to RESPA’s Section 8 prohibition.

The challenge with this, of course, is being able to fully document - and justify - that each party paid their “pro-rata share” of applicable expenses.

One possible way to do this, at least in part, would be to have an attorney create a marketing agreement that clearly outlines all of the details of the joint advertisement relationship in attempts to mitigate any risks associated with Section 8.

The bottom line is that yes, RESPA Section 8 does apply to joint advertising arrangements related to settlement service providers.  Therefore, it is important for each financial institution to carefully evaluate any such relationship in order to avoid the potential repercussions of a RESPA Section 8 violation.

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