Ben Giumarra

So has President Donald Trump slowed CFPB enforcement activity? Not yet. In February we’ve already seen actions against a Virginia pawn shop, a New Jersey company scamming 9/11 and NFL concussion victims, and a $13 million action against Mastercard and UniRush. January saw major actions against Prospect Mortgage, a debt relief law firm, Citi subsidiaries, TCF National Bank, Navient (largest student loan servicer), law firms involved in medical debt collection, TransUnion and Equifax. The CFPB has been busy.

Let’s zoom in on the Prospect Mortgage action for today. This is one of the CFPB’s favorite topics – RESPA Section 8’s “anti-kickback” rule against paying for referrals of mortgage settlement business.

The industry always seems to overreact to these cases, too often putting do-gooders at an unnecessary competitive disadvantage. So before any compliance department puts the kibosh on some legitimate business arrangements, hear me out.

Section 8’s been around since 1974, long before the CFPB. The CFPB just enforces the rule more seriously than past regulators.

The rule is surprisingly anti-capitalistic to non-mortgage professionals. It prohibits compensation (of any kind) for a referral of settlement services related to residential mortgage loans. This would include services provided by lenders, closing agents, title insurance companies and more. How many other industries would prevent salespeople from buying leads?

But while you cannot pay for referrals, paying fair market value for any other products or services is perfectly legitimate. A settlement agent can pay for an advertisement on a real estate broker’s website. A mortgage broker can rent office space in a real estate agent’s building. A mortgage lender can provide promotional materials like t-shirts and coffee mugs to local builders, attorneys, and realtors. You can even pay for “marketing services” as long as this doesn’t cross over into direct one-on-one solicitation (think paying a Realtor to hang your advertising up in his office versus paying a Realtor to convince his clients to use you for a loan).

Now, I know what you’re worrying – the CFPB really aggressive in this area. But here’s the good news: the Prospect enforcement action, like most other CFPB actions on Section 8 so far, involved quite egregious conduct. If this is the type of behavior that catches the CFPB’s attention, most mortgage lenders can rest easy.

Look at the details of what Prospect got caught doing:

Lead agreements: Prospect had agreements with more than 200 referral partners (most real estate agents) to blatantly pay for leads generated by direct solicitation. Some agents received up to $3,000 per month, with at least one company receiving $145,000 over three years. The CFPB found proof of Prospect arriving to hand out $20 bills for each lead provided. Making it all worse, these agreements had exclusivity provisions preventing the agents from sharing the same information with other lenders.

Marketing service agreements: Prospect had agreements with over 120 companies to perform “marketing services,” some receiving up to $20,000 per month. While this might have been okay, the amount companies received was based on the number of referrals provided, making it clear that this was actually payment for referrals.

Desk rental agreements: So this is another potentially legitimate arrangement that Prospect used to actually pay referral fees. The agreements went beyond rented space and required real estate agents to promote Prospect as a “preferred lender” (language to avoid) and “endorse” Prospect’s services. Here again, the amount paid for the desk rental was paid based on the number of referrals the office would generate, not based on fair market value.

Servicer agreements: Prospect also partnered with a mortgage servicer where the servicer’s employees would target and then sell clients on HARP refinancings. Prospect then split the origination proceeds with the servicer and sent the loan right back to them for servicing!

Just pause for that to sink in. You’re an employee at a mortgage servicer. You’re not a licensed loan originator. Nor do you work for a mortgage company. You spend your time on the phone with clients trying to convince them to use another company’s services and you could make thousands of dollars for each transaction. (Also imagine how mad you’d be if you were another company using that mortgage servicer. “I can’t believe all my clients are going with Prospect, those guys are killing me!”)

So in summary, is the CFPB enforcing Section 8 more aggressively than previous regulators? Sure. Are the penalties for non-compliance severe? Yes. But does this mean our sales team can’t take a real estate broker out to lunch? Does it mean we can’t allow our mortgage department to share advertising costs with real estate agents on Zillow or in the newspaper? No and no!

Most mortgage lenders I know are a long way from anything as egregious as what has been cited so far. Compliance costs enough as it is; don’t let over-compliance put your sales team at a competitive disadvantage. And for businesses inclined to criticize the CFPB, this might be one case where CFPB activity only serves to level the playing field.

Ben Giumarra is a risk management consultant with Spillane Consulting. He may be reached at BenGiumarra@SCAPartnering.com or (781) 356-2772.