The prohibition of referral fees for settlement service business under Section 8 of RESPA is subject to significant exceptions for certain strategic alliances. In this article, the author describes the prohibition, and then turns to detailed discussions of exceptions for payments for goods and services and affiliated business arrangements. She closes with tips for compliant RESPA strategies.
It has been two years since the D.C. Circuit issued its decision in PHH Corporation, et al. v. Consumer Financial Protection Bureau1 affirming the legal landscape of service arrangements between settlement service providers under the Real Estate Settlement Procedures Act ("RESPA"). It's also been nearly two and a half years since the Consumer Financial Protection Bureau ("CFPB") announced a consent order related to Section 8 of RESPA. As a result of the PHH decision and this lack of recent CFPB enforcement, many settlement service providers, including real estate brokers, mortgage lenders, and title insurance and closing entities, have renewed interest in creating strategic alliances or partnerships between or among companies that refer settlement service business. Interest in these alliances in an inactive enforcement environment can lead companies to push the envelope, but compliance with Section 8 of RESPA is imperative to ensure these strategic alliances do not create unnecessary legal and compliance risk.
This article discusses the referral fee prohibition under Section 8 of RESPA and two popular exceptions under Section 8 that permit certain strategic alliances. In addition, the article provides practical tips based on regulatory guidance to ensure new or existing strategic alliances comply with RESPA.
RESPA REFERRAL FEE PROHIBITION
Congress enacted RESPA in 1974 in response to concerns in the residential real estate and mortgage markets that consumers were paying higher prices to obtain a mortgage loan because of kickback and referral fee arrangements.2 To curb those practices, Section 8(a) of RESPA prohibits any person from giving or receiving a thing of value pursuant to an agreement or understanding in return for the referral of settlement service business in connection with a federally related mortgage loan.3 There are five elements under Section 8(a) that must be present in order for a person to violate RESPA.
First, the real estate transaction must involve a federally related mortgage loan, which essentially includes most first- or subordinate-lien residential mortgage loans.4 If a transaction is, for example, an allcash transaction, or the mortgage loan is obtained by the consumer for a business or commercial purpose, there is no federally related mortgage loan.
Second, a person must make a referral, which the law defines as "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 . . . when such person will pay for such settlement service. . . ."5 Based on this definition, a broad range of communication directed to consumers who will pay for settlement services could be deemed a referral, including, for instance, content on a company's website that touts the benefits of another company's product or service.
Third, the referral of business must involve settlement services. RESPA defines "settlement services" to include a long list of services typically related to the origination of a mortgage loan, like the services of a real estate broker, mortgage origination services of a broker or lender, title insurance services, the closing of a real estate transaction, appraisal services, and hazard insurance.6 Regulation X, which is the regulation implementing RESPA, also includes a catch-all in the definition to include any services for which a buyer or seller is required to pay in connection with a federally
related mortgage loan transaction.7 Thus, if the business that is referred is a service performed in the course of the origination of a mortgage loan and is a service for which a buyer or seller typically pays, the service generally constitutes a "settlement service."
Fourth, a thing of value must be provided in return for the referred settlement service business. RESPA takes a broad view of what constitutes a thing of value to include essentially any consideration. The statute defines a thing of value as "any payment, advance, funds, loan, service, or other consideration."8 Regulation X expands upon this definition to provide a list of specific examples of things of value, including monies, discounts, commissions, duplicate payments of a charge, stock, dividends, the opportunity to participate in a money-making program, increased equity in a parent or subsidiary entity, services of all types at special or free rates, trips, and payment of another person's expenses.9
Fifth, any "thing of value" provided must be pursuant to an agreement or understanding that such thing of value is provided in return for the referral of settlement service business. This agreement or understanding need not be a formal written agreement or even verbalized. Rather, if there is a practice or particular pattern of conduct that suggests a thing of value is provided in connection with referrals of settlement services, the agreement or understanding element of Section 8(a) will be easily established. As articulated in Regulation X, "[w]hen 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."10
If any one of these five elements is not present in an arrangement, there can be no violation of Section 8(a) of RESPA. For example, if a moving company makes cash payments to a real estate broker for the broker's consumer referrals to the moving company, there is no settlement service business being referred and, thus, no violation of Section 8(a) of RESPA. Similarly, if a real estate broker refers its commercial developer-clients (and not consumers) to a title insurance agency for the examination of title and issuance of title insurance policies and the title agency treats the real estate broker to Super Bowl tickets each year, there are no federally related mortgage loans in connection with the developer's commercial real estate transactions, and Section 8 of RESPA is not applicable. Otherwise, if the five elements are present in any referral arrangement related to settlement services and residential mortgage loans, both the party giving the thing of value and the party receiving it have violated Section 8 of RESPA
Footnotes
1 881 F.3d 75 (D.C. Cir. 2018) (en banc).
2 12 U.S.C. § 2601.
3 Id. § 2607(a)
4 Id. § 2602(1).
5 12 C.F.R. § 1024.14(f).
6 12 U.S.C. § 2602(3).
7 12 C.F.R. § 1024.2.
8 12 U.S.C. § 2602(2).
9 12 C.F.R. § 1024.14(d).
10 Id. § 1024.14(e).
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Originally published by The Review of Banking & Financial Services on 11 June, 2020
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