One component of the Act aimed at protecting the borrowers from high costs or services providers with incentives misaligned with the borrower’s interests, prohibits compensation for referrals of a settlement service. Such services can include loan applications, credit verifications, property appraisals, home inspections, various insurances, loan processing, loan underwriting, loan funding, title services and attorney services involving a federally regulated mortgage loan. This prohibited compensation can be in the form of giving or receiving kickbacks (a referral fee or other item of value) as well as charging consumers higher rates based on referrals. However, the aforementioned compensation for services is not prohibited if the payments are to a person of a bona fide salary or compensation for goods or facilities actually furnished for services actually performed.
One common arrangement that comes under scrutiny is desk rentals, where settlement service providers (such as lenders) will lease desks or other office space from real estate brokers (often for more than market value) in exchange for referrals of business. This is considered a kickback when the rental payment is higher than the market value for the desk rental. To avoid noncompliance, lenders should evaluate what the reasonable market value rent is and not charge or pay an amount higher than that reasonable value. Lenders should ensure that rental payments are reasonable, which can factor in secretary services, utilities, phone and office space for the rental. Also, avoid having the rent payments based on the number of rentals made or worse, loan volumes for that lender. Lastly, avoid “per use” fees such as for a conference room – it is best to charge a flat monthly payment for the rental.
Another popular activity is marketing services agreements (“MSAs”). Per the Consumer Financial Protection Bureau (“CFPB”), a regulatory agency charged with overseeing financial products and services that are offered to consumers, these types of agreements can be prohibited. MSAs involve a service provider who offers marketing and advertising services in exchange for referrals of closings and title insurance business (such as a lender, real estate broker, or title company) in a mortgage loan transaction. The CFPB is concerned with these types of transactions since fees should be based on market value of the services and not number of referrals. The concern is that lenders should not steer buyers to a particular service provider (especially an affiliate appraisal company) without offering other competitive options. To avoid noncompliance, fees should be based on market value of the services and not number of referrals. For additional protection, consider having a third party perform a review of the MSAs and document their conclusions as to their fair value and support that those values are reasonable.
What should you do? Consider the following – review and evaluate your current oral and written agreements and assess whether they are in compliance with RESPA and the CFPB rules. At Withum, we are experts in assessing your existing procedures and/or recommending and consulting on implementation of best practices. We would be pleased to discuss this with you how other current developments in accounting and financial reporting would affect your business.
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