Why Haven’t Loan Officers Been Told These Facts?

RESPA – The Revised Guidance on Promotional Activities

IN THE LAST FEW YEARS, the Consumer Financial Protection Bureau (CFPB) suffered several significant setbacks in its novel interpretation of the RESPA Section 8 prohibitions on unearned fees (kickbacks). Specifically, RESPA Section 8 states that (12 USC 2607. (a)) “No person shall give, and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” The CFPB broadly interpreted this prohibition to mean that referrals, in any way, shape, or form in connection with payment for services violate 12 USC 2607(a).

Notable among the CFPB setbacks was the drubbing from the U.S. Court of Appeals, which necessitated that the CFPB walk back its novel Section 8 interpretation and enforcement actions. On January 31, 2018, the U.S. Court of Appeals for the D.C. Circuit ruled that in PHH Corp. v. Consumer Financial Protection Bureau, under RESPA Section 8(c), payments made by one settlement service provider to another do not violate Section 8(a). The Court held that “the basic statutory question in this case is “not a close call,” and that the unambiguous text of RESPA Section 8(c) means that a bona fide payment by one settlement service provider to another does not violate Section 8(a) if the payment is reasonably related to the market value of the goods, services, or facilities provided.”

The Court scolded the CFPB for stretching its RESPA interpretation related to the PHH Corp. Section 8 enforcement action. The Court stated that reasonable payments are bona fide regardless of whether or not referrals were also involved in the transaction. Though the Court’s decision was not unanimous, the majority ruling established a clear need for the CFPB to clarify particular contours of Section 8 compliance.

On October 7, 2020, the CFPB published new Section 8 guidance “to provide more precise rules of the road and promote a culture of compliance.” The CFPB published the new guidance in the form of Frequently Asked Questions (FAQs) on the Real Estate Settlement Procedures Act (RESPA) Section 8 topics. Additionally, the Bureau determined that Compliance Bulletin 2015-05, RESPA Compliance and Marketing Services Agreements, DOES NOT PROVIDE the regulatory clarity needed on how to comply with RESPA and Regulation X and therefore rescinded Compliance Bulletin 2015-05. That Bulletin, combined with numerous 2014-2015 CFPB Section 8 enforcement actions, drove many industry participants away from using MSAs and had a chilling effect on promotional activities.

The Bureau stated that its rescission of the Bulletin “does not mean that MSAs are per se or presumptively legal. Whether a particular MSA violates RESPA Section 8 will depend on specific facts and circumstances, including the details of how the MSA is structured and implemented. MSAs remain subject to scrutiny, and we remain committed to vigorous enforcement of RESPA Section 8.”

The D.C. Circuit Appellate Court ruling on Section 8 did not directly address matters related to promotional activities outside of MSAs. Still, the CFPB found the need to clarify the rules related to gift-giving and other promotions.

Gifts and other promotions play a significant role in MLO’s marketing efforts. A typical compliance overlay stipulates that if the value of the gift is less than $25, the gift is not a thing of value. There is no exception to RESPA Section 8 prohibitions solely based on the value of the gift.

Common examples of a thing of value include:

  • Professional sporting events
  • Trips
  • Restaurant meals
  • Sponsorship of events
  • An opportunity to a valuable prize in a drawing or contest

Regulation X expands on the definition of a thing of value as follows:
A thing of value. 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 (Prohibition against kickbacks and unearned fees) as synonymous with the giving or receiving of any “thing of value” and does not require the transfer of money.

So how can lenders and MLOs use promotions to market their business? Regulation X allows “normal promotional and educational activities” directed to a referral source if the activities meet two conditions or tests.

1.The activities are not conditioned on the referral of business

Regulation X describes patterns that indicate the exchange of a thing of value for a referral. In other words, it may not be so much a single event or occurrence that defines a violation but more of an ongoing practice. For example, is the promotional item or activity targeted more exclusively to referral sources? If an item or activity is targeted narrowly towards prior, ongoing, or future referral sources, this could indicate that the item or activity is conditioned on business referrals. For example, a lender provides a promotional item to a limited group of real estate agents who also happen to be current referral sources or prospects for referral sources. In this case, the promotions exclusivity may suggest that the recipient is receiving the promotional item because of past or future referrals. Thus, the lender’s behavior appears to connect the promotional item to referrals in violation of section 8(a).

In contrast, should a lender offer a promotional item to a broader set of recipients, such as the general public or all settlement service providers offering similar services in a given locality, the nexus between the referral and the promotion is tenuous. In fact, the lender’s broad offering of the promotional item may indicate that it is not conditioned on business referrals or a reward for past referrals. Thus, the nexus of exclusivity and promotional activity appears to be a precursor to section 8 violations.

If exclusivity is a precursor to a Section 8 violation, what might further compound the violation is the frequency of the promotional activity.

How often is the promotional item or activity provided to the referral source? The frequency of the promotion may indicate that the item or activity is conditioned on referrals. For example, suppose a referral source is routinely and frequently provided with an item or included in an activity that excludes non-referral sources. In that case, the promotion’s provider may tie the promotion to referrals. Again, if the referral source is provided with the promotional item more often than other persons, the lender has conditioned the promotional item on referrals.

Next week the Journal expounds on the second Regulation X test against Section 8 prohibited payments.


Behind the Scenes

Loan Servicing, An MLO Wasteland?
Avoid the Appearance of Abandoning Borrowers at Closing
Get Familiar with Regulation X Error Resolution Requirements

Last week’s Journal discussed the particular Servicer responses necessitated by a borrower’s written request for error resolution. The fallout from mishandled servicing errors can include derogatory information about the borrower’s payment history, unnecessary fees, penalties, and even default or foreclosure. Hence, RESPA requires Servicers to promptly act on a “qualified written request” for error resolution. Note that Regulation X enumerates 11 discrete errors. Number 11 is a wildcard. The written request must involve one or more of the errors listed below.

Covered errors under 12 CFR 1024.35(b)

  1. Failure to accept a payment that conforms to any written requirements that the borrower must follow in making payments.
  2. Failure to apply an accepted payment to principal, interest, escrow, or other charges under the terms of the mortgage loan and applicable law.
  3. Failure to credit a payment to a borrower’s mortgage loan account as of the date of receipt, in violation of the prompt crediting provisions.
  4. Failure to pay taxes, insurance premiums, or other charges, including charges that the borrower has voluntarily agreed that you should collect and pay, in a timely manner as required by the escrow provisions.
  5. Imposition of a fee or charge that you lack a reasonable basis to impose upon the borrower, which includes, for example, a late fee for a payment that was not late, a charge you imposed for a service that was not provided, a default property-management fee for borrowers who are not in a delinquency status that would justify the charge, or a charge for force-placed insurance in a circumstance not permitted by the force-placed insurance provisions.
  6. Failure to provide an accurate payoff balance amount upon a borrower’s request within 7 days in violation of § 1026.36(c)(3). (See Section 7 for more on prompt payment crediting and payoff statements.).
  7. Failure to provide accurate information to a borrower regarding loss mitigation options and foreclosure, as required by the early intervention provisions of this rule.
  8. Failure to transfer accurate and timely information relating to the servicing of a borrower’s mortgage loan account to a transferee servicer.
  9. Making the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process in violation of the loss mitigation procedures of this rule.
  10. Moving for foreclosure judgment or order of sale, or conducting a foreclosure sale in violation of the loss mitigation procedures of this rule.
  11. Any other error relating to the servicing of a borrower’s mortgage loan.

How and when is the appropriate time to educate consumers about the Servicer’s obligations to address a consumer’s request for error resolution? The subject is a bit of a downer. Generally, error resolution is a post-closing discussion. Accordingly, the MLO should not introduce the subject before closing unless circumstances dictate a sooner discussion. The applicant has enough on their plate without the MLO introducing matters irrelevant to the loan origination. Of course, timing isn’t everything, but it can make a huge difference in how your customer receives the message of their servicing rights and how the message reflects on you.

A message about error resolution might make for more added value and substantive discourse. Traditional post-closing marketing includes the usual messaging methods—the MLOs newsletter, blog, or website. However, marketing experts advise that your outbound marketing should drive the customer to your website. For that reason, rather than an in-depth written article, better a video presentation accessed from your website where your customer can see your smiling face. Rekindle good feelings with a well-done video presentation on RESPA error resolution requirements.

If you intend to gain business from past customers, find meaningful ways to continue the professional relationship. E.g., articles about moist turkeys or homemade weed killers are great when added to more substantive mortgage-oriented messages.


Tip of the Week

The Prospect Buying Processes
Getting to Third Base

Last week, the Journal began to unpack the importance of the prospect’s emotional state on their subjective analysis of your value proposition. So, instead of first focusing the discourse on the interest rate, fees, and service-level promises, the MLO’s could be more attentive to the buyer’s positive or negative mood. A true statement about the buying process and long a maxim of sales trainers, “people buy on emotions and justify their decisions with logic.” Consequently, your ability to identify your prospect’s emotional state and how to act to positively influence the buyer’s emotional state is key to getting from Third Base to Home.

Emotions are the essential filter your prospect uses to interpret your value proposition. Of course, emotions alone won’t drive your success. Without a doubt, your presentation must recognize and address the buyer’s fundamental needs and maximize the financing solution. In this issue, we bifurcate the loan presentation from the buyer’s emotional state. Indeed, in practice, emotion and the loan presentation are inseparably joined. The Journal hopes to tackle the rudiments of an effective loan presentation at a future date. In this issue, the emphasis is on emotional awareness.

Human relationships often suffer due to death by a thousand cuts. Things that are said or not said have a cumulative effect over time. In the unforgiving buying universe, a lack of emotional awareness has more immediate and discernable consequences; lost sales, financial want, low self-esteem, and job dissatisfaction.

In your buyer’s mind, emotions shape their value perception. When the buyer experiences positive emotions while evaluating your value proposition, their impression of the goodness of your offering increases. In a like manner, buyers experiencing negative emotions will have a challenging time understanding or embracing the goodness of your offer. Therefore assessing your prospect’s emotional state could be just as important as the substance of your mortgage presentation.

Maintaining or building positive emotions is the task at hand. The good and bad news is that emotions are contagious. If your prospect is in a sour mood, that can rub off on you. On the positive side, your projection of “feel good” emotions can elevate and maintain your prospect’s mood.

Here are five simple implementations.

  1. Be enthusiastic. Eeyore and Grumpy fail to get to First Base, let alone home plate. Yet don’t be phony. Instead, find a way to be the most enthusiastic version of yourself you can muster.
  2. Use the word “because” when emphasizing the pros of the presentation. For example, “Major, the reason the 3.125% 0+0 terms is better than the 2.875% 1+0 terms are because you plan to pay the loan off within three years. Because you save $4000 at closing with the 3.125% terms, that is a better option than saving $56 monthly over three years at the lower rate of 2.875%. Because of this tradeoff, the 3.125% terms could save you almost $2000 over the next three years.
  3. Identify the prospect’s apparent struggle with negativity. Gently, with care and sensitivity, broach the prospect’s state of mind with an empathetic response. For example, “Mr. Prospect, I know buying a home can get stressful. I sense you have more than a few things on your mind. Is everything okay? Would it be better to talk another time?” If the prospect knows you are aware of their negative disposition and are concerned about their wellbeing, that simple act of compassion might be sufficient to bump up their emotional state.
  4. Talk about kittens. Help the prospect envision something that makes them feel good. Maybe it’s just getting past all the upheaval, or maybe something particular, like kicking back on the new deck with a frosty beer and a cigar. What about folks that like to entertain? Just think of the housewarming party with everyone gathered around the beautiful kitchen. Imagine the look on your little girl’s face when she starts unpacking the boxes in her new bedroom. How good will it feel having your own bathroom with the jacuzzi tub in the bedroom? The more you know about the prospect’s wants and needs, the more material you can craft to stimulate positive emotions.
  5. Let them know you care about them—people associate love with respect. So treat the prospect with courtesy and kindness. Small acts of love can ignite powerful feelings of peace and wellbeing.

Start with number 5, then add one or two other implementations, and see if a smiling prospect is not a willing buyer. Then, next week, the Journal concludes the buying process series with a trot to home plate.

The current article was substantially inspired by the book, The Science of Selling by David Hoffeld. Do yourself a favor, read the book.


2021 CE – Sneak Preview

Generally speaking, what is the first disclosure MLO’s should provide when meeting a mortgage prospect? If you’re not providing the ESIGN Act disclosure, stakeholders could question the validity of subsequent electronic disclosure.

So swing on over to LoanOfficerSchool.com and sign up for your 2021 CE class. ESIGN Act disclosure is on the menu this year. Because compliance with the law is more than the right thing to do, it’s just good business.