RESPA compliance often comes up as an area of concern for real estate licensees, but it’s equally as important to mortgage brokers. As a mortgage broker, you may find yourself in hot water if you take commissions or referral fees.
Here is your mortgage broker guide to RESPA. We’ll take a look at the main risks you need to watch out for and provide you with valuable tips to stay on the right side of the legislation.
What is RESPA?
The Real Estate Settlement Procedures Act (RESPA) was first enacted in the 1970s by the US Department of Housing and Urban Development. It is now governed by the Consumer Financial Protection Bureau. The Act covers the real estate settlement process and associated disclosures. For mortgage brokers, this means ensuring borrowers are fully informed about all lending costs and disclosing any business relationships between the various parties to a transaction. The legislation aims to stop referral fees and kickbacks in the settlement process and to stamp out illegal activity. RESPA applies to federally insured loans. If you are dealing with a transaction that does not involve a federally-insured loan, RESPA penalties will not apply.
RESPA Risks for Mortgage Brokers
Ensure Any Referrals Comply with RESPA
If you’re not a real estate licensee, you cannot make referrals for monetary gain, commissions, gifts, or future business. This is in direct violation of RESPA. Licensees who are not performing work on the transaction are also prohibited from receiving referrals for personal gain. Ideally, mortgage brokers should avoid referring other service providers to minimize risk.
Beware of Preferred Provider Lists
While preferred provider lists are not an explicit violation of RESPA, some experts say it is dangerous territory. These lists can be a sign there’s a marketing services agreement with kickback or referral arrangements in place between service providers. Consumers may also be led to believe they have to use the preferred providers on your list if this is not explained to them fully.
Avoid Any Exclusive Agreements With Other Service Providers
The best way to ensure compliance and avoid a RESPA violation is to actively avoid any exclusive agreements with other service providers. If your client wants your advice on what company to choose, the best possible answer you can give them is to do their own due diligence to decide which provider best suits their needs.
Recognize that Service Discounts Are Considered Referral Fees/Commissions
Taking a discount for services rendered as a ‘reward’ for a referral is not permissible under RESPA. Fees must be at reasonable market rates to compensate for the value of the service. Discounting, in this case, would be considered a referral fee or commission and you want to avoid this.
Ensure Your Gift Policy Complies
If you provide ‘gifts’ to clients as a thank you for choosing you as a mortgage broker, ensure it is clear this is a thank you gift. There should be no expectation or understanding that the client needs to refer future business to you. Any incentive for future referrals is prohibited under section 8 of RESPA.
Avoid Prizes and Incentives for Real Estate Licensees
Mortgage brokers should avoid running contests or competitions to incentivize real estate licensees to refer clients to your company. If you offer prizes, gifts, trips away or any other incentive, this is a violation of RESPA.
What You Can Do*
It is not in violation of RESPA to participate in joint marketing efforts with other service providers. For example, if a mortgage broker and a real estate broker take out an ad in the local newspaper and share the cost. However, each party must pay advertising costs that reflect the fair market value of the advertising. Complications may occur if one party pays more than the other.
You can also have brochures or flyers for other service providers available in your office as long as there is no expectation of referrals or payments/gifts.
*CRES recommends mortgage brokers seek independent legal advice to ensure any activities comply with RESPA before taking action.
Tips to Minimize the Chance of RESPA Non-compliance
Mortgage brokers can follow these tips to minimize the risk of a RESPA compliance issue:
- Be upfront about the cost of your services
- For third-party fees, remember you can only charge what you have to pay. Adding an additional charge is prohibited under RESPA. For example, if you are charging for a credit report and the cost to you is $50, you can only charge the client $50 to recover your costs.
- Always err on the side of disclosures. If you think you might need to disclose something, chances are you should.
- If you have brochures or lists of service providers in your office, explicitly state that the consumer has a choice and they should do their own due diligence to inform their decision.
- Include disclaimers as appropriate
- Obtain legal advice to ensure your business is compliant with RESPA
Protect Your Mortgage Brokering Business
There are considerable fines up to $10,000 and even possible imprisonment for RESPA violations. You may also need to cover court costs and attorney fees if you lose the case. RESPA can be difficult to navigate, and it’s always a good idea to obtain legal advice to ensure your business complies with the Act.
To make it easier for our members, CRES offers free legal advice and access to a team of qualified attorneys with every mortgage broker E&O + ClaimPrevent® policy. We help our members prevent claims before they become costly lawsuits.
Contact the CRES team at 800-880-2747 for a confidential discussion today.
