RESPA: Dealing with Civil Disobedience

RESPA is a complex statute and regulation. It includes both required activities and prohibited activities. The required activities involve providing disclosures - lots of them - at designated times during the process of taking an application through servicing a loan. Because the content and timing rules of RESPA disclosures are not always easy to deal with, compliance does not come naturally. Most banks can be caught at some errors in the RESPA disclosure processes.

In spite of the relatively high violation rate of the disclosure requirements, this is not the real problem area of RESPA. In fact, the dark mushroom cloud looms over the prohibited activities, not the mandated disclosures.

The prohibited activities are not simply prohibited, they are designated as crimes. Thus, violations of the prohibited activities - doing some of the prohibited things - amount to crimes. Indulging in these prohibited activities is much worse than simply not listening to the bank's compliance officer. This amounts to civil disobedience.

The problem for loan officers is that this type of activity - the dealings made illegal by RESPA, not necessarily pure civil disobedience - come naturally. The deals are part of the business. Cutting deals and sharing the take is how many loan officers learned their job. So when the compliance officer says "you can't do that" the loan officers are predisposed to ignore the troublesome griper (a.k.a. the compliance officer.)

The Internet doesn't make this any easier. Linking to Internet sites of settlement service providers may be a useful customer service and helpful to business. But it may also be considered a referral under RESPA. If so, the Internet links could bring down a criminal enforcement action for the injudicious Internet linker.

How much trouble can a loan officer get into? Lots. At Compliance Action, we keep hearing stories about new ways loan officers cook up to violate RESPA. They also cook up ways to avoid telling the compliance manager. This, however, does not magically make the activity legal. It is still illegal and the choice to avoid telling the compliance manager amounts to civil disobedience - at best.

RESPA contains a sweeping prohibition of kickbacks. It also designates a referral as a practice that has no value. Forget the realities of how businesses and business relationships are developed. RESPA prohibits these fees because of the ability to impose costs on customers that are not justified and not fair. So how do we get these points across to loan officers?

Hold a loan officer meeting (don't tell them it is a training session) and discuss current RESPA enforcement trends. Stress the importance of staying within the law. Give specific examples of illegal arrangements. In the training session, open the floor to a discussion of business development. Ask for an unfettered discussion of ways to get loan business. Then discuss how this can be done legally. In this article, we give you some examples to work with.

If you are still having trouble getting through to them, try this. When a bank employee knowingly commits a crime, the bank should file a Suspicious Activity Report. Whether you actually do this or not when a loan officer cooks up a referral deal that RESPA prohibits, the ability to do so could be used as a "management tool" for independent thinking loan officers. Remind them of the possibility. Then send them back to work.

RESPA Risks

Sharing office space with a real estate broker. A market-based rental agreement would pass RESPA's smell test, but any arrangement that is not based on fair market pricing and actual use of (and need for) the property constitutes a kickback.
Sharing Internet space through links to websites. This could be a "thing of value." Evaluate the benefits and reasons of any link. Consider the possibility that it is a kickback.
Paying referral fees. This simply cannot be done. No clever arrangement for compensating for business can withstand RESPA's assumption that the fee is for a referral. Only if there is work done to earn the fee may the fee be paid.
Paying a headhunter for loans made by the loan officer employed. Although the headhunter may not seem like a settlement service provider, the compensation is based on loans made, the headhunter provides loan officers, and this form of compensation wouldn't survive the smell test.
Sharing unearned fees with an outside settlement service provider - even another bank. It is simply a kickback. Go straight to jail.
Before entering any arrangement involving real estate loans, settlement service providers, and settlement services, consider the following questions. If there is any concern about the true answers, don't get into the arrangement.

What is the value of this agreement or arrangement to the bank and to the third party?
What is our reason for entering into this arrangement?
What is the third party's reason for entering into this arrangement?
Does the arrangement give a cost-free benefit to the customer?