An arrangement is being considered between a local mortgage company and one of our bank branches. The mortgage company would refer their clients to the bank for a Home Equity Loan and in return the bank would pay the mortgage company a fee (several hundred dollars). We have on several occasions indicated that this is prohibited by RESPA; however, they are still pursuing and since they don't like the answer given by me, they have asked another compliance person for their opinion on how to make this work. My question is, is there a "way around" the referal prohibition? We are being told that all the "other banks" are doing this. We have been told that the mortgage company would not be providing any services but would "close the loan if we needed them to do that".

Are there any suggestions on how this should be handled? And if they end up agreeing to perform additional services for the bank how do we ensure that the fee is justified?

IMO if all the "other banks" are doing it, then all the "other banks" are in violation of RESPA. The only way you could justify paying the mortgage company a fee is if the mortgage company is providing enough services in exchange for the fee. Refer to HUD's policy statement on yield spread premiums for a discussion of the level and kinds of services that should be provided.

I'd call the other bank's and ask if they do it. You can also ask the mortgage company which banks are doing it so you know who to call.

It has been my experience with the exception of one time when a similar situation has come up at my bank the information was bogus or their was a renegade loan officer doing the wrong thing.

The one exception was in a large city and involved mortgage companies and realtors. When I asked my regulator about it they said to report it to HUD because both settlement service providers were violating Section 8, and the mortgage companies primary regulator was HUD. Of course nothing ever happened and to my knowledge the arrangement is still going on. Fortunately, my current bank does not do business in that city.

In my opinion, the only way to get around the violation is to pay a fee for actual work completed. HUD has addressed several (I think 16 or 18) items that constitute work in the lending process for which a creditor can pay for. These include: taking the application, obtaining credit report, ordering appraisal, counseling applicants, etc... You should be able to find this list somewhere on this website. Even than, in my opinion you have to be careful and not tie the payment to closed loans only.

This is only my opinion!

Something happened to my post. Oh well. Without retyping the whole thing, I agree with the other posters and what was left of my post is the penlaties shown below.

(d) Penalties for violations; joint and several liability; treble damages; actions for injunction by Secretary and by State officials; costs and attorney fees; construction of State laws

(1) Any person or persons who violate the provisions of this section shall be fined not more than $10,000 or imprisoned for not more than one year, or both.

(2) Any person or persons who violate the prohibitions or limitations of this section shall be jointly and severally liable to the person or persons charged for the settlement service involved in the violation in an amount equal to three times the amount of any charge paid for such settlement service.

Anon -

RESPA does not prohibit the payment of fees for services actually rendered. If the mortgage company were to provide services beyond the mere act of referral, those services could be compensated. HUD has stated that fees can be shared if the referring party takes the application information (item “A” below) and performs an additional five out of fourteen services associated with real estate loan settlement services. In Statement of Policy 1999-1 HUD identified the following services as those normally performed in the origination of a loan:

A. Taking information from the borrower and filling out the application (or borrower’s worksheet);

B. Analyzing the prospective borrower’s income and debt and pre-qualifying the prospective borrower to determine the maximum mortgage that the prospective borrower can afford;

C. Educating the prospective borrower in the home buying and financing process, advising the borrower about the different types of loan products available, and demonstrating how closing costs and monthly payments could vary under each product;

D. Collecting financial information (tax returns, bank statements) and other related documents that are part of the application process;

E. Initiating/ordering VOEs (verifications of employment) and VODs (verifications of deposit);

F. Initiating/ordering requests for mortgage and other loan verifications;

G. Initiating/ordering appraisals;

H. Initiating/ordering inspections or engineering reports;

I. Providing disclosures (truth in lending, good faith estimate, others) to the borrower;

J. Assisting the borrower in understanding and clearing credit problems;

K. Maintaining regular contact with the borrower, realtors, lender, between application and closing to appraise them of the status of the application and gather any additional information as needed;

L. Ordering legal documents;

M. Determining whether the property was located in a flood zone or ordering such service; and

N. Participating in the loan closing.

There are some additional qualifiers and you can get the Statement at HUD's web site to check them out.

As far as "everyone else is doing it" - why are they pursuing your bank if they could just go to one of the others? As noted above in another post, those reports of others doing it usually cannot be substantiated.

"Everybody else does it" is the oldest line in the book. It is used by the lenders whose dogs ate their homework during their schooldays. First, it isn't an excuse for a violation. Second, it usually turns out not to be true.

Aren't home equity lines outside RESPA?

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Aren't home equity lines outside RESPA?

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No. This is a misconception by a lot of people. HELOCs are subject to RESPA, it's just that by giving the disclosures required by 226.5(b) satisfies the RESPA requirements. See 3500.7(f)

Right. HELOCs are not exempted from RESPA, but the Z disclosures meet the GFE and HUD-1 requirements. As for Section 8 -- it applies with full force.

If HUD's proposal concerning mortgage packages comes out this spring as promised, I think that you could structure a deal involving a referral as long as it's in your (or their) package.