Hi,
Can someone please help???
Our lenders are starting a referral program that any employees who refer
people to our lenders and the loan closes, get a $25 fee from the
bank (like a commission). Are they supposed to include this
$25 charge as a "paid outside closing" cost?
Of course, the CLO wants an answer yesterday!
Thanks a lot.

I have never thought of this. But...the HUD rules indicate:

"The settlement agent shall complete the HUD-1 to itemize all charges imposed upon the Borrower and the Seller by the Lender and all sales commissions, whether to be paid at settlement or outside of settlement, and any other charges which either the Borrower or the Seller will pay for at settlement."

So, I guess I would lean toward yes, report the referral fee as POC.

This is getting really stupid!

Is the customer paying the $25? If not, I don't think it enters into your transaction with the borrower at all - it's an internal bank incentive. Other opinions?

No, the bank is paying the fee, not the borrower.

David, you beat me to the continue button! Do you agree that it's not reportable unless the loan is subject to RESPA? I don't think this is a finance charge.

I'm still struggling over whether it's reportable even in a RESPA transaction. It's not really a sales commission, since it's paid internally to a bank employee.

So, David,
The borrower nor the seller are paying this commission,
I'm still confused... Thanks

David, I guess I have to disagree. Are you stating that anytime a bank has a employee/loan officer/loan processor/underwriter on an incentive program, that any payment to that employee based on that loan has to be included on the HUD-1. I don't think even HUD contemplated including salary/commissions to lender employees??

Sorry David, I edited while you were responding. Didn't mean to confuse the situation - the thoughts are coming in short, unconnected bursts this morning! Too much football yesterday, I guess.

Another thought - assuming that the bank disclosed it's fees on the HUD-1, and that the $25 would be paid from the fees the bank is collecting in the transaction, wouldn't disclosing the $25 separately be duplicate reporting?

We haven't done this, but I don't see this as a cost "imposed" upon the buyer or seller if the bank didn't change its pricing.

If the pricing does change, then it could be considered a finance charge component for any loan.

I also worry about privacy issues in these situations. Referrals are often friends and relatives. The employee then knows if they are or are not credit worthy. These may be facts they have no need to know about.

I never thought about this before, but HUD does require that all charges associated with the mortgage transaction be reported on the settlement statement, whether paid by the borrower, seller or lender. I saw no exemption for referral fees paid to employees.

After reading through the reg. and the other comments so for; (this is also based on my opinion that a referral fee is in fact a sales commission, not the type of sales commission associated with the sale of the property, but with the sale of the loan application, and although HUD’s intent may have been for sales commission to be associated with the sale of the property, I saw nothing that differentiated between the two types of sales commissions that could be associated with the loan transaction. )

1. If the referral fee is being paid from an Application Fee, Processing Fee, etc., then I would opine that the referral fee would not be disclosed as a separate item. As Lestie implied, this would be “double reporting” a charge.

2. If the fee is being expensed by the bank (as in our case we only charge a Doc Prep fee and a Title Examination fee), then I would opine that the referral fee should be disclosed as POC/L. It is in reality a fee paid in association with the loan transaction. I also agree with Lestie that this is not a finance charge because it is not being paid by the borrower.

Now, I would really like to find a good solid reference that would allow not disclosing this referral fee, because, as David said, “This is really getting stupid!”

Thanks all of you! Keep them coming!

I would look to 3500.14 for guidance to indicate that the payment from a bank of a fee to an employee for an internal referral is not a settlement service and therefor would not be subject to reporting on a HUD-1 as relating to a settlement service:

(ix)(A) A payment by an employer to its bona fide employee for the referral of settlement service business to a settlement service provider that has an affiliate relationship with the employer or in which the employer has a direct or beneficial ownership interest of more than 1 percent, if the following conditions are met:
(1) The employee does not perform settlement services in any transaction; and
(2) Before the referral, the employee provides to the person being referred a written disclosure in the format of the Controlled Business Arrangement Disclosure Statement, set forth in appendix D to this part.
(B) For purposes of this paragraph (g)(1)(ix), the marketing of a settlement service or product of an affiliated entity, including the collection and conveyance of information or the taking of an application or order for an affiliated entity, does not constitute the performance of a settlement service.

While this in reality deals with an affiliated business arrangement - why would this be any different if there was no affiliated business arrangement involved????? It is still a referral payment from the bank to it's own employee.

Don't make this worse than it is.

In reply to:

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(B) For purposes of this paragraph (g)(1)(ix), the marketing of a settlement service or product of an affiliated entity, including the collection and conveyance of information or the taking of an application or order for an affiliated entity, does not constitute the performance of a settlement service.

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I'll nominate you for the year's first virtual umbrella drink!

Good find Randy! In case Maria didn't pick up on this, Randy has correctly pointed out that a referral fee to an employee is not a "settlement service." All of the regulations that I quoted above indicate that you must show all SETTLEMENT SERVICES. Since this isn't one, it doesn't need to be listed on the GFE or HUD-1/1A.

Whew! Glad that's over. I wasn't liking my answers.

Yup. This is employee compensation, not a settlement service. By the way, when in doubt, don't ask HUD!

In reply to:

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By the way, when in doubt, don't ask HUD!

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DUH! (sorry couldn't resist)

It's turning into that kind of day!

Just say HUD backwards three time and things will get better!

Hey, that's FUN! And it sounds a lot better than "she sells sea shells." Maybe we can get Congress to try it.

Just don't ask Congress to spell it.

Can't resist this oldie but a goody.

If Pro is the opposite of Con, what is the opposite of Congress???

It's Progress

(didn't mean to have not is the orginal reply. I was thinking that progress is not a by-product of congress)

Does this mean that the employee has to provide a Controlled Business Arrangement Disclosure Statement to the person being referred ????

Thanks rlcarey.