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Forwarding Declined Loan Applications to Mortgage Company

A mortgage company has approached our bank wanting to pay a specific employee a referral fee, if we would forward real estate loan applications we have turned down to them. I do not see how this is a legal process given Section 8 of RESPA's prohibition of referral fees. The only way I can see it would be legal, is if forwarding the application to the mortgage company would not be defined as a settlement service. I think it would be.

Answer by Randy Carey: The mortgage company paying the bank a fee for forwarding declined applications will result in a Section 8 violation, unless the mortgage company is compensating the bank for services performed in putting the application package together. The bank would have to meet the services test as outlined by the HUD Policy Statement 2001-1. I would not recommend forwarding any packages without the express consent of the consumer.


Answer by Andy Zavoina: There is also this 1999 statement describing some fee justification scenarios:

64 FR 10080 - Real Estate Settlement Procedures Act (RESPA) Statement Of Policy 1999-1 Regarding Lender Payments To Mortgage Brokers; Final Rule

In the determination of whether payments from lenders to mortgage brokers are permissible under Section 8 of RESPA, the threshold question is whether there were goods or facilities actually furnished, or services actually performed for the total compensation paid to the mortgage broker. In making the determination of whether compensable services are performed, HUD's letter to the Independent Bankers Association of America, dated February 14, 1995 (IBAA letter) may be useful. In that letter, HUD identified the following services normally performed in the origination of a loan:

(a) Taking information from the borrower and filling out the application;

In a subsequent informal interpretation, dated June 20, 1995, HUD stated that the filling out of a mortgage loan application could be replaced by a comparable activity, such as the filling out of a 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) Participate in the loan closing.

While this list does not exhaust all possible settlement services, and while the advent of computer technology has, in some cases, changed how a broker's settlement services are performed, HUD believes that the letter still represents a generally accurate description of the mortgage origination process. For other services to be acknowledged as compensable under RESPA, they should be identifiable and meaningful services akin to those identified in the IBAA letter including, for example, the operation of a computer loan origination system (CLO) or an automated underwriting system (AUS).

No violation would exist if, in addition to taking the application, the third party performs five or more of the listed compensable services and the fee is reasonable. If the third party is taking the application and performing only the counseling-type services in b, c, d, j and k, HUD would verify that meaningful counseling has occurred rather than steering the customer. Acceptable counseling would give the borrower the opportunity to consider products from at least three different lenders. The counselor would receive the same compensation regardless of which lender's products were selected, and any fee would have to be reasonable for the services performed. The fee could not be based on the amount of loan business referred to the lender.

First published on 2/27/06

First published on 02/27/2006

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