It is not uncommon to see solicitations for business on social media websites — for many industries, social media advertising and digital marketing are common practice. However, such advertisements in the mortgage industry may end up costing the company penalty fees in violation of the Real Estate Settlement Procedures Act of 1974 (RESPA). Section 8 of RESPA, which became effective on June 20, 1975, focuses on prohibitions for kickbacks, fee splitting and unearned fees.
It continues to be a highly enforced provision by the regulators, with their increased effort focused on protecting the consumer. Specifically, this section of the statute prohibits anyone from giving or accepting a fee, kickback or anything of value in exchange for referrals of settlement service business involving a federally related mortgage loan. In addition, RESPA prohibits fee splitting and receiving unearned fees for services not actually performed.
As the original supervisory agency, the Department of Housing and Urban Development administered and enforced RESPA along with Section 8 of the Act until July 21, 2011, when the Consumer Financial Protection Bureau took the reins of enforcement. Once the CFPB took over and became the supervisory entity for Section 8, a few changes occurred. Some changes focused on the logistics of the CFPB and how enforcement is handled, while other changes brought along new rules altogether.
Social Media Addition to RESPA
RESPA Section 8 guidance regarding fee solicitation and kickbacks was supplemented in December 2013 when the Federal Financial Institutions Examination Council issued a Social Media Guidance and the CFPB issued rules to complement the FFIEC’s guidance. With the advent and increasing popularity of social media, it is very easy for financial institutions to attract customers with a Facebook post or Twitter tweet. Since a primary concern by these regulating agencies is consumer protection, the rules and guidance were implemented to address a potential for increased harm to the consumer, along with likely compliance and legal risks that companies could experience as they venture into this new avenue of social media as a means for business generation.
The guidance defines social media as a form of online communication where users can generate and share content through text, audio, video and/or images. It also specifically lists social media sites including Facebook, Google+, Twitter, Flickr, Yelp, YouTube and social media games such as FarmVille and CityVille. The guidance was careful to distinguish stand-alone email and text as not constituting social media.
The CFPB has not just issued a hollow warning with the new rules. The agency has been implementing plans to use social media to track down individuals and companies who have been violating Section 8 via the subject matter of their online social media posts. In fact, there is an entire division housed at the CFPB that has the single task of combing social media sites to monitor what individuals are posting. Regulators are searching for violations by title companies, real estate agents and developers by searching for buzz words, such as “referral” and “referral fee.”
Some companies have loan officers that are posting on social media sites such as Facebook and LinkedIn. These posts are generally advertisements for cash or gift cards in exchange for referrals, with additional monetary compensation upon such referrals leading to the closing of a loan. While this may seem like an innocent ploy to generate business, such fees are not permitted to be paid out or collected for a service that has not yet been performed.
With a simple post online, the loan officer is subjecting himself, the employer or both to a violation of Section 8 of RESPA. This, in turn, can lead to civil and criminal penalties, negative publicity and a damaged reputation for both the individual and the company.
Consequences of Violating Section 8
RESPA Section 8 was created with the intention to help consumers become better shoppers for settlement services and to eliminate kickbacks and fees, which may increase the price of settlement services. The consequences of violating Section 8 include civil and criminal penalties.
Criminal penalties by a person in violation of Section 8 can result in up to one year in prison and a fine not to exceed $10,000. Any person in a civil lawsuit regarding violation of Section 8 is jointly and severally liable to the person charged for the settlement service an amount equal to three times the amount of the charge paid for the service. Individuals have one year to bring a private lawsuit to enforce violations of Section 8. Private lawsuits may be brought in any federal district in which the property is located or the violation occurred. Furthermore, the state attorney general, HUD, or state insurance commissioner may bring an injunctive action to enforce violations of Section 8 within three years of the violation.
Recently, the CFBP took action against two of the nation’s largest banks for illegal mortgage kickbacks. Both institutions were found to have been aware of their loan officers referring homeowners to a now defunct title company in exchange for cash, marketing materials, and consumer information. Collectively, the banks will pay $35.7 million in civil penalties, while the loan officer who generated the largest amount of kickbacks must pay $30,000 in civil penalties.
“These banks allowed their loan officers to focus on their own illegal financial gain rather than on treating consumers fairly. Our action today to address these practices should serve as a warning for all those in the mortgage market,” said CFPB Director Richard Cordray.
A third financial institution was found to have loan officers that participated in this kickback scheme. However, this institution was not subject to an enforcement action because they were proactive in rectifying the situation. Upon discovering what their loan officers were taking part in, the institution terminated them and self-initiated a remediation plan.