Administrative and Enforcement Changes
More prevalent than actual amendments or additions to the rules under Section 8, the CFPB implemented a number of changes in the way business is carried out by virtue of the agency enforcement actions. The CFPB is using such enforcement actions to convey to the industry that it means business. A former HUD investigator and fraud examiner commented, “The entire staff of HUD investigators was transferred over to the CFPB and given 20% raises. They were told they have to ‘justify’ their income increase, so they are being very aggressive on the kickback issue. In addition, they have hired more people in this department to investigate complaints and find violations.”
The CFPB is currently paying close attention to the individuals/small players, as well as the larger institutional mortgage companies. With respect to the small players, the CFPB is looking at the loan officer, real estate agent and developer. A common violation that these smaller firms or individuals commit, in addition to possible violations resulting from social media posts, stems from agreements among themselves.
An example of this is where a mortgage company owner is approached by a real estate agent to become an in-house lender, and, in turn, the agent demands a $60,000 set-up fee. This agreement would have allowed for an up-front payment for service not yet rendered, making it a violation of Section 8, and therefore would subject those individuals to fines and penalties.
In reviewing the larger full-service mortgage companies, the agency is reviewing the institutions’ actions, and imposing large fines to set an example.
The biggest enforcement trend that the CFPB is following regards the agreements between institutions and individuals in the mortgage industry. There are generally two types of agreements resulting in violations: lead-generation agreements and marketing service agreement.
A lead-generation agreement consists of just that, paying for leads. While paying for the lead is permitted under RESPA, paying for the results from the lead is not. For instance, a real estate agent can collect basic information (name, address, phone number, etc.) from a consumer and pass it on to a mortgage company. The mortgage company would then pay the real estate company for the lead — perhaps $50 or the current rate in the geographic area in which the lead is generated. What is not permitted, however, is for the mortgage company to first collect the lead, attempt to pre-qualify the consumer, and pay more than the agreed upon amount ($50) if it turns out to be a “better lead.”
Marketing Service Agreements
MSAs consist of agreements between companies in which marketing is provided to help refer business. In these agreements there must be marketing services performed before payment can be made. In addition, the company charging under the marketing service agreement has to prove the value of services, such as the advertising. When compared with lead-generation agreements, these MSAs are a more prominent focus under the CFPB and there is a growing trend of enforcement.
An example of enforcement of MSAs occurred in September 2014, when the CFPB entered into a Consent Order with Lighthouse Title, a Michigan title insurance agency, for entering into an MSA with real estate brokers with the agreement that such brokers would refer closing and title business to Lighthouse Title.
The CFPB found that the MSA made it seem as if the payments would be based upon marketing services that the real estate companies were to provide to Lighthouse Title. However, Lighthouse set the fees it would pay under the agreement to each company, and the fees Lighthouse paid to the real estate brokers was determined, in part, on the number of referrals or potential referrals Lighthouse would receive from those companies.
Under the MSA, this is a violation because the fees paid should have been on the fair value of marketing services actually rendered, rather than based upon the number of referrals or expected referrals they were to receive.
Because of this, the CFPB found that more business was referred to Lighthouse when a business was contracted under an MSA then when there was not such an agreement. Therefore, the CFPB penalized Lighthouse Title as follows:
Civil money penalty in the amount of $200,000
Prohibition of entering into MSAs in the future
Requirement to terminate all existing MSAs
For a five year period, requirement to document all exchanges of things of value worth $5.00 or more with persons in a position to refer business.