Question & Answer

Question: Our lending staff has been approached by a mortgage broker who would like to refer loan clients to the bank. He would charge the bank a fee for the referral. Our lenders are excited about the possible increase in business. Are there RESPA problems with this arrangement?

Answer: You bet there can be RESPA problems! There are two principles to take into account. First, RESPA only permits fees for actual services performed. That is a very important concept. The customer must get some value for every payment they are required to make. Second, as HUD interprets RESPA, a referral has no value. Simply referring a customer to a lender has no value and any fee paid for that referral would be a kickback. You may find it useful to remind loan staff that kickbacks are a criminal violation of RESPA. We're not just talking about a citation in an examination report!

There are ways to structure programs that include referrals but any fees must be based on the actual performance of a settlement service, and not on the referral. Thus, a broker who prepares an application and performs tasks such as compiling information and performing verifications may be compensated for that service and the cost passed on to the customer as long as the bank uses the work performed by the broker and does not re-perform those services. In other words, the customer's money has to buy something, and the customer should only buy that service once.

There are always brokers looking for new ways to structure their business and new ways to make money. You need to be alert to the developments and always watchful for regulatory concerns such as RESPA. Encourage your loan staff to bring these ideas to you. It's far better to find out about it before any deals are cut or referral fees paid!

Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 4, 2/96