RESPA: Controlled Compensation?

Beginning October 7, 1996, HUD's new rules restricting compensation to employees take effect. The old regulation permitted banks to compensate employees who referred customers to an affiliate as long as the bank paid the compensation and the affiliate did not pass the compensation back to the employer bank.

HUD's recent rulemaking narrows this permission. HUD now takes the position that employees that provide settlement services may not be compensated for referrals. However, employees who do not provide any settlement services may be compensated for referrals as long as the employee provided the required notice before making the referral.

As a practical matter, this position will only affect banks that compensate employees for making referrals. The most common such situation is referral of customers to an affiliate which makes mortgages. Small banks that have no affiliate lending relationships may be unaffected by the new rule. However, the effect on banks with mortgage lending affiliates may be far reaching and devious. The rule places several limita-tions on referrals. First, before making any referral, the banker must provide the customer with a controlled business referral notice, and ask the customer to read and sign it. The customer's signature acknowledges that they have read and understood the notice. After getting the customer's signature on the notice, the banker may make the referral.

Complying with this rule will be difficult because, in this case, compliance will be bad customer service. Usually, the referral arises because the customer is asking for information the banker is likely to have. The customer doesn't want to read and sign notices before getting an answer to a simple question.

The second limitation is how the bank may or may not motivate employees to provide this information to customers. Essentially the rules allows the bank to compensate employees who have nothing to do with lending but prohibits compensation to employees who do.

Bank employees who have no connection with federally related mortgage loans (most loans secured by a 1-4 family dwelling) may be compensated for referrals to an affiliate as long as the compensation comes from the bank and is not passed back in any way from the affiliate.

Bank employees who are involved in lending may not be compensated in any way for making referrals. HUD's reasoning for this is that the customer is more likely to place trust in the expertise of a lender and therefore more likely to be influenced by the recommendation instead of shopping for the most favorably priced service.

The list of employees who may be compensated include tellers, non-lending platform staff, and branch managers that do not make loans or take loan applications. Taking actions to facilitate the consumer's application process, such as providing forms and taking a limited amount of information in preparation for an appointment do not rise to the level of providing a settlement service.

Employees that may not be compensated include any bank staff that make dwelling-secured loans. Any bank lending staff that take applications for products such as home equity lines of credit, secured home improvement loans, or specific types of mortgages are barred from any referral compensation.

ACTION STEPS

Review your bank's compensation plan for incentive compensation. Determine whether any employees can receive incentives for referrals to an affiliate or controlled business.
Review the job responsibilities of all branch staff. Identify which jobs include providing settlement services. Prepare a list of these positions and notify your human resources department that staff in these positions cannot be compensated for referring customers to a mortgage lending affiliate or controlled business.
Brief management on the impact and scope of the new requirement. Include information on the number and type of jobs and compensation affected within the bank.
If you have controlled business arrangements with companies that make federally related mortgage loans, take appropriate steps to advise them of RESPA's restrictions. If appropriate, initiate a procedures review for referring customers.
Advise your audit department and provide them with information about the rule. Agree whether audit or compliance has lead responsibility for this audit.