On January 16, 2014, Director Richard Cordray and the CFPB announced the entry of a Consent Order involving a mortgage lender, Fidelity Mortgage Corporation (FMC), and its President for alleged violations of Section 8 of the Real Estate Settlement Procedures Act (RESPA). Although FMC and its President neither admit nor deny the CFPB's allegations, the Consent Order entered against the company and its President are instructive of potential future actions by the CFPB in connection with purported RESPA violations. Moreover, since the CFPB recently took action under RESPA against two other third parties, a law firm and a home builder, we believe this action signals that the CFPB intends to actively police for RESPA enforcement.
As our readers know, Section 8(a) of RESPA prohibits a person or entity from providing a fee, kickback, or "thing of value" in exchange for a referral of business relating to a real estate settlement service. Regulation X, the implementing regulation of RESPA, further clarifies that any instance where a "thing of value" is "connected in any way with the volume or value of the business referred," such action serves to evidence that the thing of value was provided in exchange for the "referral of business."
According to the Consent Order, a predecessor entity to FMC, Fidelity Financial Mortgage Corporation (FFMC), approached a bank in Missouri with an opportunity whereby the bank would outsource its lending activities to FFMC. In turn, the consent order alleges that FFMC leased an office from the bank at an above-market rate. In the Consent Order, the CFPB alleges that FFMC and its President rejected an office-lease agreement with a flat monthly rental and, instead, demanded that payments be tied to loan volume and the company's purported use of the office. During the term of the office lease, FMC paid monthly rents ranging from $800-$2000, with a monthly average of $1,350, while the fair market rent for comparable space was $600-$900 monthly.
In this instance, it appears that the mortgage lender provided a thing of value (i.e., payments in the form of above-market rents) in exchange for the referral of loans to it by the bank. Above-market rents are a thing of value that the Department of Housing and Urban Development (HUD) previously commented on with respect to RESPA limitations. Specifically, in its 1996 policy statement, HUD concluded that above-market rents could simply be a disguised referral fee. HUD counseled settlement service providers, when establishing office-rental agreements, that fair market rents should be considered from the general market value of the property and not the "special value" that certain office-rental agreements could pose to a settlement service provider.
In connection with the Consent Order, the CFPB ultimately required disgorgement of $27,076 of fees that FMC earned in connection with its relationship with the bank. The CFPB also required a civil money penalty of more than double the disgorgement amount, $54,000.
We strongly encourage financial services companies, including settlement service providers, to evaluate any third party relationships they have to make certain that no RESPA issues exist. To the extent you have questions or require assistance in ensuring that your business practices are RESPA compliant, we are able to assist.