On January 31, 2017, the CFPB ordered mortgage lender Prospect Mortgage, LLC to pay a $3.5 million civil penalty for violating the anti-kickback provisions of the Real Estate Settlement Procedures Act (RESPA). According to the consent order, Prospect paid illegal kickbacks to two real estate brokers and a mortgage servicer in exchange for mortgage referrals, in violation of RESPA Section 8(a). The consent order also alleged that the mortgage servicer improperly obtained consumer reports in the form of "trigger leads" in violation of the Fair Credit Reporting Act (FCRA). The Bureau concurrently ordered several brokers and a servicer who accepted the kickbacks from Prospect to pay a combined $495,000 in consumer relief, redress, and penalties.
The Bureau's enforcement action against Prospect and the brokers and servicer who referred business to them is the latest action in CFPB anti-kickback enforcement under RESPA, and is the first RESPA action focused on Marketing Services Agreements (MSAs) since October 2015. Then, the CFPB issued Compliance Bulletin 2015-05, which highlighted the "substantial risks" associated with MSAs and the Bureau's view that many MSAs are designed to evade RESPA's prohibition on the payment and acceptance of kickbacks and referral fees.
Here, the Bureau once again focused on the MSAs between the Sherman Oaks, California-based Prospect Mortgage and its brokers and servicer, contending that Prospect used these and other, similar agreements to funnel illegal kickbacks:
Marketing Services Agreements. Under the MSAs, Prospect allegedly paid its brokers not for marketing services, but rather for volume-based referrals. Prospect allegedly monitored the "capture rate" of its brokers, meaning the percentage of an individual broker's total loan volume referred to Prospect, and adjusted that broker's compensation under the MSA accordingly. Prospect also purportedly held monthly meetings with its MSA-brokers to review their capture rates and discuss "missed opportunities" to refer business to Prospect.
Lead Agreements. Similarly, the Bureau alleged that Prospect entered into exclusive "lead agreements" to pay brokers for referrals. Under these agreements, brokers were prohibited from sending prospective mortgage buyers' (leads) contact information to any of Prospect's competitors, and in turn Prospect paid the brokers on a per-lead basis. This exclusivity provision, however, meant that brokers were strongly incentivized to actively refer prospective buyers to Prospect's loan officers. In addition, Prospect is alleged to have encouraged its brokers to pay the brokers' agents amounts commensurate with the volume of referrals sent to Prospect each month.
Desk Licensing Agreements. Furthermore, the Bureau alleged that Prospect entered into "desk licensing" agreements with various brokers. According to the Bureau, these agreements were not just payments for office space but were actually used to pay brokers to endorse Prospect's services and promote Prospect as a "preferred lender." The key issue, however, was that Prospect analyzed the value of the desk licensing agreements in proportion to the number of referrals, rather than tying the cost of the office space to the fair market value of the particular geographic area.
Pre-approval Requirements. The Bureau also alleged RESPA violations stemming from Prospect's alleged practice of contractually requiring (or otherwise encouraging) brokers to insert a pre-approval requirement into the agent-only remarks section of the local multiple listing service. These instructions required a home buyer's listing agent to inform the buyers that they needed to obtain a mortgage pre-approval specifically with a Prospect loan officer before submitting a purchase offer on the property. In turn, the Bureau alleged that this gave Prospect the "inside track" on the mortgage business because much of the pre-approval information carried over into the full mortgage application.
Fee and Credit Pressure on Consumers. Prospect also allegedly pressured the brokers it worked with to "squeeze" consumers into using Prospect over other lenders. In one example, a broker's agent responded to this pressure by conditioning a discount on the sales price (a "seller's credit") on using Prospect for the mortgage. Other agents imposed a daily penalty on buyers for each day beyond the closing date that the loan did not close, but would waive the fee if the buyer used Prospect.
Unlawful Use of Trigger Leads in Violation of FCRA and RESPA. Prospect allegedly entered into agreements with a mortgage servicer where the servicer obtained "trigger leads" from a credit bureau to identify existing customers seeking to refinance. According to the consent order, the servicer obtained consumer reports but did not make firm offers of credit, in violation of FCRA. Rather, it referred those leads exclusively to Prospect in exchange for the servicing rights for new loans and a split of the proceeds when loans were later sold to secondary purchasers.
This recent action shows that the Bureau continues to be interested in aggressively enforcing RESPA's anti-kickback provisions and takes action not just against non-compliant lenders, but also against the brokers and servicers with whom they work. Further, the Bureau is reinforcing its all-inclusive approach with its statutes, often using its "unfair, deceptive, or abusive acts or practices" authority (or, as here, the FCRA) coupled with a RESPA violation. This action likely serves as a reminder to all people who touch mortgage settlement services to revisit their compliance policies and relationships within the mortgage pipeline.