Bodman, PLC Mr. Lax, Counsel to Bodman PLC, concentrates his - - PowerPoint PPT Presentation

Presented By:

Howard A. Lax Melissa K. Bridges

Bodman, PLC

Bodman PLC Detroit, Troy, Ann Arbor, Cheboygan, MI Dallas, TX Affiliate Office www.bodmanlaw.com

How to Float Like a Social Media Butterfly Without Getting Stung by the CFP Bee

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• Mr. Lax, Counsel to Bodman PLC, concentrates his

practice in financial institutions consumer compliance and regulatory affairs and real property law. Mr. Lax has written numerous articles on residential mortgage lending issues. Mr. Lax participates in numerous seminars for the American Bankers Association, AllRegs, CMPS Institute, MMLA, the Michigan Bar, and various title insurance and real estate trade groups. Mr. Lax’s articles are found in RESPA News, The Dodd- Frank Update, and Mortgage Compliance Magazine.

• Mr. Lax is rated AV by Martindale Hubbell, and he was

recognized as a “Michigan Super Lawyer” and “Top Lawyer.” Mr. Lax is an Adjunct Professor at Wayne

HOWARD A. LAX Bodman PLC 201 West Big Beaver Road, Suite 500 , Troy, Michigan 48084 Tel: (248) 743-6011 Fax: (248) 743-6002 Email: hlax@bodmanlaw.com

2 State University Law School teaching Banking Law.

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• Ms. Bridges is a frequent speaker on financial

institution regulatory topics and served as the moderator of the Michigan Bankers Association’s Compliance Forum. She has also presented on topics including the SAFE Act, the Bank Secrecy Act, federal and state garnishment rules, the Fair Credit Reporting Act, Truth in Lending credit card rules, mortgage compensation rules, and the implementation of Dodd-Frank Act. Ms. Bridges

MELISSA K. BRIDGES Bodman PLC 229 Court Street , Cheboygan, MI 49721 Tel: (231) 627-8001 Fax: (231) 627-3477 Email: mbridges@bodmanlaw.com

3 also regularly contributes articles on regulatory changes to both state and federal law to the Financial Institutions Compliance Cooperative newsletter. Before joining Bodman, Ms. Bridges worked as a regulatory compliance consultant in charge of conducting Bank Secrecy Act and Regulatory Compliance reviews for financial institutions in Michigan, Florida, and California.

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Today’s Agenda

 The Rules, only the Rules, and nothing but the Rules:

 Trigger terms to avoid;  Required Disclosures when you use a trigger term; and  Disclosures needed whether or not you use a trigger term.

 Building advertising text – what you do not recognize will hurt you.  RESPA and marketing through referral sources.

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CFPB Guidance

The CFPB has stated that whenever you use social media, you must have a risk management program that allows you to identify, measure, monitor, and control the risks related to that activity. The size and complexity will be dependent on your involvement in social media. It should include compliance, technology, information security, legal, human resources, and

• marketing. The CFPB has also stated that you should provide training to

your employees regarding official use. Specifically, you must have an

• versight program for monitoring information posted to social media that

you administer.

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Regulation Z/General Requirements

 Advertisements are “messages inviting, offering, or otherwise announcing

generally to prospective customers the availability of credit transactions.”

 Specific credit terms stated in an ad must be the terms that the creditor

actually is offering or will arrange to offer.

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Regulation Z/Closed End Triggers

 Amount or percentage of any down payment (only in credit sale

transactions).

 Number of payments or period of repayment.

 30 year loan; or  60 fixed monthly payments

 Amount of any payment.

 Payments as low as $365.

 Amount of any finance charge (positive or negative finance charge).

 $99 closing fee; or  $200 off closing costs.

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Regulation Z Advertising: Rate Restrictions

 Only a simple interest rate applied to the unpaid balance may be

advertised.

 Add-on rates are prohibited.  Triggers:

 Rates as low as 4%.  Rates fixed at 3% for the first year.  2% rate on the first $20,000.

 If an ad states a rate of finance charge (an interest rate), the ad must

CLEARLY and CONSPICUOUSLY state:

 The rate as an “annual percentage rate.”  The APR may increase (if applicable).

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Regulation Z/Closed End Disclosures

 If an ad contains a trigger, it must CLEARLY and CONSPICUOUSLY state

the following, as applicable:

 Amount or percentage of the down payment.  Terms of repayment (reflect repayment over full term of loan including any balloon

payment),

 The “annual percentage rate” or “APR” and, if it may increase, that fact.

 Other required disclosures:

 If first lien mortgage, the ad must also state that payments do not include tax/insurance

premiums and the actual payment obligation will be greater (if applicable).

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Regulation Z/Closed End Disclosures

 If ad states a simple annual rate of interest and more than one rate will apply over the

loan’s term, ad must disclose each simple annual interest rate, period of time each applies, and loan’s APR. For variable rate transactions, the rate must be determined based on a reasonably current index and margin and the APR must be “accurate.”

 Equal prominence and close proximity as well clear and conspicuous standards apply.  Not applicable to TV, radio, or “envelopes.”

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Examples of Fixed and ARM Disclosures

 Fixed Rate Loan  1/1 ARM Loan

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Clear and Conspicuous Defined

 The definition of “clear and conspicuous” disclosures is defined by the

CFPB as “clearly and prominently” in CFPB consent orders. Disclosures must not be contradicted by, mitigated by, or inconsistent with anything else in the communication with the consumer.

 The CFPB expects that disclosures and disclaimers will be presented in

the following manner in advertising:

 In textual communications (e.g., printed publications or words displayed on

the screen of an electronic device), the disclosure must be of a type size and location sufficiently noticeable for a reasonable consumer to read and comprehend, in print that contrasts with the background on which it appears;

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Clear and Conspicuous Defined

 In communications disseminated orally or through audible means (e.g.,

radio or streaming audio), the disclosure must be delivered in a volume, speed, and cadence sufficient for a reasonable consumer to hear and comprehend it;

 In communications disseminated through video means (e.g., television or

streaming video), the disclosure must be in writing in a form consistent with the requirements for printed material, and must appear on the screen for a duration sufficient for a reasonable consumer to read and comprehend it;

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Clear and Conspicuous Defined

 In communications made through interactive media such as the Internet, online

services, and software, the disclosure must be unavoidable and presented in a form consistent with the format for printed communications. Furthermore, a disclosure is not clear and conspicuous if a consumer must take any action, such as clicking on a hyperlink or hovering over an icon to see it;

 In communications that contain both audio and visual portions, the disclosure must

be presented simultaneously in both the audio and visual portions of the communication;

 In all instances, the disclosure must be presented before the consumer incurs any

financial obligation, and use diction and syntax that is understandable to a reasonable consumer, in each language in which the representation that requires the disclosure appears.

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Regulation Z/Closed End Restricted Terms

 Don’t use “fixed” when rates and payments can change (unless meet

additional requirements).

 Don’t make misleading comparisons.  Don’t make misleading claims re government endorsements.  Don’t make misleading claims of debt elimination.  Don’t use “counselor” when referring to lender, broker or their employees.  Don’t falsely imply that you are or represent current lender. Specific

disclosures required.

 Watch foreign language ads.

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Regulation Z/HELOC Triggers

 HELOC disclosure triggers are:

 The amount of any finance charge or any other charge;  Circumstances when finance charge is imposed, and an explanation of how

the finance charge is determined;

 Amount of any other charge that may be imposed as part of plan or

explanation of how determined; and

 Payment terms (but only for certain triggered terms).

 Affirmative and negative statements are triggers (e.g. “closing costs no

more than $50”, or “no closing costs”).

 Special rules for TV and radio ads.

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Regulation Z/HELOC Disclosures

 If a trigger is in ad, it must also CLEARLY and CONSPICUOUSLY state:

• 1. Any minimum, fixed, transaction, activity or similar charge that is a finance

charge that could be imposed under the plan.

• 2. Any membership or participation fee that could be imposed under the plan.
• 3. Any period rate that may apply (as APR) and statement rate is variable (if

applicable).

• 4. Any periodic rate used to compute the finance charge (as APR).
• 5. Any fee that is a percentage of credit limit and an estimate of any other fee

imposed for opening the account.

• 6. Maximum APR in variable rate plan.

 Payment terms are triggers for disclosures 4, 5 and 6 only.

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Regulation Z/HELOC Disclosures

 If ad states a promotional rate or promotional payment, it must state:

 Period of time applies.  If promo rate, any APR that will apply under the plan (the APR must be “accurate”).  If promo payment, amounts and time periods of any payments that will apply under the plan. Disclosed

payments amounts must be based on a reasonably current margin and index.  Not applicable to TV, radio, or “envelopes.”

 If ad states an initial APR that is not based on the index and margin used to make later

adjustments, it must state the period such initial rate will be in effect and a reasonably current APR that would have been in effect using the index and margin.

 If ad states any minimum periodic payment and a balloon payment could result if only

the minimum payment is made, ad must state that a balloon payment could result.

 If ad is for a program where a balloon payment could result if only minimum payments

are made and ad states any minimum periodic payment, ad must state that a balloon payment will result and the amount/timing of the balloon payment.

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Regulation Z/ HELOC Disclosures

 Applicable to ads in paper form or on Internet.

 If ad is for loan secured by principal dwelling and states loan may exceed FMV of that

dwelling, the ad must clearly and conspicuously state:

 Interest portion of loan that is greater than FMV is not tax deductible for federal income tax purposes; and  Consumer should consult a tax advisor for further information re the deductibility of interest and charges.

 Don’t make misleading statements regarding tax implications.  Don’t make statements regarding “free money.”  Don’t use “fixed” when interest rate or APR could change, unless include required

disclosures.

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Integrated Disclosure Rule

 A model statement must be included at the top of the front of the first page of a

written estimate of terms or costs specific to a consumer that is provided to a consumer before the consumer receives the LE:

“Your actual rate, payment, and costs could be higher. Get an official Loan Estimate before choosing a loan.” This statement may also be included in ads that cite specific loan costs (e.g. website payment calculator).

 Advertising and other communications with a consumer may not have headings,

content, and format substantially similar to the Loan Estimate or the Closing Disclosure.

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Mortgage Advertising Practices Rule

 Regulation N (MAP Rule) prohibits material misrepresentations,

expressly or by implication, in any commercial communication regarding any term of any mortgage credit product.

 If the least sophisticated person in your audience may be misled by or

misinterpret a statement or image, the advertisement violates the MAP rule.

 Any statement is subject to the Rule (including email footers, social media

posts, and statements from referral sources).

 Any person making a statement is subject to the Rule.  Purely informational publications and business purpose credit are exceptions.

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MAP Rule Specific Prohibitions

 The rule outlaws misrepresentations concerning many specific “basic loan

transaction terms,“ including ancillary costs (e.g. taxes, all insurances, underwriting conditions, occupancy rights, and debt consolidation).

 You might not consider a term to be material, but your opinion does not

count.

 Do not let your gut feeling allow you to approve an advertisement without

scrutiny.

 Consider each item independently from the viewpoint of the uneducated

consumer.

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MAP Rule Specific Prohibitions

 Advertising a false association is illegal. Specific prohibitions include:

 A false claim that the lender or broker is associated with the borrower’s current lender, or the

message is from the current lender.

 Any association (express or implied) with the government or a government agency, entity or

• rganization.

 Any government benefit (watch out for tax benefits).  The loan is endorsed, sponsored by, or affiliated with any government or other program,

including but not limited to the use of formats, symbols, or logos that resemble those of such entity, organization.

 18 USC § 709 prohibits use of a federal banking agency, HUD, the US Mint, or

GSE logos, without authorization. See Mortgagee Letter 2011-17.

 Provide disclosures in the languages used in your advertisements.

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Waivers, Disclaimers, and Records

 Waivers are not effective defenses to regulatory liability.

 A confused consumer cannot waive the spokesperson’s liability for a material

misrepresentation.

 Apologies or making things right for the consumer do not avoid regulatory liability.

 Disclaimers may be used to avoid some allegations of misrepresentation.

 Any disclaimer must be “clear and conspicuous” and in close proximity to the statement it

applies to.

 Fine print at the bottom of a page is no longer a valid disclaimer.  Accurate information in the text of an advertisement does not remedy a misleading headline.

 Keep a sample of all “materially different” communications and supporting materials for

two years after the last use.

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Puffing is Prohibited

 Traditional puffing is prohibited without conspicuous disclaimers:

 “Bad credit, No Problem!”  “Nobody is denied a loan!”  “Consolidate all of your debts!”  “We can lower your interest rate!”  “Our rates are the lowest!”  “No costs, no fees!”  “Get pre-approved in less than one hour."  “Zero down payment or 100% financing.”  “No cash needed for down payment.”

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Questionable Assertions are Illegal

 Advertisements that make false or questionable assertions, or that use

false assumptions, are also prohibited:

 “You are paying too much.”  “Important financial information enclosed.”  “Exclusive rate reduction program.”  “Contact us immediately regarding this notice.”  “Rates as low as 2%.”  “Why rent when your mortgage payment is less?”

 Always have a valid, verifiable basis for your assumptions.

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Examples of Improper Government Associations

Advertisements that look like they are government

approved or sponsored are illegal:

 “Lender sponsored government approved loans.”  “VA Mortgage Center.”  “Contact us immediately regarding this notice.”  “Rates as low as 2%” (only the government lends at this low level).  Advertisements using eagles, or shields and arrows, and other graphics that

look like government logos or landmarks, are improper since they can fool the unsophisticated consumer.

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Examples of Improper Government Associations

 In conjunction with Fannie Mae & Freddie Mac Relief Program we

would like to improve the terms on your present mortgage.

 This implies that the lender is sponsored by or approved by Fannie Mae and Freddie

Mac (seller/servicers are not sponsored or approved by the GSE’s).

 This also implies that the lender represents the interests of Fannie Mae and Freddie

Mac.

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Example of Improper Disclaimer

 Refinance your home at Big Bad Mortgage and we will give you a

$1000 gift card!

 Very Fine Print: “*Receive your Gift Card fifteen days after funding. Limited-time offer.

Offer does not apply to loans under $40,000. Loans of $40,000 to $125,000: receive a $500 Gift

• Card. Loans of $125,000 or more: receive a $1000 Gift Card. All programs are subject to borrower

qualification.”

 How limited is the time period of the offer?  The differentiation based on loan amount and the disqualification of small loans is

subject to redlining claims.

 Do “no-cash-out” loans (e.g. FHA streamline refinance loans) and state housing

finance authority loans qualify for the gift card?

 What other conditions apply that are not stated here?

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Drafting the Text of an Advertisement

 Simple ideas are more complex than they appear. Example:

 Special Program for Big Manufacturing employees only. $200 off your

closing fee, and we will match or beat any estimate.

 What are you missing?

 You want a written estimate from a real lender. “The written estimate that you are

asking us to match or beat must be provided in an official Loan Estimate form approved by the Consumer Financial Protection Bureau, and the Loan Estimate may not have expired as of the date it is presented to us.

 You want to be able to sunset this program. This offer is available only to borrowers

who submit an initial application for a mortgage loan between ____________, 2017 and __________, 2017.

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Drafting the Text of an Advertisement

 You need to disclose material terms to avoid a MAP Rule violation:

 You want to limit the offer to profitable products. “This offer applies only to closed end

30 year and 15 year fixed rate conventional residential mortgage loans that meet underwriting requirements for and qualify for sale to the Federal National Mortgage Association (“Fannie Mae”).

 You want to avoid advertising where you are not licensed. “This offer and the rates and

loans shown below are not available in all states.”

 You want to limit the offer to consumers who might qualify for a loan. “This offer is

available to our best and most credit worthy customers who provide a 20% downpayment and/or are borrowing no more than 80% of the appraised value of the home to be mortgaged.”

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Material Terms are Trigger Terms

 Information included in the advertisement includes TILA trigger terms. You need TILA

disclosures and more information to avoid a MAP Rule violation:

Rates, terms, and fees as of __/__/2017 __ AM EDT for loans secured by single family residential property. Rates and terms below are subject to change without notice. This rate and payment example is based on a $100,000 loan amount, and a $125,000 appraised value and/or purchase price. Other loan amounts are available from $10,000 to $$424,100. These minimum and maximum loan amounts are applicable for Michigan properties, and may be higher in certain states. Ask us about the amount of loan you wish to borrow. The mortgage interest rate shown in the example above is the rate available to our best and most credit worthy customers who provide a 20% downpayment and/or are borrowing no more than 80% of the appraised value of the home to be mortgaged. The interest rate is based upon a variety of assumptions and conditions which include a consumer credit score of at least _____. Your credit score may be higher or lower. Rate, points and the APR that may be offered to you will be based on several factors including, but not limited to, state

• f property location, loan amount, documentation type, loan type, occupancy type, property type, loan to value ratio, your credit history

and your credit score. Your final rate and points may be higher or lower than the terms in the example below based on information relating to these factors, which may be determined after you apply. Your loan's interest rate will depend upon the specific characteristics

• f your loan transaction and your credit history up to the time of closing.

Loan Type – Fixed Rate 15 year loan 30 year loan Interest Rate (APR) ___% (___ % APR) ___% (___ % APR) Number of monthly payments and estimated principal and interest payment amount 180 monthly payments of $_________ 360 monthly payments of $_________

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Disclosures Lead to More Disclosures

 More required TILA disclosures:

 “If the down payment is less than 20% or the loan-to-value ratio is less than 80%, mortgage insurance

will be required and your actual payment obligation will be higher. The payment amount does not include homeowner's insurance, flood insurance (if applicable), or property taxes which must be paid in addition to your loan payment.”

 More information to avoid a MAP rule violation:

 “The interest rate is based upon a variety of assumptions and conditions which include a consumer

credit score of at least _____. Your credit score may be higher or lower. Rate, points and the APR that may be offered to you will be based on several factors including, but not limited to, state of property location, loan amount, documentation type, loan type, occupancy type, property type, loan to value ratio, your credit history and your credit score. Your final rate and points may be higher or lower than the terms in the example below based on information relating to these factors, which may be determined after you apply. Your loan's interest rate will depend upon the specific characteristics of your loan transaction and your credit history up to the time of closing.”

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Other Disclosures

 SAFE Act laws – always include an NMLS number for a named LO.  FHA approved lenders must include the Equal Housing Opportunity logo.  Depository institutions must include the Equal Housing Lender logo.  Samples of state advertising requirements:

 Washington – link to NMLS public access page on web pages.  Multiple States require companies to disclose the type(s) of licenses held, the

name of the licensing agency, and the address of the licensee; do not use the term “immediate approval” “bad credit, no problem” or similar language; do not include any SSN; fax headers must include identifying info.

 Some states require the company’s NMLS ID# in ads.

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Social Media Advertisements - Twitter

 Take a clue from the CFPB Twitter account at https://twitter.com/CFPB :

 Use Twitter to build an image and a brand, not to advertise loan terms;  Use Twitter as an infomercial about publicly available information, but do not

solicit business. Solicitations require disclosures;

 Have statistical evidence to support any statement you make. Do not make

promises that you might not keep or claims you might not satisfy;

 Make sure that your followers are a diverse group – advertising to a narrow

corner of the market will lead to claims of disparate impact in lending; and

 Never assume a marketing company advertisement is compliant – the

marketers do not know state and federal regulatory requirements.

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Social Media Advertisements – Facebook and LinkedIn

 Build brand and reputation, and do not make claims unless you have statistical

proof to back them up.

 Add mandatory disclosures ( , NMLS numbers, contact information, and

link to NMLS public access website, as applicable).

 Follow FTC endorsement rules:

 Disclose any consideration provided for likes and endorsements.  Do not allow overstated or fictitious endorsements, or endorsements from non-customers.  Verify at least annually that each endorsement is still valid.  Do not use endorsements of professionals or organizations unless you have a formal

certification.

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Social Media Advertisements – Text Messaging

 Prior express written consent is needed to call or to send a text message to a cell

phone.

 Consent must specifically state (in writing) that the consumer agrees to receive autodialed

and/or artificial voice/prerecorded telephone calls at a specified number.

 Calls and text messages have the same protection under FCC rules (e.g. do-not-call list

restrictions).

 An existing commercial relationship does not constitute permission to be robocalled or

• texted. If, at some future date, you plan to mine your client list using text messaging or phone

calls, you need to get consent at the time that you originate the loan.

 Consent to be called or texted cannot be a condition of a sale or other commercial

transaction.

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Sponsored Message

The FTC has said that it is going to be cracking down on sponsorships in social

• media. If you are using celebrities or influencers to talk up your brand or if you

hold contents with promotional tie-ins (if you tag us in a photo, you could win!), you may be getting a more increased focus. If you are involved in this type of arrangement, you must “clearly and conspicuously” disclose the material relationship between the brand and the endorser. Contents and sweepstakes rules need to be disclosed. Make sure you use #contest or #sweepstakes, #sweeps in not

• enough. If you are using a celebrity, they must indicate whether they are being

paid for the promotion. The FTC also said that it discourages incentivizing likes

• n your Facebook page. Twitter is not excluded. Make sure you take these #s in

your count. For YouTube, the disclosure must be made at the beginning.

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Robocalls are Illegal

 Calls to cell phones, text messages, etc. require express written consent

that includes contact information from the consumer. Consent may be revoked verbally.

 FCC clarified that any device that can be used to send automated calls is

an auto-dialer and cannot be used without the consumer’s express consent.

 Lenders must scrub lists of phone numbers that have changed ownership.

 One wrong call is permitted – liability attaches to the second call. See King v.

Time Warner Cable, where a NY court awarded $229,000 to a consumer for 163 pre-recorded calls.

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TCPA: Do Not Fax Rule

 Most unsolicited fax advertisements are prohibited by federal and/or state laws.

 An “unsolicited advertisement” under federal law is “any material advertising the

commercial availability or quality of any property, goods, or services which is transmitted to any person without that person’s prior express invitation or permission, in writing or otherwise.”

 There is an exception for an established business relationship (EBR). An EBR is

“a prior or existing relationship formed by a voluntary two-way communication between a person or entity and a business or residential subscriber with or without an exchange of consideration, on the basis of an inquiry, application, purchase or transaction by the business or residential subscriber regarding products or services

• ffered by such person or entity, which relationship has not been previously

terminated by either party.”

 The rule requires businesses with an established business relationship to provide

specified notice and contact information on the fax that allows recipients to “opt-

• ut” of any future faxes from the sender.

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Exception to Do Not Fax Rule

 A fax advertisement may be sent to an EBR customer if the sender also:

 obtains the fax number directly from the recipient, through, for example, an application,

contact information form or membership renewal form.

 obtains the fax number from the recipient’s own directory, advertisement, or site on the

Internet, unless the recipient has noted on such materials that it does not accept unsolicited advertisements at the fax number in question.

 has taken reasonable steps to verify that the recipient consented to have the number listed, if

• btained from a directory or other source of information compiled by a third party.

 includes an opt-out notice.

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Fax Opt-Out Notice Requirements

 The notice must:

 be clear and conspicuous and on the first page of the advertisement state that the

recipient may make a request to the sender not to send any future faxes and that failure to comply with the request within 30 days is unlawful.

 include a telephone number, fax number, and cost-free mechanism (e.g. toll-free

voice or fax number, website address, or email address) to opt-out of faxes. These methods must permit consumers to make opt-out requests 24 hours a day, seven days a week.

 senders who receive a request not to send further faxes to specific number must

honor that request within the shortest reasonable time from the date of the request, not to exceed 30 days. Senders are also prohibited from sending future fax advertisements to the recipient unless the recipient subsequently provides prior express permission to the sender.

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TCPA Civil Liability

 The person or business on whose behalf a fax is sent or whose property,

goods or services are advertised is liable for a violation of the junk fax rules, even if the person or business did not physically send the fax.

 In MIMS vs. Arrow Financial Services, LLC, the Supreme Court decided

that a business can be sued under the Telephone Consumer Protection Act

• f 1991, 47 U. S. C. §227 for sending unsolicited faxes.

 Watch out for fax trolls – companies that buy out rights to sue for violation

• f the rule, and demand $500 in damages per fax sent on behalf of your

company.

 The rule applies to faxes to consumer and commercial phone numbers.  Concurrent state laws also prohibit unsolicited faxes.

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CAN-SPAM Act: Do Not Email

 The CAN-SPAM Act applies to emails with primarily a commercial

• message. It does not apply to messages primarily concerning an existing

transaction with a consumer or business.

 The CAN-SPAM Act prohibits false and misleading email headers,

misleading subject lines, and requires that all advertisements be clearly identified as an advertisement.

 Each email advertisement must include a valid postal address.  Each email advertisement must include a clear and conspicuous

explanation of how the recipient can opt out of getting email from the advertiser in the future.

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Email Opt-Out Notice Requirements

 Each advertisement must include a method of opting out of future email

advertisements by reply email or single web page visit.

 A person opting out must be required to provide only an email address.  The consumer must be allowed 30 days to opt out.  Opt out requests must be implemented within ten business days of receipt.  Email addresses of individuals who opt out cannot be transferred to another

business (except that the email can be sent to a company that manages your

• pt out requests).

 A business is liable for violations by its marketing company.  State laws may impose additional requirements.

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What is an Illegal Kickback?

 Section 8(a) of RESPA prohibits “kickbacks:”

 “No person shall give and no person shall accept any fee, kickback, or thing of value pursuant

to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.”

 Three essential elements of a kickback are:

 A Fee or Thing of Value;  An Agreement or Understanding; and  A Referral.

 No kickback exists under Section 8(a) if any of these three elements is

missing.

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What is an Illegal Kickback?

 Section 8(b) of RESPA prohibits a second form of kickback:

 “No person shall give and no person shall accept any portion, split, or percentage of any

charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.”

 This form of kickback is distinct from Section 8(a):

 A fee for settlement services can only be shared with a person who performs some of the

settlement services.

 The amount of the fee is irrelevant, but the split should reflect the level of work performed

by each person.

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Common Exceptions to Section 8(a) and (b) in Section 8(c)

 Paying a market rate to a referral source for bona fide goods and services.

 The services or goods must be bona fide (they must provide value to the recipient).  The services or goods must be utilized – a lender cannot rent space from a real estate

broker that the lender does not use.

 The amount and rate of the fee must be commensurate with the market rate for

services rendered or the goods provided.

 If a real estate broker sublets an office to a lender, the rent should be based on actual

cost, and should not be marked up. The same is true for desk licenses granted to lenders – the real estate broker should not mark up the price based on loan size.

 If a real estate broker needs additional income, it must provide extra services.  Premium for business opportunities or access to real estate sales persons may be hidden

kickbacks.

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Common Exceptions to Section 8(a) and (b) in Section 8(c)

 Paying a bona fide employee for referring business to his/her employer.  Affiliated business arrangements.  Marketing and educational expenditures that do not defray costs that a

referral source would ordinarily incur.

 Cooperative brokerage agreements among real estate brokers.

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CFPB Theory of RESPA Violation

 Any agreement that results in increased referrals by a party that is receiving

something of value through the agreement is illegal.

 CFPB views the agreement itself as a thing of value – Section 8(c)

exceptions do not apply.

 CFPB rejects everything that HUD did or said, informally or formally.  CFPB does not consider the 3 year limitations period applicable to court

actions to apply in administrative adjudications.

 CFPB uses its authority to punish abusive practices rather than RESPA

penalties.

 The CFPB’s stated policy is to regulate by enforcement rather than spend

the time and effort to write regulations.

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CFPB Theory of RESPA Violation

 In Edwards v. First American Corp., the Court of Appeals accepted the CFPB theory that an

agreement to increase referrals is illegal.

 Edwards claims that First American’s payment for membership interests in title agencies in

return for increased referrals is a kickback.

 First American argued that the amount paid was commensurate with the market value of the

membership interest, citing the “goods and services exception in Section 8(c) of RESPA.

 The Court rejected the argument that the “goods and services” exception applies to sales of

membership interests in title agencies.

 The Court also accepted the CFPB position that “Edwards need only prove the existence of an

exchange involving a referral agreement.”

 The agreement is illegal if one of the purposes is to increase referrals.  Edwards need not show that the amount paid for the membership interest was excessive.

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Marketing Services Agreements

 The CFPB views MSAs as schemes “to evade RESPA’s prohibition on the payment and acceptance

• f kickbacks and referral fees.”

 CFPB Compliance Bulletin 2015-05 describes substantial risks posed by entering into marketing

services agreements (MSA’s).

 “…any agreement that entails exchanging a thing of value for referrals of settlement service business

involving a federally related mortgage loan likely violates RESPA…”

 The parties cannot enter into these agreements for the purpose of increasing referrals – putting “marketing

dollars” into the hands of a referral source to increase referrals is illegal according to the CFPB.

 An agreement that prohibits a referral source from providing marketing services to any competitor is

presumed by the CFPB to be a kickback.

 MSA’s inhibit consumer shopping contrary to purpose of TILA/RESPA.

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The Impact of RESPA on Advertising

 Advertising Agreements fall under the general “goods and services”

exception, provided they are referral neutral:

 A settlement service provider can buy commercially available services from whomever it

wants, so long as the provision of services is not dependent on and does not have a motive to increase referrals.

 The services provided by a referral source must be commercially reasonable.  The fee for goods and services provided by a referral source must be at a rate and amount

comparable to similar services available in the marketplace.

 Services provided by a referral source and fees paid to a referral source should be validated

through market research to prove that no fee is attributable to referrals.

 Success fees are prohibited whether or not the payee is a referral source because success fees

result in a sharing of the settlement service fee when no settlement services are provided (a Section 8(b) violation).

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The Impact of RESPA on Advertising

 Joint advertising plans are permitted by RESPA:

 Flyers, hockey rink business cards, newsletters, and other advertising material may be jointly

produced by a referral source.

 The cost of producing and distributing joint advertising should be split with your referral

source based on the percentage of space each party has in the advertisement.

 Any profit made by a referral source through marking up costs is presumed to be for the

referral of business.

 A referral source may be paid for adding value (e.g. the cost for employees to stuff and mail a

flyer).

 Choosing a referral source for joint advertising should be done on a referral neutral basis and

not for the purpose of increasing referrals.

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The Impact of RESPA on Advertising

 Some of the pitfalls that may violate RESPA are:

 The bundle of services provided by a referral source may include services already

provided as part of referral source’s duties, and payment by the title agent or lender is a double payment that possibly violates Section 8(a) of RESPA;

 Fees are based on the lender’s success;  Services are not provided (or there is no proof of services rendered);  The “services” are not utilized or are under utilized;  There are no commercially reasonable “services.” The only “service” may be allowing

the title agent or lender to talk to the referral source’s clients or to beg referral sources for endorsements or leads; and

 The agreement pays a referral source for refusing to advertise competing settlement

services (CFPB frowns on exclusivity).

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Soliciting Referral Sources

 The CFPB recently fined Prospect Mortgage, Planet Home Lending, and two real

estate brokerages, for violating Section 8(a) of RESPA.

 Prospect Mortgage paid marketing fees to real estate brokers and to Planet Home Mortgage

that were partially based on referrals.

 Consumers who purchased homes through the real estate brokers were pressured to become

pre-qualified through Prospect Mortgage.

 Real estate brokers that received marketing fees shared part of these fees with their real

estate agents to incentivize them to make referrals to Prospect Mortgage.

 The CFPB also found that waiving fees and granting seller credits or other credits only when

consumers obtained a loan from Prospect Mortgage was illegal.

 The CFPB declared that exclusivity clauses in these agreements violated RESPA.

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RESPA – Lessons Learned from Prospect Mortgage

 There is nothing new legally in the Consent Orders with Prospect Mortgage, Planet Home

Lending, and two real estate brokerages.

 You can never provide enough training to employees and vendors, or impose enough oversight,

• n the subject of Section 8 of RESPA.

 Incentive compensation is a driving force that increases revenue, but it will often encourage

illegal action that lead to oversized losses.

 Compliance management programs are often insufficient when success revenue is shared with

vendors.

 There is no way to avoid a fine for illegal behavior, but cooperation with a CFPB investigation

usually results in lesser penalties.

 The CFPB tends to focus its consent orders, and ignore collateral issues, to provide a clear lesson

for the industry.

 The CFPB continues to pick on the “low hanging fruit” in order to make its point.

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Conflict Between RESPA and Fair Lending

 Can a lender subsidize non-profit/charitable housing counseling services

from which they receive referrals?

 The Homeownership Preservation Foundation met with the CFPB regarding

lenders paying counseling fees for customers, a practice previously approved by HUD, and issued a guidance for housing counseling agencies (HCA) on April 12, 2017.

 The guidance, written by the law firm Buckley Sandler, summarizes the statement

read by the CFPB at this meeting and summarizes the limited questions answered by the CFPB.

 Points made by the CFPB are divided into issues related to the wording of

agreements between an HCA and a lender, and actual conduct of the parties.

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RESPA – Marketing Agreement No No’s

 Agreements should not contain an exclusivity provision.  Agreements should include non-exclusivity provisions that expressly allow the

referral source to provide information on multiple lenders and products.

 Agreements should not include provisions requiring the referral source to

include the lender on every list of options provided to a consumer.

 Agreements should not require the referral source to direct a consumer referred

by a lender for counseling back to that same lender once counseling is complete.

 Agreements should not include provisions requiring the referral source to

promote the lender.

 Agreements should not condition the lender’s payments on referrals.

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RESPA – Prohibited Marketing Conduct

 Referral sources should avoid the practice of providing the names or

products of only those lenders with whom the referral source has a funding agreement.

 Referral sources should avoid providing lists of lenders or products that

always list the lenders with whom they have an agreement at the top or more prominently than other lenders or products.

 Referral sources should avoid actively recommending or marketing a

lender.

 Referral sources should work with a consortium of lenders offering

appropriate products for consumers.

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RESPA – Joint Advertising

 Joint advertising is permitted provided that each party pays their fair share for

the cost of advertising.

 HUD’s RESPA FAQ for the industry stated:

• 18. Can a mortgage banker and a real estate broker advertise their services together, for example, on the same

brochure or newspaper advertisement? Nothing in RESPA prevents joint advertising. However, if one party is paying less than a pro-rata share for the brochure or advertisement, there could be a RESPA violation.

 When splitting a print ad or a web page with a referral source, each party must pay a

percentage of the cost based on the percentage of space on the page that each party receives.

 With regard to Zillow type advertising and advertising on real estate broker signs, the

lender or title agency pays a percentage of costs equal to the percentage of square inches the lender or title agency uses.

 The space used for the picture of a home is paid for by the real estate broker since the

broker receives more benefit from the picture than the lender or the title agency.

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Questions?