There’s a new sheriff in town: CFPB targets mortgage referral fees

Compiled by members of the firm’s Banking Law practice group

Individuals or businesses that refer home-mortgage seekers to mortgage providers should take notice following news of a Consent Order between the Consumer Financial Protection Bureau (CFPB), and a mortgage referrer. Depending on who you are and how you structure the transaction, the CFPB may force you to disgorge any and all profits from such referrals, in addition to stopping you from selling settlements services. This news comes in the wake of the 9th Circuit’s recent holding that a consumer had standing to sue a mortgage-referrer under federal law.

On May 17, 2013, the CFPB ordered a Texas homebuilder to surrender over $100,000 in kickbacks he allegedly received for referring mortgage origination business to Benchmark Bank and Willow Bend Mortgage Company. Pursuant to the order, the homebuilder is also prohibited from engaging in future real estate settlement services, including mortgage origination. A copy of the Consent Order can be found here.

The CFPB alleged that the “kickbacks” were passed through two sham entities: the homebuilder and Benchmark allegedly created and jointly owned Stratford Mortgage Services, which claimed to be a mortgage originator; likewise, the homebuilder and Willow Bend allegedly created and jointly owned PTH Mortgage Company. The CFPB found that both entities served as illegal fronts to facilitate kickbacks in the form of profit distributions.

This recent action by the CFPB shows that it will continue to aggressively take action to protect consumers, doing so against not only banks, but also those making the referrals. As CFPB director Richard Cordray noted, “[k]ickbacks harm consumers by hampering fair market competition and by unnecessarily increasing the costs of getting a mortgage . . . [t]he CFPB will continue to take action against schemes designed to let service providers profit through unscrupulous and illegal business practices.”

Federal law disallows kickbacks for services involving federally-related mortgages under the Real Estate Settlement Procedure Act (RESPA). Amongst other things, RESPA broadly prohibits “any fee, kickback, or thing of value pursuant to any agreement” made between parties concerning mortgage referrals. RESPA was only enforced by the FDIC until recently; however, RESPA was amended with the creation of the CFPB in 2010, which gave the CFPB the power to enforce RESPA as well.

The CFPB’s enforcement action against the service provider under RESPA is important news for individuals or businesses selling financial products for two reasons. First, the safe harbor provided under the law for settlement service providers has been significantly curtailed, as individuals or businesses now face heightened scrutiny when referring a client seeking to purchase a home to a mortgage provider.

Second, while RESPA prescribes penalties of up to $10,000 or a year in prison (or both), in addition to liability to the referred client, the CFPB has broader enforcement power. Here, for example, the Texas homebuilder was ordered to pay the CFPB the full amount he received. The CFRB also prohibited him from selling settlement services for the next five years. The large penalties used in the homebuilder’s case show how any mortgage-referring person or business targeted by the CFPB can be significantly penalized by this new agency, referred to by some in this area as “The Bureau.”

However, there is a shadow over this Consent Order, and other actions taken by the CFPB. This blog has detailed recent challenges to Richard Cordray’s appointment to head the CFPB here, here, and here. Decisions from the United States Courts of Appeals for the Third and District of Columbia Circuits cast doubt on whether President Obama’s recess appointment of Richard Cordray was constitutional. The United States Supreme Court will likely address this issue sometime during its next term starting October 2013. If the Supreme Court decides that President Obama’s recess appointment was unconstitutional, then there will be a great deal of uncertainty regarding the effect of this Consent Order and other actions of the CFPB.

Main takeaways from the CFPB’s Consent Order:

• The FDIC can still fine banks for paying for these referrals—but the FDIC will also inform the CFPB, allowing follow-up against the person or business making such referrals. Moreover, the penalty for the referrer can far exceed whatever penalty the FDIC inflicts upon the bank.
• The CFPB takes a very broad stance on what constitutes a mortgage kickback that is punishable under RESPA. While the law allows the CFPB to create exemptions in the future, businesses referring customers to banks for any home mortgages, regardless of whether it is for purchase money mortgage interests or secondary mortgages, should tread lightly.
• The Cordray appointment dispute will continue to create a shadow of uncertainty over the decision and declarations of the CFPB for the foreseeable future.