Can you reward referrals on mortgage loans?

ABA Bank Marketing, Sept, 2008 by Carl G. Pry

Times are tough in the mortgage business right now. Loans are harder to come by, and you may be thinking of more creative ways to bring new business into your bank. Let's say you want to offer a reward, maybe $50 cash or a girl card to anyone (customer or otherwise) who refers someone to you who ends up closing a mortgage loan. Can you do this?

The answer to this question is most likely not, but there are exceptions. There are no simple answers in compliance, of course, and this an example of that. The reason you cannot offer this type of incentive is the Real Estate Settlement Procedures Act's (RESPA's) "prohibition against kickbacks and unearned fees." [24 CFR 3500.14] RESPA is a HUD regulation that covers "federally related mortgage loans," [24 CFR 3500.2(b)] which are consumer loans secured by residential real property. These include home purchase loans, refinancings, and home equity loans used for a consumer purpose (such as home improvement or to pay a child's tuition, for example).

RESPA also is the regulation that requires Good Faith Estimates (GFEs) and HUD-1 Settlement Statements be provided, so if you're giving a GFE and HUD-1 to the borrower, you can assume the loan is covered.

The provision at issue here is Section 8 (the section number of the RESPA statute), and it prohibits the giving or receiving of "any fee, kickback or other thing of value pursuant to any agreement or understanding" [24 CFR 3500.14(g)] in connection with a covered loan. This section prohibits unearned fees from being paid to third parties who do no real work on the loan (like the person receiving the reward in the example), which raises the cost of the loan to the borrower.

"Thing of value" is construed very broadly, so in addition to cash rewards or gift cards (which have obvious value), waivers or discounts on bank fees or other breaks given are also considered "things of value." Most anything a person would be happy to receive that has economic value would be covered. The rule restricts only payments made to third parties (meaning someone other than the lender or borrower), so a discount provided by the lender to the borrower is not a problem.

So does that mean you cannot pay any type of fee to a third party? Not at all--RESPA permits payments for "services actually rendered" or performed. [24 CFR 3500.2(1))] This can get complicated and has been the source of more than a few lawsuits over the years. HUD has issued guidance as to what constitutes an allowable payment, with two requirements: (1) the payee must perform sufficient work to deserve a fee, and (2) the fee must be related to the work done.

The problem is that referring a customer to the lender, by itself, is not compensable work in HUD's opinion. The regulation states that you cannot pay or be paid just to refer "settlement service" [24 CFR 3500.2(b)] business (meaning any service provided in connection with the loan, including making the loan itself). The section is entitled, "No referral fees," after all. Therefore you cannot say a reward paid to someone who just refers the customer to you meets either of HUD's requirements for an allowable fee. No work was done (outside of saying "go to this bank for your loan--I'll get something out of it," which HUD says isn't compensable); therefore no fee can be reasonable for no work.

So watch your refer/reward promotions for residential real estate loans. If the value provided is for nothing more than the referral, it's not permitted.

Carl G. Pry, CRCM, is a vice president and compliance manager in consumer risk management for KeyBank, Cleveland. E-mail: Call Carl_G._Pry@KeyBank.com