As appeared in Banker’s Digest on October 26, 2015
By: Karen Neeley
The CFPB has been very active in pursuing perceived kickbacks in the real estate settlement process. In June, Director Cordray issued a decision in the PHH Corp administrative enforcement appeal. The administrative law judge had imposed a penalty of $6 million. The case involved an alleged kickback relating to mortgage insurance referred to affiliates of the mortgage company. Cordray concluded that the action was not limited in time and pursued all loans closed on or after July 21, 2008 (years before the bureau was created). In addition, he disallowed reliance on a 1997 HUD letter on point. The result was an increase in the penalty to $109 million. This case follows on the heels of a number of other kickback cases decided on an ad hoc basis by the CFPB.
On October 8, 2015 the CFPB issued Compliance Bulletin 2015-05 on RESPA Compliance and Marketing Services Agreements (MSAs). This is not a rule, and so no comments are permitted. As with UDAAP, the CFPB is making law through enforcement proceedings and guidance rather than through formal rulemaking.
Although many of the cases brought by the CFPB have related to insurance services, the bulletin is not limited in its scope. For example, the Bureau notes that it has found many examples of settlement service providers keeping payments without actually performing any contractually-obligated services such as underwriting, processing, and closing services. In one case, a title company entered into unwritten agreements with individual loan officers to defray their marketing expenses and to provide leads. Then the loan officers sent referrals to the title company. Other cases involved other marketing services that were alleged not performed in exchange for the fees paid.
The bulletin notes that the “Bureau has found that many MSAs necessarily involve substantial legal and regulatory risk for the parties to the agreement…” A more careful consideration of legal and compliance risk arising from MSAs is recommended by the CFPB. Whistle blower activity continues to grow and is encouraged by the CFPB.
The timing on this bulletin could not be worse. Many community banks have already exited residential mortgage lending due to the rigidity of the QM rules and ability to repay standard. Those who are toughing it out have seriously reevaluated their programs due to the compliance nightmare posed by TRID (Truth in Lending/RESPA Integrated Disclosures). One obvious solution to the bank that wanted to continue providing residential mortgage loans was to enter into an MSA with a mortgage company or larger institution. The Compliance Bulletin pours cold water on that option.
Nonetheless, a properly drafted and carefully monitored MSA with a quality mortgage lender can still be a viable option. But there must be a rigorous due diligence review of the third party with whom the bank contracts. The board should carefully evaluate all risks before entering into such an arrangement. Most significantly, the bank must carefully and fully perform the services it agrees to provide in exchange for its fee. Finally, the program should be monitored and evaluated from time to time to make sure that compliance is still on course.
The bulletin notes, and Cordray states in his decision, that these MSA arrangements result in higher cost and less ability to shop for the consumer. My concern as an unabashed supporter of community banking is that the true cost of these moves by the CFPB will be in reduced credit availability in rural communities and to marginal borrowers. Meanwhile, clearly regulatory compliance costs for community banks are now higher. And while I don’t have a degree in economics, I strongly suspect that higher costs will ultimately mean higher prices on loans.