Federal regulators are slapping a California-based lender with a $3.5 million dollar fine for what they call an illegal kickback scheme. They also ordered two brokers and a mortgage servicing company to pay almost a half million dollars in fines for accepting those kickbacks in exchange for illegal referrals.
The Consumer Financial Protection Bureau says Prospect Mortgage used a variety of methods to pay brokers for referrals from 2011 through 2016. It appears the primary method involved Marketing Service Agreements.
Those are supposed to be used to pay for advertising or promotional services. But, the CFPB says the MSAs were used to hide customer referral payments. It says Prospect would track the number of referrals by an individual broker and then adjust the amount of money it would pay that broker for marketing services. A Keller Williams broker out of Corvallis, Oregon was fined $180,000 for accepting these kinds of payments.
The kickbacks are a violation of the Real Estate Settlement Procedures Act or RESPA. The law was enacted in 1974 to protect consumers against biased advice from brokers during the purchase of a home. It covers any kind of service that consumers might need including title insurance, appraisals, inspections, and mortgages.
The idea behind the law is that buyers often rely on their agents to help them through a complicated process. And brokers are supposed to make recommendations based on a consumer’s best interest. When brokers are paid for their referrals, they would likely be working for their own best interest, and not their clients.
Regulators say Prospect also used other methods, including being “written in” to the listing agreement. That means prospective buyers would need to get pre-approved for a loan by Prospect before their offers would be considered by sellers — even if they were already pre-approved by another lender. A Re/Max broker out of Ventura, California, was fined $50,000 for allegedly including that requirement in its listings.
The last alleged violator was mortgage servicing firm Planet Home Lending LLC.
The CFPB says that Planet Home would refer clients interested in refinancing to Prospect Mortgage. Any proceeds from that refinancing deal would be split between the two companies. Prospect would also send the mortgage servicing rights back to Planet Home.
In addition to violating RESPA with the split fee arrangement, regulators say Planet Home violated the Fair Credit Reporting Act by ordering “trigger leads” from a major credit reporting agency. These leads would provide basic contact information for consumers trying to refinance their homes. Planet Home would then encourage them to go with Prospect for their refinancing needs.
The CFPB says this was an illegal use of credit reports because Planet was not a lender. It was a mortgage servicing company that could not provide consumers with loans. The fine against Planet Home — $265,000.
All four companies agreed to “consent orders” which means they will pay the fines without admitting any guilt. CFPB Director Richard Cordray said: “We will hold both sides of these improper arrangements accountable for breaking the law, which skews the real estate market to the disadvantage of consumers and honest businesses.”
As for Prospect, it announced last July that it would discontinue the use of marketing service agreements due to regulatory issues. That announcement came after regulators fined several other companies for their use of MSAs including Wells Fargo and JPMorgan Chase. Prospect said it planned to terminate its MSA program at the end of the third quarter.
Prospect’s President of National Lending, Doug Long, said: “Given the uncertainty surrounding the use of MSAs, Prospect has made the decision to discontinue marketing activities that depend on these agreements.” He says: “This decision has no impact on our continuing efforts and commitment to deliver the highest level of value and service to our customers and clients.”
In response to the regulatory action, Prospect said in an emailed statement to Inman News: “Under Prospect Mortgage’s new leadership team, the company has rebuilt its legal, regulatory and compliance practice.” It says: “(the) settlement with the CFPB regarding alleged origination practices initiated under the prior management team, closes an important chapter in the company’s history.”
In November, Prospect announced that it was selling its operating assets to national mortgage lender HomeBridge. That acquisition was recently completed.
In an interview with the National Real Estate Post, Executive Vice President Rick Floyd says they did not buy the company — only the operating assets. He said the CFPB audit and the fines stay with Prospect. He said there’s never a guarantee against a rogue loan officer who might do something illegal, but he says that HomeBridge is focusing attention on compliance.
With the combined assets, HomeBridge says it has become one of the 10 largest non-bank mortgage lenders in the nation. It says it Prospect added 500 mortgage loan originators to its team who did $8.4 billion dollar in loans last year. Homebridge says it now has 900 loan officers at 250 branch locations in 35 states. It says its servicing portfolio totaled $17 billion as of January of this year.
The regulatory action against Prospect, two brokers, and a loan servicing company raises further questions about brokers who had MSA’s with Prospect. The CFPB says there were hundreds of them and indicated that the MSA’s were in whole or at least in part, illegal. Will those brokers also get fined? We haven’t heard yet.
Floyd of HomeBridge told the Post: “Those who continue to do them and think they are too small to ever get noticed hopefully this will get their attention and everyone will take note.” He says: “My advice as a long term guy in the mortgage industry business I’d highly advise everyone to play by the rules.”
In California, the Bureau of Real Estate and California law allow a licensed real state brokerage to pay a “finder fee” to an unlicensed person as long as that person was not soliciting on half of the brokerage. It only allows the unlicensed person to make an introduction to a buyer or a seller, but cannot be involved in any negotiations in the real estate transaction.
Some states also allow a broker -to-broker fee, meaning that if a buyer wishes to purchase a property in a state in which their broker is unlicensed, their broker can refer the buyer to another broker who is licensed in that state and receive a referral fee. But not all states allow this.
As always, be sure you understand the laws before paying or receiving referral fees.
Disclaimer: The information provided on this page is for educational purposes only. Real Wealth Network makes no warranty or representation as to the accuracy, completeness or reliability of this information. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Real Wealth Network be liable to you or anyone else for damage stemming from the use or misuse of this information.