On Jan. 31, 2017, the Consumer Financial Protection Bureau (CFPB) filed consent orders against one of the largest independent residential mortgage lenders, two real estate brokers and a mortgage servicer for their roles in an improper “kickback” scheme involving mortgage referrals. The fines here were notable given that the CFPB targeted realtors for accepting payments from the referral arrangements.
Prospect Mortgage, a mortgage lender based in Sherman Oaks, California, was assessed a $3.5 million civil penalty for paying illegal kickbacks. ReMax Gold Coast, based in California, and Keller Williams Mid-Willamette, headquartered in Oregon, are two of the real estate brokers with which Prospect Mortgage had improper marketing service arrangements. The CFPB also took action against a Connecticut-based mortgage servicer for accepting fees from Prospect Mortgage for referring consumers seeking to refinance.
CFPB Director Richard Cordray said in a release, “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.”
To prevent exploitation of consumers, Section 8 of the Real Estate Settlement Procedures Act (RESPA) prohibits making payments or providing kickbacks to anyone, including brokers and agents, in return for referring consumers to particular real estate settlement service providers. This includes mortgage lenders, title insurers and home inspectors. The CFPB determined that each entity violated RESPA § 8 by making or accepting payments for mortgage referrals.
Notably, ReMax Gold Coast will pay $50,000 in civil money penalties and Keller Williams Mid-Willamette will pay $145,000 in disgorgement and $35,000 in penalties.
ReMax Gold Coast and Keller Williams Mid-Willamette
The CFPB determined that ReMax Gold Coast and Keller Williams Mid-Willamette accepted improper referral payments through marketing services agreements (MSAs), lead agreements and desk-license agreements with Prospect Mortgage.
For instance, pursuant to a lead agreement with Prospect Mortgage, Keller Williams Mid-Willamette increased payment amounts to agents who steered a greater number of consumers to Prospect Mortgage in a given month. Keller Williams Mid-Willamette paid $20 per lead when the agent provided one or two leads in a month, $30 per lead for three to five leads, $40 for five to nine leads and $50 per lead for 10 or more leads. The CFPB’s investigation revealed that several agents earned $500 or more in certain months under this arrangement.
The CFPB found that Prospect Mortgage executed an MSA with each company, which served to disguise referral payments as payments for advertising or promotional services. Specifically, Prospect Mortgage engaged in several improper payment arrangements:
- Mortgage referrals: Prospect Mortgage maintained agreements with more than 100 real estate brokers, including ReMax Gold Coast and Keller Williams Mid-Willamette, to deliver mortgage referral payments. Prospect Mortgage tracked each broker’s number of referrals and adjusted MSA payment amounts accordingly.
- Prequalification: Brokers and agents required consumers seeking to purchase a property to prequalify with Prospect Mortgage as part of a purchase agreement, even those who had prequalified with another lender. For example, depending on the home price, Prospect Mortgage paid between $10 and $25 each time it received a prequalification from ReMax Gold Coast – a so-called “write in” tactic used to drive improper referrals.
- Fee splitting: Prospect Mortgage also engaged in illegal fee splitting with a Connecticut-based mortgage servicer that referred consumers looking to refinance to Prospect Mortgage. Prospect Mortgage compensated the servicer for the referrals by evenly splitting the proceeds of the sale of such loans.
The CFPB has not deemed MSAs to be illegal on their face, but has signaled its distaste for the practice by continuing to expose and discontinue kickbacks. This is the first public censure of a realty firm for accepting fees for mortgage referrals.
We will continue to monitor mortgage referral developments affecting the financial services industry.
The consent order filed against ReMax Gold Coast is available at: http://files.consumerfinance.gov/f/documents/201701_cfpb_RGCServices-consent-order.pdf
The consent order filed against Keller Williams Mid-Willamette is available at: http://files.consumerfinance.gov/f/documents/201701_cfpb_Willamette-Legacy-consent-order.pdf
The consent order filed against Prospect Mortgage is available at: http://files.consumerfinance.gov/f/documents/201701_cfpb_ProspectMortgage-consent-order.pdf