Mortgage Mess

Over the past few years, numerous advisors, independent broker/dealers, and brokers have formed relationships with mortgage lenders to help serve their clients better and pull in some extra cash. But not all of these relationships are on the up and up. As a result, some advisors may be violating Section 8 of the federal Real Estate Settlement Procedures Act (RESPA), exposing themselves to large fines and even imprisonment.

John Jacobs, an attorney with Maddin, Houser, Wartell, Roth & Heller, P.C. in Southfield, Michigan, has been representing mortgage companies for 30 years. He says he knows of quite a few cases where mortgage lenders and advisors are walking a thin line in complying with the law. Mortgage lenders pay fees to some advisors in return for referring clients, he says. Under RESPA, that’s a no-no. Jacobs says he’s gotten numerous phone calls from mortgage companies asking him how to go about compensating advisors for referrals, “and each time, the [lender's current referral] structure poses significant problems.”

RESPA is enforced by the U.S. Department of Housing and Urban Development (HUD). It is a consumer protection statute that “requires that consumers receive disclosures at various times in the transaction and outlaws kickbacks that increase the cost of settlement services,” according to an explanation provided on the RESPA home page (www.hud.gov:80/offices/hsg/sfh/res/respa_hm.cfm).

Indeed, Section 8 of RESPA “prohibits the payment of a referral fee kickback, or ‘thing of value’, for the referral of the mortgage loan,” Jacobs says. “Thing of value” is broadly defined, he says, but usually means trips and gifts other than money. The two exceptions to this prohibition, Jacobs says, are that the mortgage company can pay commissions to its employees, and that the mortgage company “can pay reasonable compensation for substantial services provided.”

Jacobs says HUD has never issued a statement on “what it takes to be an employee” in these types of arrangements. The only decree related to this issue that it has made, he says, is that HUD “is not going to accept a sham.”

What’s a Fee?

“For example, say there’s an arrangement where a mortgage company leases space in a realtor’s office; [HUD] has said, ‘if it’s a real lease, that’s fine.’ But if you’re paying substantially above market value for rent, then you’re paying a referral fee.” Another instance would be “simply referring one mortgage loan a year and being paid a payroll check for it and getting a W-2,” he says. “Without having any other contact with the [mortgage] company, I don’t believe that qualifies as an employee.”

David Peskin, CEO of Vertical Lend, a mortgage lender in Melville, New York, says he knows there are “kickbacks going on” among mortgage lenders and advisors. And not only are advisors and brokers being illegally compensated, he says, but mortgage lenders are sometimes paying “a marketing fee” to the company that the advisor or broker works for. “A mortgage company cannot pay a company to do a loan; they have to pay an individual to act as a loan officer,” Peskin says. It’s legal to pay a “marketing fee” to an advisor or broker “as long it’s not based on the outcome of the loan,” Peskin says. But “a lot of mortgage companies are basing the fee on the outcome.”

An advisor or broker must be an employee of the mortgage company–either full- or part-time–to receive compensation for a referral, Peskin says. That is the way his firm’s program is set up. And the advisor can only do business with one mortgage company at a time.

But another common setup would be illegal: A planner calls a mortgage company and says he’s going to have a client call the lender about a loan. After receiving the call, the lender then goes ahead and processes the loan and sends the advisor a check. “That’s a complete violation of RESPA,” Peskin says. Why? Because “RESPA states that the planner has to participate in the mortgage origination,” adds Jeff Tubbs, a planner with Wealth Management Group in South Lion, Michigan.

Section 8 of RESPA identifies 14 different activities that take place in a mortgage origination; of those 14, the advisor must participate in five. “If there is a [mortgage lending] program in which [an advisor] is getting paid for doing little or nothing, that’s a cause for concern,” says Robert Foregger, COO of Everbank in Jacksonville, Florida, which has a mortgage lending program for advisors. And that includes providing “consulting-type activities,” says planner Tubbs, in which the advisor merely says: “I told my client what a 15-year or 30-year mortgage is,” and that’s it. An advisor or broker must take the client’s mortgage application, fill it out, decide which loan program is best for the client–typical tasks that are performed by a loan officer. However, attorney Jacobs adds that many states, including Michigan, require an advisor or individual broker to be a licensed mortgage broker before performing any of these tasks. “If all you do is take the application and perform the services and you’re paid a fee when you refer that application to the mortgage lender, you must be a licensed mortgage broker under [many] state laws.”