The FDIC examiners identified significant consumer compliance issues during its supervisory activities in 2022 according to its March 2023 issue. The Spring 2021 issue of the Consumer Compliance Supervisory Highlights discussed Real Estate Settlement Procedures Act “RESPA” Section 8(a) violations and the difference between paying for a lead (which is generally acceptable) and paying for a referral (which is prohibited). True leads permissible under RESPA are often lists of customer contacts that are not conditioned on the number of closed transactions resulting from the leads, or any other consideration, such as endorsement of the settlement service. While a service may be characterized as a lead generation service, the activity could actually be a referral arrangement depending on the facts and circumstances. If the payment for the lead is in exchange for activity directed to a person that has the effect of affirmatively influencing the consumer to select a particular lender, then it becomes a referral fee. Banks often contract with third parties to provide what are characterized as lead generation services, but in some cases, the FDIC has found that the banks are actually paying for referrals. While the FDIC Supervisory Highlights demonstrate what banking regulators are looking at, it provides a good roadmap for other settlement service providers who are engaging in these types of marketing efforts.
In 2022, the FDIC identified RESPA Section 8(a) violations where a bank contracted with third parties that took steps to identify and contact consumers in order to directly steer and affirmatively influence the consumer’s selection of the bank as the settlement service provider. In some cases, this process involved the third party calling identified consumers and directly connecting and introducing them to a specific mortgage representative on the phone. This process is often referred to as a “warm transfer.” In other cases, the process involved operation of a digital platform that purported to rank lender options based on neutral criteria but where the participating lenders merely rotated in the top spot. Although each case is fact specific, indicators of risk in these arrangements include a third party that does one or more of the following activities:
• Initiates calls directly to consumers to steer them to a particular lender;
• Offers consumers only one lender or will only transfer the consumer to one lender;
• Describes the lender in non-neutral terms such as preferred, skilled, or possessing specialized expertise;
• Receives payment from the lender only if a “warm transfer” occurs; or
• On a consumer-facing digital platform that purports to rank settlement service providers based on objective factors, includes providers that pay to take turns appearing in the top spot in a round robin format.
Payment for activities that go beyond the simple provision of a “lead” may be improper payment for referrals when the activity affirmatively influences the consumer towards the selection of a particular lender.
DCP has observed certain risk-mitigating activities that may assist supervised institutions in complying with RESPA requirements. Illustrative examples include:
• Training staff on RESPA Section 8, including the differences between a permitted lead and an illegal referral (including a warm transfer).
• Understanding the programs that lenders are involved with, how the programs function, and how the cost structure works.
• Developing policies and procedures that provide guidance to comply with regulatory requirements and management’s expectations with regard to lead generation programs.
• Requiring loan officers to annually certify applicable relationships to ensure that the bank is aware of the arrangements used by loan officers to generate loans and that these arrangements have been vetted and controls put in place for associated risks.
• Monitoring lead generation activities regularly to ensure compliance with the bank’s policies and procedures, and regulatory requirements.