Citi Non-Agency Deal; CFPB Goes After Affiliate Business Relationships; RESPA & Gifts
What holds the records for the most patents? It sure isn't new printing methods for disclosure documents! Between 1838, when the United States Patent Office opened its doors, and 1996, more than 4,400 mousetrap patents were awarded in dozens of different subclasses, including "Electrocuting and Explosive," "Swinging Striker," "Choking or Squeezing," and 36 others. (And no, these are not CFPB enforcement actions against lenders. Yet.) That's more patents than have been awarded for any other device, according to the Smithsonian Institution's National Museum of American History.
The industry is hoping for some good news from Nationstar Thursday at 9AM EST, which announced last week that its 3rd quarter earnings and business outlook will be reported. The dial-in number for the call is 800-299-9086. "Please use the participant passcode 70733762 to access the live conference call. Please dial in at least five minutes prior to the call to register. The call may also be accessed via an audio webcast available on the Nationstar website. Click on the November 7 'Conference Call' link to access the call."
As a sign of the times, "Raymond James Downgrades Provident Financial Holdings on Dramatic Reduction in Mortgage-Banking Income".
There are plenty of lenders that team up with builders and real estate companies in varying degrees of affiliation - remember that "joint venture" is a forbidden term. But what happens when one real estate agency buys another, and both have in-house lenders? (This particular deal appears to have a decent ending for both sides.) But after announcing two RESPA consent orders in June 2013 targeting affiliated business arrangements ("AfBAs"), the CFPB is again taking aim at AfBAs. In a lawsuit filed in federal district court in Kentucky, the CFPB alleges that a law firm and three of its attorney principals gave impermissible referral fees to owners and managers of real estate and mortgage brokerage companies through profit distributions made by title insurance AfBAs owned by the attorneys and the real estate and mortgage brokerage companies. Because the CFPB alleges these AfBAs were not structured according to RESPA's requirements, the CFPB is seeking to disgorge all monies received by the attorneys related to settlement services provided in connection with referrals, including profit distributions from the AfBAs.
Law firm K&L Gates reports that, "The CFPB's complaint describes an alleged arrangement whereby real estate and mortgage brokerage companies referred consumers to the attorney defendants for closing services. Then, in connection with the purchase of title insurance, the attorneys allegedly referred consumers to the specific AfBA title insurance entity partially owned by the attorneys and the consumers' real estate or mortgage brokers. The CFPB's complaint, however, asserts that these nine AfBAs did not constitute bona fide providers of settlement services and states the following alleged facts in support of this position: the AfBAs were thinly capitalized with funds contributed only by the attorney owners, the AfBAs each contracted with the same employee of the law firm to perform work on behalf of the AfBAs, the AfBAs did not have separate office space or email addresses and telephone numbers, the AfBAs did not advertise themselves to the public, the AfBAs did not perform substantive title insurance work, and an affiliated business disclosure was sometimes provided, but at closing and in a format that did not conform to the model form in the RESPA regulations."
The write-up goes on, and it is not hard to see the potential implications for other affiliated business relationships. "As a result of this arrangement, the CFPB claims the attorneys and real estate and mortgage brokerage companies received substantial profit distributions from the AfBAs that violated RESPA's prohibition on the payment of referral fees. The CFPB also asserts that the law firm received substantial closing fees for the services it provided to consumers referred to it by the real estate and mortgage brokerage companies. The CFPB is seeking to disgorge these profits and other fees from the attorneys and the law firm as part of the lawsuit, as well as enjoin the attorneys from restarting the AfBAs or creating any new AfBAs in the future.
"In addition to reinforcing the CFPB's focus on AfBAs and the importance of creating and operating bona fide AfBAs, the CFPB's complaint raises new questions about how the CFPB is interpreting RESPA and seeking relief. For instance, RESPA grants the CFPB a three-year statute of limitations to pursue violations of Section 8 of RESPA. Here, the CFPB filed the complaint on October 24, 2013, which suggests the CFPB is authorized to seek relief for impermissible activities conducted since late 2010. Yet, the complaint refers to alleged improper activities as far back as 2006. Whether the CFPB intends to seek relief for AfBA activities in 2006 through 2010 and under what legal theory remains to be seen. Moreover, Section 8 of RESPA requires one person to give and one person to receive a thing of value in return for the referral of settlement service business. In this action, the CFPB seeks to disgorge the closing fees earned by the law firm, which were presumably paid by consumers for services performed by the law firm. However, the facts identified in the complaint focus on the structure of the AfBAs and the referrals made by real estate and mortgage brokerage companies. While the CFPB may view the closing fees received by the law firm as substantial, it is unclear from the complaint how the law firm's closing fees amount to impermissible referral fees.
"Each of these issues has the potential to result in significant implications for AfBAs if the CFPB is successful in its apparent broad interpretations of the law and broad relief sought in the complaint. That makes this case one to watch for any persons or companies that own an interest in AfBAs under RESPA. To read the CFPB complaint filed in this case, please refer to the CFPB's press release. To read more about the CFPB's June 2013 RESPA consent orders, please refer to K&L Gates' Legal Insight."
Regarding Saturday's note about the 2013 HOEPA "Small Entity Compliance Guide", Pete Mills with the MBA writes, The HOEPA guide is dated May 2, 2013. Following its publication, the CFPB issued a revision to the original final rule in response to recommendations from MBA and others in the industry that the rule should exclude employee LO comp (among other things). The revision to the rule excluding employee comp was adopted May 29, 2013. It looks like CFPB has not yet updated the HOEPA Compliance Guide to reflect the change."
And Bill Kidwell with IMMAAG writes, "Rob - I could not help but note the uselessness of Guides that grow stale in months and have no proactive updates for those who might depend on them. The cited guide is from April 2013; the LO Comp/P&F was not even finalized at that time. When they did issue the final rule (May 2013, promulgated in June 2013) it changed the information on which the guide was based. So, the info in the guide is wrong."
Bill goes on: "The Bureau addresses below various issues regarding the inclusion of loan originator compensation in points and fees. Specifically, the final rule provides that payments by consumers to mortgage brokers need not be counted as loan originator compensation where such payments already have been included in points and fees as part of the finance charge. In addition, compensation paid by a mortgage broker to its employees need not be included in points and fees. The Bureau also concludes that compensation paid by a creditor to its own loan officers need not be included in points and fees.
"From the final Rule published in the Federal Register in June 2013, 35504 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations: Paragraph 32(b)(1)(ii), 'Loan originator compensation-general. Compensation paid by a consumer or creditor to a loan originator, other than an employee of the creditor, is included in the calculation of points and fees for a transaction, provided that such compensation can be attributed to that particular transaction at the time the interest rate is set. Compensation paid to an employee of a creditor is not included in points and fees. Loan originator compensation includes amounts the loan originator retains and is not dependent on the label or name of any fee imposed in connection with the transaction.'" Thank you Bill!
Continuing on this train of thought, we have less than two months until Christmas, usually a time of giving. But banks, and their employees, have to be careful about giving. RESPA does not allow a bank employee to pay, or give anything of value, to anyone in exchange or in thanksgiving for a referral of "settlement service business." It also does not allow bankers to receive anything of value in exchange for referring someone to them. For the purposes of this, a "settlement service business" is any service provided in connection with a prospective or actual settlement, including, but not limited to, any one or more of the following: anything involving a loan, mortgage brokers, anything related to title services, closing agents, attorneys, appraisers and AMCs, credit report companies, inspectors, insurance agents (hazard, flood homeowner's warranties, etc.) real estate agents. Click here and look under Settlement Service towards the bottom. And a "thing of value" includes monies, things, discounts, salaries, gift cards, royalties, retained or increased earnings, special banking terms, special or free rates, sales or rentals at special prices, etc. Click here and look under letter (d). Here is the link to the primary piece in RESPA for those interested.
But there is some very interesting Q&A associated with this. Q: May a bank employee give a realtor, title agent, insurance agent, etc., a gift because they referred a guest to the bank?
A: No, that is an illegal kickback under RESPA Section 8. The same with, "Q: May a bank employee accept a gift from an insurance agent, realtor, title agent, etc. in exchange for referring someone to the third-party? A bank employee may give a guest a gift when the guest's loan closes, as well as write a thank you note to a realtor, insurance agent, title agent, etc., for referring a guest to the bank. Q: May the bank jointly advertise with a realtor, financial planner, title agent, etc.? A: Yes, but only if each party (bank or other entity) pays for their proportion of the advertisement. Q: May a bank employee take a Realtor to lunch in an effort to market or network with the realtor, or provide refreshments at an open house? Yes. (The refreshments, for example, are being provided to the potential loan applicants, not the realtor.) Q: May the bank provide giveaways of water bottles, pens, mugs, etc. to the general public at a golf tournament or other such event? A: Yes.
Turning to the markets, folks hoping for some good news on the jumbo/non-agency front had some late last week. Citigroup/CitiBank/CitiMortgage (I lose track) is planning its first sale of bonds tied to new non-agency home loans since 2008.
With a lack of "top tier" economic numbers late in the week, the market focused on "second tier" numbers which usually don't push rates much. They are now, and in fact the market activity late in the week (rates moving higher) was blamed on stronger-than-expected manufacturing data. But this is a new week, and new things to push rates higher or lower. Third quarter Gross Domestic Product (GDP), the broadest measure of economic growth, will be released on Thursday, and the October employment report will come out on Friday. But we have a delightful round of other releases, including ISM Services, Factory Orders, Leading Indicators, and the Trade Balance in the first part of the week, and then Core PCE inflation, Personal Income & Consumption, and Consumer Sentiment also will be released on Friday. The 10-yr. closed Friday at a yield of 2.62%, and in the early going is 2.61% and MBS prices are nearly unchanged.
LO compensation...prevent steering...equal pay for equal work...are there equivalents in nature? You bet there are - worth two minutes (and you'll need sound):