The holiday season has always been one of my most favorite times of the year. There is nothing better than getting to spend a few days off with your friends and family. During the holidays, people become more generous in both the social and business settings. However, if you are a mortgage lender, then you have to use caution when giving or receiving a gift from a realtor or any other settlement service provider also known as a referral source. Some might urge that we must avoid the practice of gift giving in the mortgage lending setting as to ensure we do not violate the provisions of RESPA Section 8.
So therein lies the question – Are gifts and promotions allowed under RESPA Section 8? Well, it depends.
In October of 2020, the CFPB released a series of FAQs to provide further guidance for RESPA Section 8 provisions including guidance on how RESPA Section 8 applies to gifts and promotional activities. Under RESPA Section 8, gifts and promotions generally are “things of value” and therefore could, depending on the circumstances, violate RESPA Section 8. If the gifts or promotion are given or accepted, as part of an agreement or understanding, for referral of business incident to or part of a real estate settlement service involving a federally related mortgage loan, they are clearly prohibited.
For example, if a settlement service provider gives current or potential referral sources, such as a mortgage lender, tickets to attend professional sporting events, trips, restaurant meals, or sponsorship of events (or the opportunity to win any of these items in a drawing or contest) in exchange for referrals as part of an agreement or understanding, such conduct violates RESPA Section 8. Such an agreement or understanding need not be written or oral and can be established by a practice, pattern, or course of conduct. There is no exception to RESPA Section 8 solely based on the value of the gift or promotion. Accordingly, settlement service providers should carefully analyze whether providing gifts or opportunities to win prizes to referral sources could violate the prohibitions under RESPA, but in certain circumstances, gifts or promotions directed to a referral source are not prohibited if they are a “normal promotional or educational activity.”
As discussed by the FAQs released by the CFPB, RESPA allows “normal promotional and educational activities” directed to a referral source if the activities meet two conditions:
- The activities are not conditioned on referral of business; and
- The activities do not involve defraying expenses that otherwise would be incurred by the referral source.
Whether a particular item or activity meets each of these two conditions is a factual question. Factors that are relevant to whether the first condition is met may include the following:
- Whether the item or activity is targeted to referral sources. If an item or activity is targeted narrowly towards prior, ongoing, or future referral sources, this could indicate the item or activity is conditioned on referrals of business.
For example, if a promotional item is provided only to a limited set of settlement service providers who also happen to be current referral sources or an intentionally targeted group of future referral sources, this may suggest that the recipient is receiving the promotional item because of past or future referrals and, therefore, the promotional item may be conditioned on referrals. If, instead, a promotional item is provided to a broader set of recipients, such as the general public or all settlement service providers offering similar services in a given area, then that may indicate that the promotional item is not conditioned on referral of business.
- Another consideration in determining whether the gift or promotional activity is based on the referral of business is determining how often the item or activity is given to the referral source. If a referral source is routinely and frequently provided with an item or included in an activity, and particularly, if that referral source is provided with the item or included in the activity more often than other persons, this could indicate the item or activity is conditioned on referrals from that particular source.
Factors that may be relevant to whether the second condition is met may include the following:
- Whether the item or activity involves a good or service that the referral source would otherwise have to pay for themselves. If, for example, a promotional activity involves paying for mandatory continuing education expenses, certifications, licenses, or other items that the referral source would otherwise need to pay for on their own, the promotional item or activity is more likely to defray expenses. Similarly, if the activity involves paying for the referral source’s office supplies branded with the referral source’s name, contact information, or logo, this is more likely to defray expenses of the referral source. On the other hand, if the activity involves providing the referral source with office supplies featuring the name, contact information, or logo of the entity providing the supplies, this is less likely to defray expenses, since it is unlikely that the referral source would otherwise use its own funds to purchase office supplies featuring the name and information of another entity.
If the particular item or activity does not meet either of these conditions, it is not a “normal promotional or educational activity” meeting the conditions in RESPA. Ultimately, whether a particular item or activity meets the conditions in RESPA for “normal promotional and educational activities” depends on the facts and circumstances.
Let’s take a look at an example –
- A title company hosts a continuing education course for real estate agents who must meet mandatory continuing education requirements to maintain their license. The title company charges a course admission fee equivalent to the fair market value of the course and invites all of the local real estate agents, regardless of their status as referral sources. The real estate agents pay for their own admission to the course.
Under these facts, the activity will meet the conditions for a “normal promotional and educational activity” under Regulation X because 1) the course admission is not provided conditioned on referrals and 2) the course admission fee is the fair market value, meaning the title company is not defraying the real estate agent’s expenses for the course.
Now, let’s slightly change the facts and see how such slight changes can cause these activities to fail to meet the conditions for “normal promotional and educational activity” under RESPA.
For example –
- A title company’s continuing education course that real estate agents use to meet their license requirements, for which the admission fee is waived if the real estate agent makes a specified number of referrals, is likely not a “normal promotional or educational activity” meeting the conditions established in RESPA. This is because the course admission fee waiver is conditioned on referrals to the title company and the fee waiver is defraying the real estate agent’s expenses.
Similarly, if the title company opens the same continuing education course to the public and charges an admission fee, but waives the fee for all real estate agents (regardless of referrals), the activity is considered “normal promotional or educational activity” meeting the conditions established in RESPA.
So, this holiday season, be cautious in the giving and receiving of gifts from settlement service providers as RESPA provisions seem to be a “hot button” as of late for examiners. In recent years, nearly 35% of all reported CFPB mortgage-related enforcement actions were focused on Section 8, and the total penalties imposed reached huge totals. Don’t let a costly mistake ruin your holiday cheer this season.
As always, if you have any questions or would like to discuss the provisions around RESPA Section 8 further, don’t hesitate to reach out to one of our expert advisors on the Temenos Compliance Advisory team. We’re here to relieve the burden of compliance from your institution.