Financial institutions are always contemplating new and innovative marketing plans to further product sales within the organization. This process can often involve incentive payments to employees to encourage cross-selling to existing customers. Let’s take a minute to explore the regulatory implications of this practice.
There are two main considerations when referring for consumer lending products: illegal kickbacks under RESPA and mortgage loan originator compensation under TILA. Under RESPA, a lender is generally prohibited from paying referral fees in connection with a federally related mortgage. However, there is an exemption under 12 C.F.R. 1024.14(g)(1)(vii) that allows an employer to pay referral fees to their own employees when that referral is in connection with a federally related mortgage. RESPA places no limitations on the monetary amount of these referral fees.
The other consideration is the mortgage loan originator (MLO) compensation rules under Reg. Z. These rules prohibit certain types of payments to MLO’s, and also define who is determined to be an MLO. Referring a customer to an MLO is considered an activity of a loan originator, deeming those individuals who are doing the referring subject to the rule, unless they meet the exception outlined in the commentary. The commentary indicates that an employee making a referral to an MLO at the same organization is not considered an activity of a loan originator so long as that employee does not make any sort of assessment of the consumer’s financial characteristics. For example, let’s assume a customer asks a teller for the name and contact information for a loan originator at the financial institution. The teller then asks the customer whether they have any credit issues that might prevent the customer from obtaining a loan. That teller will now be considered a loan originator and any referral payments to this teller will become subject to the MLO compensation rules.
A lender will also want to keep in mind certain cautionary tales of large institutions who have become the subject of media coverage over the last few years due to their uncontrolled incentive programs. These are great examples of what can go wrong with incentive programs that are allowed to operate without the proper controls in place.
For example, a few years ago the CFPB found that a certain large institution created an environment that made it lucrative for fraud and dishonesty to occur, and then were not adequately monitoring the program. In another example, employees would submit applications for credit products in consumer’s names using consumer’s information without their knowledge or consent to obtain the incentive. Not only was this very costly to the bank to the tune of $100M, but individual members of management were assessed millions in penalties and fines as well.
If employees will be referring customers for non-deposit investment products, then the FDIC’s guidance needs to be considered. This guidance states that a financial institution can only pay a one-time, nominal fee per customer referred. Generally, this fee is limited to $5 to $15 dollars and must not be conditioned on whether the referral results in a transaction.
Lastly, there are no federal regulations that strictly prohibit or restrict referral fees in connection with deposit products or commercial loan products. However, even for these types of products, a financial institution will want to make sure there are tight controls in place to monitor for fraud since allowing any sort of incentive program to go unchecked can be disastrous.
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