Referral Fees, Steering, and Borrower Misrepresentation
Renee, an MLO, is working with a first-time buyer whose offer is $8,000 over the buyer's preapproval. The listing agent, Tasha, tells Renee that the buyer can 'make it work' if Renee uses a higher appraised value from Tasha's preferred appraiser and charges the buyer a 1% 'processing fee' paid to Tasha's marketing company. Tasha also offers to send Renee three future buyers if Renee steers this buyer to Tasha's affiliated title company. Separately, the buyer asks Renee to state on the application that he receives $1,500 per month in rental income from a room he rents occasionally, although there is no lease. Renee's compensation is paid by the lender, and her company has a marketing services agreement with Tasha's company.
1. Analyze Tasha's proposal under RESPA Section 8 and ethical origination standards.
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Tasha's proposal contains multiple red flags. Paying a 1% fee to Tasha's marketing company in exchange for the referral of this buyer is a thing of value for a referral, which RESPA Section 8 prohibits unless it fits a bona fide marketing services arrangement with fair market value compensation for actual services and no referral-based payment. A per-loan payment tied to closed loans is especially risky. Steering the buyer to Tasha's affiliated title company in exchange for future buyers is also a referral-fee arrangement. Renee should refuse the arrangement, document the request, and review the existing marketing services agreement to confirm it is not a disguised kickback. She should not use Tasha's preferred appraiser to influence value.
2. How should Renee respond to the buyer's request to state $1,500 per month in rental income?
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Renee must refuse. The application must reflect the borrower's actual income and liabilities. Occasional rental of a room without a lease may not be acceptable qualifying income, and stating $1,500 per month would be a misrepresentation on a federally related mortgage application. Renee should explain what documentation would be required if the income is real, such as a lease, proof of receipt, and tax returns. If the income cannot be documented, it should not be used. Renee should document the borrower's request and her refusal in the file, because allowing false income could expose both the borrower and the MLO to fraud liability.
3. What disclosures and controls should Renee's company have in place for these relationships?
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The company should require a written affiliated business arrangement disclosure if it refers the buyer to an affiliated title company, and the disclosure must state the relationship and that the buyer is not required to use the affiliate. The marketing services agreement with Tasha's company must be reviewed for fair market value, actual services, and no referral-based compensation. The company should have a written anti-kickback policy, a complaint log, and file documentation of referral arrangements. Renee should escalate Tasha's proposal to compliance and management. The company should also monitor for appraiser influence and ensure appraisals are ordered independently. These controls protect against RESPA, fraud, and UDAAP exposure.