Increased Industry Attention on RESPA Section 8 Leads to Class Action Lawsuit

On April 2, 2024, a putative class action was brought against a wholesale mortgage lender alleging, among other claims, violations of Section 8(a) of the Real Estate Settlement Procedures Act (RESPA).

Unlike conventional mortgage providers that analyze the borrower’s creditworthiness and then provide the mortgage, wholesale mortgage lenders receive mortgage applications from third-party mortgage brokers who handle the client intake process.  In the recently filed putative class action, plaintiffs allege that the defendant violated RESPA Section 8(a) by orchestrating a scheme to corrupt broker independence and capture their mortgage business by misrepresenting to consumers and/or concealing the relationship between brokers and the wholesale mortgage lender and offering inducements or “things of value” to brokers in exchange for referrals of mortgage business.  Plaintiffs also allege that the defendant did not satisfy the Section 8(c)(2) safe harbor exception.

RESPA Section 8(a) prohibits “giving and accepting kickbacks or other things of value pursuant to any agreement or understanding to refer settlement service business…in connection with a federally related mortgage loan.”  RESPA Section 8(c) establishes five exceptions to Section 8(a), including the commonly used Section 8(c)(2), which permits “certain payments and arrangements, including bona fide salary or compensation or other payment for goods or facilities actually furnished, or services actually performed.”

In September 2023, the CFPB  confirmed that it would continue to apply the Department of Housing and Urban Development’s (HUD) RESPA Statement of Policy 1999–1, Regarding Lender Payments to Mortgage Brokers.  This HUD document, originally published in March 1999, provides guidance as to whether payments to mortgage brokers are a RESPA violation.  For a payment from lender to mortgage broker to be deemed compliant, the first question is “whether goods or facilities were actually furnished or services were actually performed for the compensation paid.”  The fact that goods or facilities have been actually furnished or that services have been actually performed by the mortgage broker does not by itself make the payment legal.  The second question is “whether the payments are reasonably related to the value of the goods or facilities that were actually furnished or services that were actually performed.”  If the answer to both of those questions is “yes,” then the payment is legal.  HUD further stated that there are fourteen services which the broker could provide during loan origination.  If the broker provides at least five of the fourteen services, then the first prong is met.  As for the second prong, the broker should get paid no more than “reasonable value” for the services.

In 2023, after a period of relative enforcement dormancy on these issues, the CFPB issued two consent orders alleging RESPA violations.  These were the first instances of RESPA Section 8 enforcement by the CFPB since 2017.