Now, it’s more important than ever for lenders to continually monitor performance with any type of arrangement that involves a referral source because the Federal Deposit Insurance Corp. (FDIC) is becoming more involved in RESPA enforcement, Franzen & Salzano President Loretta Salzano told RESPA News.

“The FDIC warned they were going to be looking at RESPA Section 8,” Salzano said. “They were even telling some banks the last time they had their routine exam, `We’re going to be giving this a closer look next time.’

“It seems some of the examiners are taking an ultra-conservative approach. I think our clients – which are relatively small banks - are going to have to push back and demonstrate how their activities comply with the exceptions in RESPA for marketing, lead sharing and normal promotional activities.”

`Smoking gun’ no longer necessary

Section 8(a) of RESPA prohibits giving or accepting a thing of value for the referral of settlement service involving a federally related mortgage loan. According to the statute, the CFPB, the secretary of the Department of Housing and Urban Development, or the attorney general or insurance commissioner of any state may bring an action to enjoin violations of this section.

However, the FDIC may become directly involved in a RESPA enforcement action when they have direct oversight of the bank.

Salzano said so far, there have been no recent public FDIC RESPA enforcement actions. However, she has seen an increase in focus on RESPA in routine compliance exams.

“It isn’t targeted. It’s just routine. But these banks have never received this degree of scrutiny when it comes to their arrangements involving real estate professionals,” she said.

“In our experience, in the past, unless there was a smoking gun, (the FDIC) wouldn’t really dig in. Sometimes the exam would focus on the higher-priced MSAs and co-marketing arrangements but never with this degree to inquiry and data production.”

However, despite the increased scrutiny, Salzano said there are ways to legally engage in advertising and promotional activities to increase business.

“Maybe examiners are looking at a lunch that had a thank you on the expense report, which obviously would be prohibited because it would be in consideration of the referral,” she said. “We’ve set up policies for institutions to limit the frequency or number of times a loan originator can take someone out for lunch, limit the amount the LO can spend, set forth permissible reasons (introduce new LOA, products, etc.) and require an apportionment of introductory meetings vs. those with someone the LO has done business with before. I think there are ways you can show your entertaining is not tied to referrals and instead is to increase brand awareness. This is especially true for small community banks. They need to get their brand out there and promotional activities and marketing service agreements are vehicles to do so.”

Intense data requests

The biggest change Salzano has seen with the FDIC’s exams has to do with data requests.

“In the good old days, the examiners would ask banks relatively high-level questions, and the bank could provide relatively high-level answers,” she said. “Like with an MSA, they might be able to say, `Yes we worked with counsel and we have an agreement and had it valued by a third party,’ and that was satisfactory.

“These data requests are much more intense. They want to see not only the agreement and the valuation, but they want to know who is sitting in those offices. Even if there isn’t a lease, they want evidence of every single service. It’s pretty common in an MSA for the broker, the builder and the counterparty to display marketing materials. The FDIC has asked how many copies of the marketing material were provided and displayed. They want to know monthly visitor counts at the websites, the number of people who click through on links and if there’s a payment for a web ad. They want to know a date and location of every single yard sign and rider. It’s really intense when it comes to MSAs.

“And they have inquiries that are just as robust related to other marketing activities which include other things mortgage originators might do as part of their sales activities, whether it’s taking people to lunch or hosting events. Lots of questions, such as: Who’s invited? Who attends? Who pays? And what are you getting for these sponsorships? Who are you sponsoring with? Why are you sponsoring?

“There is a ton of focus on the third-party co-marketing platforms. The examiners are asking not only for the agreements and the payments, of course, but also the type of data you’re receiving. They’ve asked for lists of emails and reports the banks received from the platforms.”

Appetite for risk

Salzano advises having a solid compliance management system that documents how your company requires preapproval for programs and what you require for expense reimbursement.

“Make sure to build an appropriate monitoring platform for each type of arrangement based on the services and your appetite for risk,” she said.

For instance, Salzano said in the case of an MSA for a yard sign, it’s unrealistic to think a regulator would expect someone to have a picture of every single sign in every single yard for every single day of the payment period.

However, you should have a plan that shows you are checking periodically and that you aren’t paying for services you aren’t receiving.

“It’s especially challenging right now with MSAs and other sponsorships due to COVID,” Salzano said. “But if you’re paying for sponsoring of an event and then it turns out that event doesn’t happen because an event goes virtual, it’s going to impact the number of impressions. And it’s not a one-size-fits-all. You need to have a robust monitoring, valuation, expense and reimbursement policy.”

And it is not just the FDIC out there digging in. Salzano said one state commenced administrative action against a regional manager at an independent mortgage lender for approving activities on a mortgage loan originator (MLO) level.

“The FDIC’s exams have been pages and pages and very detailed,” she added. “They’re not just general. They’re really digging into the weeds. They’re looking very closely at MSAs and co-marketing through various platforms and are also looking at the sponsorships folks are doing and expense reimbursements for what MLOs are doing.

“One examiner was even challenging the bank putting bottled water in open houses. We’re recommending the bank brand the water. Or if they serve cookies, put them in a branded wrapping or make them in the shape of the bank’s logo. If you’re going to be hosting a lunch, it helps to get copies of the invitations, programs, signage, and a picture of employees standing there with bank polo shirts all to demonstrate the promotional consideration provided.”

The good news is the clients Salzano has seen going through such exams have had good compliance ratings historically.

“The key is to mind the store – whoever you are,” she said.