Community banks can take away some noteworthy lessons from recent enforcement actions and litigation against Freedom Mortgage Corp for illegal kickbacks and improper reporting of applicants’ race and ethnicity.

The Consumer Financial Protection Bureau (CFPB) took action in August against the Boca Raton, Fla.-based company for providing illegal incentives to real estate brokers and agents in exchange for mortgage loan referrals, in violation of the Real Estate Settlement Procedures Act (RESPA).

Illegal incentives included monthly cash payments totaling roughly $90,000; free access to paid industry subscription services such as property reports, comparable sales and foreclosure data; and exclusive event invitations—with the understanding that the brokers and agents would refer prospective homebuyers to Freedom for mortgage loans.

The CFPB ordered Freedom to cease its illegal activities and pay $1.75 million into the CFPB’s victim relief fund.

“Section 8 is extremely broad, so banks need to develop a policy around how much risk they wish to take on when entertaining business clients and associates.”
—Ron Haynie, ICBA

RESPA terms and conditions

Under RESPA Section 8, a lender can give a gift or an incentive to a broker or an agent, but not in exchange for a referral.

However, in certain circumstances, gifts or promotions directed to a referral source are not prohibited if they are a “normal promotional or educational activity,” as long as they meet two conditions under Regulation X: 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.

Ron Haynie
Ron Haynie

“Section 8 is extremely broad, so banks need to develop a policy around how much risk they wish to take on when entertaining business clients and associates,” says Ron Haynie, ICBA’s senior vice president of mortgage finance policy.

Freedom also rented space in real estate agents’ offices and placed loan officers there, under a marketing services agreement.

“But those are very, very dangerous,” Haynie says. “These agreements have to be constructed in a certain way and there cannot be anything that mentions expectations about X number of referrals for loans per week. Most community banks don’t want to take on that compliance risk, so they stay away from these kinds of arrangements.”

HMDA violations

Separately, the CFPB in October filed a lawsuit alleging that Freedom submitted mortgage loan data that had numerous errors. According to the CFPB, Freedom’s practices violate both the Home Mortgage Disclosure Act (HMDA) and a 2019 consent order.

CFPB also discovered in 2019 that Freedom had intentionally misreported HMDA data about its applicants’ race and ethnicity. For example, Freedom’s managers or loan officers had told other loan officers to select “non-Hispanic white” when applicants did not provide their race or ethnicity, even though it was potentially inaccurate.

The 2019 order required Freedom to pay a separate $1.75 million penalty, improve its compliance management system and avoid future HMDA violations.

The lawsuit filed in October states there were many errors across multiple data fields in Freedom’s 2020 HMDA data, and these errors constitute violations of HMDA, the Consumer Financial Protection Act and the 2019 order.

Under the CFPB compliance guide for HMDA, if a prospective borrower chooses not to disclose their ethnicity, race and sex on their mortgage application, then the lender must provide that information based on visual observation or surname.

While a borrower can self-identify their race and ethnicity under subcategories—such as Mexican, Puerto Rican or Cuban under the Hispanic category, or Vietnamese, Chinese or Cambodian under the Asian category—lenders are not permitted under HMDA to describe the borrower using subcategories if the borrower chooses not to self-identify. Rather, lenders must stick to the general categories based on visual observation or surname.

“Banks should make sure that employees understand the mortgage loan application process, what information is required and why,” Haynie says. “Banks need to make sure that their loan officers are properly trained to provide this information and complete that section of the application if the borrower chooses not to.”

If lenders collect information from borrowers online, in the mail or during phone calls, and the borrower chooses not to provide their sex, race or ethnicity, lenders must report that the information was not provided in a mail, internet or telephone application.

“Lenders can also have a follow‑up conversation with the borrower and ask for that information to be completed,” Haynie says. “Borrowers also have an opportunity at the closing table to complete any information there if they so desire, or lenders can make a visual observation at that time.”

According to him, it all comes down to training. “Loan officers need to be aware of the compliance risks of certain activities, and that’s where the bank’s compliance officer can help,” Haynie says. “They can increase training around RESPA and HMDA to make sure that the bank is in full compliance of all these rules—because those fines can be very expensive.”

As a note of caution, he adds: “There’s a reputational issue that community banks certainly don’t want to have.”