Dear Ms. Rios:
You have asked whether an FCU employee, who serves as the Director of Lending, has a conflict of interest when she disapproves member loans and then refers them to a mortgage banker that also compensates her. Yes, it is an impermissible conflict of interest for the FCU employee whether she receives a referral fee or a salary from the mortgage banker.
The FCU currently has a relationship with a mortgage banker and acts as a finder for members whose loan applications do not meet the FCU’s lending policies. The FCU’s Director of Lending is responsible for reviewing loan applications and makes the decision to approve or deny loan applications. The Director of Lending also receives compensation from the mortgage banker and has received a formal offer for a position as the mortgage banker’s Chief Underwriter of the Mortgage Underwriting Department.
NCUA’s lending rule prohibits an employee from “receiving directly or indirectly, any commission,
fee or other compensation in connection with any loan made by the credit union.” 12 C.F.R. §701.21(c)(8)(i). While the rule provides an exception that permits a non-senior management employee to receive compensation from third-parties for services performed outside of the FCU, the exception does not apply when either the FCU or employee makes a referral to the outside party. See §701.21(c)(8)(iii)(D). Under the facts presented, even if the Director of Lending is not deemed a senior management employee, the exception is unavailable as both the FCU and the employee appear to have a referral arrangement with the mortgage banker.
As we have discussed in previous opinions, the lending rule’s conflict of interest prohibition
ensures that employees and management make appropriate decisions regarding lending. Loan officers must decide whether to grant or deny loan applications absent economic incentives that could influence decisions against the best interests of members and the FCU. See OGC Op. 06-0210 (May 1, 2006).
We also note that, while the lending rule controls, the incidental powers rule similarly prohibits
employees from receiving compensation or other benefits in connection with an FCU engaging in finder activities. 12 C.F.R. §721.7(a). Again, the rule provides an exception for non-senior management employees but only if the FCU’s board of directors adopts written policies regarding third-party compensation and determines the employee’s involvement does not present a conflict of interest. 12 C.F.R. §721.7(b)(4).
Finally, while you have not provided specific details regarding the Director of Lending and FCU’s
referral arrangements with the mortgage banker, we are concerned that the arrangements may violate the Real Estate Settlement Procedures Act (RESPA). An FCU may act as a finder of mortgages offered by other lenders as a service to its members and earn income from engaging in finder activities, without restriction, under NCUA’s incidental powers rule. 12 C.F.R. §721.6. Other applicable federal or local law, however, may limit or prohibit an FCU from receiving compensation when acting as a finder. 12 C.F.R. §721.5. RESPA may prohibit the FCU from receiving fees from the mortgage banker depending on the services provided to the mortgage banker and the compensation arrangement.
RESPA regulates the settlement process for federally-related mortgage loans. 12 U.S.C. §2602(1). Section 8(a) of RESPA prohibits any person from giving and any person from accepting “any fee, kickback, or thing of value pursuant to an agreement . . . that business incident to or part of a
real estate settlement service . . . shall be referred to any person. “ 12 U.S.C. §2607(a). Under
Regulation X, 24 C.F.R. Part 3500, the rule issued by HUD to interpret RESPA, the term “referral”
is broadly defined.
A referral includes any oral or written action directed to a person which has the effect of
affirmatively influencing the selection by any person of a provider of a settlement service or
business incident to or part of a settlement service when such person will pay for such settlement
service or business incident thereto or pay a charge attributable in whole or in part to such
settlement service or business.
24 C.F.R. §3500.14(f). While RESPA does not prohibit an FCU from making referrals, it may not
receive a fee for its referrals. Regulation X specifically states that a “referral of a settlement
service is not a compensable service.” 24 C.F.R. §3500.14(b). Settlement services include the
taking of loan applications. 24 C.F.R. §3500.2(b). RESPA does allow, however, payment of a fee by a lender to a duly appointed agent or payment to any person for services actually performed.
12 U.S.C. §2607(c)(1)(C), (2); 24 C.F.R. §3500.14(g)(1)(iii), (iv). To inquire about the applicability
of RESPA to the FCU’s arrangements with the mortgage banker, you may contact the Department of Housing and Urban Development, the federal agency authorized to interpret and enforce RESPA.
If you have any questions, please contact Staff Attorney Chrisanthy Loizos or me.