Concerned about “increasing uncertainty surrounding regulatory oversight of these types of arrangements,” Wells Fargo is ending all of its roughly 200 mortgage marketing services and desk rental agreements with builders and real estate brokers. Such arrangements are pervasive in the mortgage business, an industry marked by intense competition for eligible borrowers.
Under the arrangements that it is now terminating, Wells Fargo would, for example, rent desk space from a homebuilder in an effort to enhance its ability to sell mortgages to home buyers passing through the builder’s sales office.
A bank spokesman said Wells Fargo was responding to broader regulatory scrutiny of such arrangements, which are governed by the Real Estate Settlement Procedures Act (RESPA). RESPA’s purpose is to prevent mortgage lenders, real estate brokers, builders and any other party involved in the home buying process from giving or receiving kickbacks in exchange for referrals. The law seeks to protect consumers from being steered into unsuitable loans or insurance contracts, as a consequence of collusion by parties providing different types of services as part of the home purchase cycle. Previously administered by the U.S. Department of Housing and Urban Development, RESPA now falls under the jurisdiction of the Consumer Financial Protection Bureau (CFPB).
The CFPB was quick to applaud Wells Fargo’s decision as “an important step for the mortgage industry.” This was a far cry from its attitude towards this leading bank in January of this year, when it required Wells Fargo to pay a $24 million fine and an additional $10.8 million to consumers, as part of a consent order with the consumer bureau related to an alleged scheme involving referrals from a title company, the now-defunct Maryland company Genuine Title.
Besides being notable as an insight into Wells Fargo’s reading of the requirements of the current regulatory landscape, this development warrants careful consideration by large national builders with captive mortgage companies and other financial services providers. Will this reinforce their inclinations to provide in-house financial services options (by making one possible alternative—marketing arrangements with outside businesses—less viable), or heighten concerns that their previously-approved, long-standing, valuable in-house divisions will suddenly no longer pass regulatory muster? We see little reason at this point for builders with financial services divisions or affiliates to have substantial concerns of that nature, but the issue is worth monitoring for further developments.