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Under the case, Tyrone vs Kelly, 9 Cal. 3d 1, the court defined a “finder” as a person whose employment is limited to bringing parties together, so that they may negotiate their own contract…”

The California Attorney General issued an opinion in 1995, (78OPS CAL ATTY GEN 71) that confirmed that a real estate broker can pay a commission to an unlicensed person for providing the name, telephone number and address of a prospective borrower provided that the unlicensed person did not obtain the information in the course of soliciting borrowers or lenders on behalf of another or others. The opinion also stated that the finder’s exemption can only apply if the activity is limited to arranging an introduction between the parties and the unlicensed person cannot be involved in any role in the negotiation of the loan.

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Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, as amended (Title XI) requires the Agencies to adopt regulations prescribing standards for appraisals used in connection with federally related transactions within the jurisdiction of each agency, including that they be performed by certified or licensed appraisers.

The Agencies’ appraisal regulations identify categories of real estate-related financial transactions that do not require appraisals. In particular, Title XI authorizes the Agencies to establish a threshold level below which an appraisal is not required.

Under current thresholds, all real estate-related financial transactions with a value of $250,000 or less, as well as qualifying business loans secured by real estate that are $1 million or less, do not require appraisals. Qualifying business loans are business loans that are not dependent on the sale of, or rental income derived from, real estate as the primary source of repayment.

For real estate-related financial transactions at or below the applicable thresholds, the interagency appraisal regulations require financial institutions to obtain an appropriate evaluation of the real property collateral that is consistent with safe and sound banking practices.  This evaluation does not need to be performed by a licensed or certified appraiser or meet the other appraisal standards.

The Appraisal NPR creates a new definition of, and separate category for, commercial real estate transactions and proposes to raise the threshold for requiring an appraisal from $250,000 to $400,000 for those transactions.

No increase in the qualifying business loan threshold is being proposed, but the Agencies are requesting data and information about this threshold.

No increase in the residential real estate transaction threshold is being proposed, but the Appraisal NPR requests comment on whether other factors should be considered in evaluating this threshold.  For further examples, you can visit the FDIC website.

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As legal counsel, it is essential to be aware of the legal and regulatory benefits that may be available.  For example, certain commercial developments may offer incentives to the developer, thus offering an easier path to approval and fewer transactional costs.  Also, if we are setting up an advertising partnership in, for example, the fintech lending space, are there any advertising guidelines we need to address?  Please contact us to explore our innovative strategic alliance and/or Regulation D packages.

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The Federal Trade Commission (the “FTC”) filed a complaint against Lending Club in the district court for the Northern District of California, in April, 2018.   The complaint alleges that Lending Club’s online advertising “lures prospective borrowers by promising ‘no hidden fees,’ but when the loan funds arrive in a consumer’s bank account, the “hidden fees” have been deducted from the consumers’ loan proceeds.” The complaint  discuses other advertising practices, such as,  a paid blog post, stating “once you’re approved, your money goes straight into your account, with no hidden fees,” along with online, mail and television advertising that direct consumers to Lending Club’s website. In addition to  hidden fees, the complaint states that Lending Club: (a) misled consumers into believing they were approved for a loan, which discouraged them from seeking credit elsewhere; (b) withdrew double payments from consumers’ accounts; and (c) continued to collect electronic payments from consumers after they had canceled their automatic payments or completely paid off their loans.   Lending Club has denied the FTC’s complaint allegations.

Based upon these allegations, I would advise fintech clients to have policies and procedures to document consumer complaints, how such complaints will be resolved and to have appropriate audit and review procedures in place.   Also, it should be noted that Lending Club loans are made by Web Bank but the FTC’s complaint makes no mention of that fact. Thus, for purposes of this non-usury lawsuit, it is clear that the FTC views Lending Club as the lender.  This fact goes back to the structuring issues we have discussed in the past.  Since the FTC does not have jurisdiction over depository institutions, banks that present false and misleading advertising may have similar suits brought against them by their primary regulators.

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While the California law does not prohibit the payment of a referral fee when the payment is from one broker to another broker, there may be requirements for disclosure to the principals by each broker and there are prohibitions on salespersons from giving or receiving
payment, and in certain transactions from paying the person making the referral. There are
several statutes in California the deal directly and indirectly with referral fees. Business and Professions (B&P) Code Section 10176(g) gives the Department authority to suspend or revoke a real estate license for the “claiming or taking by a licensee of any secret or undisclosed amount of compensation, commission or profit.” Any broker who makes an otherwise lawful referral in return for a referral fee is responsible for disclosure of that fee to the principal(s) in the transaction. 

B&P Code Section 10137, prohibits a salesperson licensee from accepting compensation from any person other than his or her employing broker and from paying a fee to another licensee except through his or her employing broker if the transaction requires a license. Any fee for an
otherwise lawful referral must first be paid to the employing broker who can then compensate the salesperson.

Except for very narrowly defined exceptions, real estate licensees are also prohibited from claiming, demanding or receiving fees for the referral of customers to any escrow agent, structural pest control firm, home protection company, title insurer or escrow company (B&P Code Section 10177.4).

Section 8 of the Real Estate Settlement Procedures Act (RESPA). Regulation X, 24 CFR (Code of Federal Regulations) Section 3500.14 forbids any person to pay or receive any fee, kickback, or anything of value that is incident to a settlement service involving a federally-related mortgage loan. A referral of a settlement service is not a compensable act. Essentially a real estate broker or agent cannot be compensated for merely referring his or her client to a mortgage broker, lender, title or escrow company, etc., without providing certain services, goods or facilities. RESPA covers most transactions involving single-family residences or 1-4 units. To emphasis, the language in the statute states that the law applies to “federally-related” mortgage loans. This is a broad definition, so therefore careful analysis must be done relative to each mortgage loan transaction. An in-depth review of this issue is beyond the scope of this White Paper.

Under RESPA, the definition of “Settlement Services” can be summarized anything related to a real estate settlement, including anything which relates to title searches, examinations, insurance, services rendered by an attorney, preparation of documents, credit reports, appraisals, pest control activities, services rendered by a real estate agent or broker and any other service related to a mortgage loan… 12 USC 2603 (3). The law requires that the services have actually been performed. 12 USC 2607 (b). A violation of this law carries criminal and civil penalties. When you are analyzing a fee paid under federal law, you must first determine if RESPA applies, what are the circumstances of the transaction and can fees be paid contractually.

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The Office of the Comptroller of the Currency (“OCC”) has published its proposal for how it will address a national Fintech Charter “Fintech Charter”. The Fintech Charter could be used by any entity providing certain financial services, including, money transmitters, check cashers and providers of technology (“Financial Service Centers” or “FSC”). Current OCC regulations allow the OCC to permit “a national bank or a Federal savings association” with a special purpose. The advantage of the national bank charter for a fintech company is that it allows the fintech company to conduct business on a nationwide basis under the National Bank Act (“NBA”). The NBA gives national banks preemption over certain state laws.  The key to the Fintech Charter strategy, is the ability to charge the interest rate of the jurisdiction where the lender is domiciled.  The FDIC has also discussed third-party lending arrangements.

Many states have responded by litigating against an OCC charter and have made efforts to make their own laws more stringent and/or commercially reasonable to become the “go to” state for licensing.  What does this mean to a fintech company?  When you engage counsel to set up your licensing plan, be aware that there is reciprocity for some activities.  The key is understanding the products and services offered and to be sure you are adequately licensed in all jurisdictions that you do business to make the loans in your revenue model.  Please note that I am writing an article about this subject matter in greater depth.  There are breaking developments in this area of practice on a fairly frequent basis and my article will discuss the strategies and recent case law.

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