Fidelity Bank, a New Orleans-based community bank with $ billion in assets, was reprimanded by banking regulators after it was found to have broken federal rules that aim to prevent kickbacks for mortgage-related services.
The Federal Deposit Insurance Corp. found in its latest report on Fidelity that the bank had made significant and substantive violations of the Real Estate Settlement Procedures Act. Specifically, the regulator said Fidelity paid over-market rent to a local real estate brokerage and had paid illegal referral fees through a lead-generation service.
The federal rules are aimed at preventing conflicts between banks and real estate brokers that could result in borrowers not seeing the best mortgage deals that are available.
A violation can result in criminal and civil penalties, with a prison term of up to a year and hefty fines. However, referrals from the bank regulators to the Consumer Financial Protection Bureau or the U.S. Department of Justice are rare.
The agency declined to provide any further details on the Fidelity Bank violations. Spokesperson Carroll Kim cited a long-standing policy of not discussing cases of banks that are still open and operating.
The agency said that it did not downgrade Fidelity Bank s satisfactory rating because executives took immediate action to remedy the violations.
Fidelity Bank CEO Chris Ferris said the violations in question related to office space that the bank s subsidiary, Nola Lending Group, sublet at two Greater New Orleans offices of Keller Williams Realty-New Orleans, a local branch of a national real estate franchise.
He said that such arrangements are common in the mortgage industry and that the offices in question were two of a handful of such subletting deals Fidelity has with various real estate brokers. The subletting does not involve any quid pro quo payments for mortgage referrals, he said.
Still, Ferris said, the bank agreed to lower the rent it pays to Keller Williams for the office space.
Ferris said the regulator also rapped Fidelity for another arrangement that was made by an individual lending officer rather than by bank executives.
The employee, on his own initiative, contracted with a well-known national real estate website for one of its online products, whereby Fidelity bank s mortgage services would be advertised to area customers searching for property.
None of the federal agencies would comment on whether the Fidelity Bank case was referred for civil or criminal penalties, though Ferris said he has had no indication of the case going any further than the FDIC.
Fidelity has branches, most of which are in the Greater New Orleans area, with one in Baton Rouge. An outlet in a Keller Williams office in Lake Charles was shuttered after it was severely damaged by Hurricane Delta.
The FDIC, whose oversight duties include regular assessments of a bank s performance in meeting the credit needs of its community, couldn t say how frequently Louisiana s regulated banks are cited for such breaches. But it appears to be rare.
Fidelity Bank is the only one of the Louisiana banks the agency assessed over the last three years to have been cited for violations of the kickback rules.
Mark McArdle, an assistant director in charge of mortgage markets at the Consumer Financial Protection Bureau, said the law around kickbacks, which dates from the s, has been notoriously murky.
He said his agency has in recent years been trying to clarify where the lines are in terms of what cooperation between mortgage service providers is allowed and where it crosses over into illegal behavior.
The bureau recently issued new guidelines for mortgage lenders and others in an effort to help clarify. Also, a U.S. Supreme Court decision a decade ago determined that for the law to be broken, it must be demonstrated that two parties split a fee for a mortgage referral or service.
Proving a quid pro quo when there are arrangements liked shared offices or marketing efforts can be very difficult, McArdle said.
In spring of last year, the FDIC warned banks and other lenders that it saw the risk of violations of the kickback laws rising. In a report in March, , it specifically warned of kickbacks in the form of overpayment of rent.
Of the increase in violations the agency had observed at banks the previous year, it said: These matters involved the payment of illegal kickbacks, disguised as above-market payments for lead generation, marketing services, and office space or desk rentals.
He said that while the kickback rules were sometimes hard to discern, the bank moved quickly to comply with the regulator s determination to avoid even the appearance of a violation.
