A new partnership with Costco Wholesale has helped several small banks and mortgage lenders boost originations. But a potential conflict with state and federal law could jeopardize the customer referral program.
The potential trip wire for the warehouse club and its financial partners involves laws that regulate licensing and compensation for mortgage brokers and originators. "There are all kinds of issues with this" arrangement, says Herman Thordsen, a Santa Ana, Calif., lawyer who represents mortgage companies but none involved in the Costco partnership.
Costco selected five community banks and four small mortgage lenders to be a part of the mortgage-referral service. Costco's lead partner is the $669 million-asset First Choice Bank in Lawrenceville, N.J.
Bill Blanton, the chairman and chief executive of First Century Bancorp in Gainesville, Ga., said the Costco partnership has "substantially" increased applications and mortgage originations at his $57 million-asset bank.
The online-only service is available exclusively for Costco customers, who must enter their membership number to obtain quotes from participating lenders. The customer then selects a lender.
Because Costco is soliciting borrowers, the company should be licensed as a real estate broker under California state law, where it has more than 100 stores, Thordsen says. Costco also appears to be violating a Dodd-Frank Act requirement that mortgage originators be licensed or registered. Costco could be subject to discipline from California regulators, he says.
Costco could face the same issue in other states that require mortgage brokers and originators to be licensed, including New Hampshire, North Carolina and Texas, says Marx Sterbcow, a New Orleans lawyer.
"What concerns me is that Costco takes all of this personal information from the applicants and sends it to the lenders," says Sterbcow, who represents companies and individuals in real estate litigation. "I've had clients that got caught up in trouble that were taking a whole lot less information than what Costco is taking."
Costco says it receives no financial compensation from the banks in its partnership.
Costco's yearly membership fee could be considered compensation, says Jim Clay, a senior loan officer at Peoples Home Equity in Louisville, Ky. That could violate a provision of the Real Estate Settlement Procedures Act, or RESPA, that addresses credit report charges, says Clay, whose company is not involved in the Costco partnership. "I can't charge a fee to get you a quote, and Costco shouldn't be able to either," he says.
Clay says he filed a complaint with the Consumer Financial Protection Bureau alleging that Costco's membership fee violates RESPA. Clay cited the section of the law that says "the only charge that a loan originator may impose on a potential borrower before issuing [an estimate] is a charge limited to the cost of a credit report."
Costco could face CFPB discipline because of the compliant, Thordsen says. Sterbcow, however, says he does not believe Costco is in violation of RESPA because nothing of value changes hands between Costco and its preferred lenders.
"Costco isn't a mortgage broker," says Jay Smith, Costco's director of financial services. "We reviewed the regulations closely with our legal team before launch. We're very comfortable with the way we've structured the relationship with First Choice."
Costco has not registered or received licenses as a broker or originator in any state, Smith adds.
Norman Koenigsberg, who heads the mortgage business at First Choice, did not return calls.
Another lawyer, Jed Mayk at Stevens & Lee, also doubts that Costco has violated RESPA. "There is no compensation coming from the parties that are receiving the referrals," says Mayk, who represents banks on RESPA and licensing issues.
Mayk declined to comment on whether Costco may be violating mortgage broker licensing laws.
The CFPB declined to comment.
The other community banks participating in the Costco partnership include the $649 million-asset Farmers Bank & Trust of Great Bend, Kan.; the $9.5 billion-asset Sterling Financial in Spokane, Wash.; and the $2.2 billion-asset BofI Holding in San Diego.