Fidelity Bank, a New Orleans-based community bank with $1 billion in assets, has been reprimanded by banking regulators after finding it violated federal rules aimed at preventing bribes for services relating to mortgage loans.
The Federal Deposit Insurance Corp. found in its latest report on Fidelity that the bank had committed “significant and substantial” breaches of the Property Settlement Procedures Act 1975. Specifically, the regulator said Fidelity paid above-market rent to a local real estate agency and paid “illegal referral fees” through a lead generation service.
The agency conducted the review last summer and released it on Monday.
The federal rules are intended to prevent disputes between banks and real estate brokers that could prevent borrowers from seeing the best mortgage deals available.
A violation can result in criminal and civil penalties, with up to a year in prison and heavy fines. However, referrals from banking regulators to the Consumer Financial Protection Bureau or the US Department of Justice are rare.
Reprimand but no demotion
The agency declined to provide further details about Fidelity Bank‘s violations. Spokesman Carroll Kim cited a long-standing policy of not discussing cases of banks still open and operating.
The agency said it did not downgrade Fidelity Bank’s “satisfactory” rating because executives took immediate action to address the violations.
Fidelity Bank CEO Chris Ferris said the violations in question relate to office space that the bank’s subsidiary, Nola Lending Group, is subletting in two Greater New Orleans offices of Keller Williams Realty-New Orleans, a local branch of a national real estate franchise.
“They felt the rent was too high for the space we were renting,” Ferris said.
He said such arrangements are common in the mortgage industry and that the offices in question were two of the few such sublease agreements that Fidelity has entered into with various real estate brokers. Subletting does not involve any quid pro quo payment for mortgage referrals, he said.
Still, Ferris said, the bank agreed to reduce the rent it pays Keller Williams for the office space.
Keller Williams did not respond to a request for comment.
Ferris said the regulator also hit Fidelity for another arrangement made by an individual loan officer rather than bank executives.
The employee, on his own initiative, entered into a contract with a well-known national real estate website for one of its online products, whereby Fidelity bank mortgage services would be advertised to clients in the area seeking of a property.
That arrangement was also terminated after the regulator questioned him, Ferris said.
None of the federal agencies would say whether the Fidelity Bank case had been referred for civil or criminal penalties, though Ferris said he had no indication the case went any further than the FDIC.
Fidelity has 20 branches, most of which are in the Greater New Orleans area, including one in Baton Rouge. An outlet at a Keller Williams office in Lake Charles was closed after being badly 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, could not say how often Louisiana’s 112 regulated banks are cited for such violations. . But that seems rare.
Fidelity Bank is the only one of 52 Louisiana banks assessed by the agency over the past three years to have been cited for violating bribery rules.
A murky standard
Mark McArdle, deputy director in charge of mortgage markets at the Consumer Financial Protection Bureau, said the bribery law, which dates back to the 1970s, was notoriously obscure.
He said his agency has tried in recent years to clarify where the boundaries lie in terms of permissible cooperation between mortgage service providers and where it devolves into illegal behavior.
The office recently released new guidelines for mortgage and other lenders to help clarify. In addition, a US Supreme Court decision ten years ago determined that for the law to be broken, it must be shown that two parties share the cost of a mortgage referral or service.
Proving quid pro quo when there are arrangements such as shared offices or marketing efforts can be very difficult, McArdle said.
In the spring of last year, the FDIC warned banks and other lenders that it saw the risk of violating bribery laws increasing. In a March 2021 report, he specifically warned against bribes in the form of overpayment of rent.
Commenting on the increase in breaches the agency had observed at banks in the previous year, it said: “These cases involved the payment of illegal bribes, disguised as above-market payments for the generation of leads, marketing services and rental of office or office space.”
Ferris said Fidelity Bank executives take the regulator’s concerns seriously.
He said while bribe 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.