RESPA Revisited

Posted on March 1, 2013 by Michelle Lind, Esq

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Now and then it is good to get a little reminder. This month, we’ll take a look at The Real Estate Settlement Procedures Act of 1974 (RESPA) in a short excerpt from the book, Arizona Real Estate: A Professional’s Guide to Law and Practice written by AAR CEO Michelle Lind. To order a copy visit http://www.aaronline.com/azre-book/

The Real Estate Settlement Procedures Act of 1974 (RESPA) is a Federal law enacted to insure that buyers are provided with sufficient information about the nature and costs of financing and closing escrow on a home (defined in the law as the settlement process). RESPA is also intended to protect buyers from unnecessarily high close of escrow charges. RESPA requires that buyers receive disclosures at various times that spell out the costs associated with the close of escrow, lender and escrow practices and fees, such as the Good Faith Estimate. Section 8 and Section 9 of RESPA have the greatest impact on real estate brokers.

KICKBACKS AND REFERRAL FEES Section 8 (12 U.S.C. §2607; 24 C.F.R. §3500)

Section 8(a) Prohibits Kickbacks and Referral Fees Section 8(a) states: No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person. Thus, Section 8 prohibits a person from giving or accepting any “thing of value” for referrals of prohibits a person from giving or accepting any “thing of value” for referrals of settlement service business.

Section 8(b) Prohibits Unearned Fees Section 8 (b) prohibits a person from giving or accepting any part of a charge for services that are not performed. Section 8(b) states: No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.

 Section 8 Definitions (12 U.S.C. §2602)

A “settlement service” includes any service provided in connection with a real estate transaction, including title insurance, attorney services, surveys, credit reports, appraisals, pest and fungus inspections, and loan origination (the taking of loan applications, processing, underwriting and funding). If the service is provided at or before close of escrow, it is probably a settlement service. A “thing of value” is very broadly defined. A thing of value includes any payment, advance, funds, loan, service or other consideration. A “federally related mortgage” includes any loan (other than temporary financing such as a construction loan) that is secured by a first or subordinate lien on residential real property designed principally for the occupancy of one to four families. In other words, a federally related mortgage covers virtually all financing secured by a lien on residential property.

 Section 8(c) Exceptions

Not all fees, salaries, compensation or payments for settlement services violates Section 8. RESPA does not prohibit: payments to attorneys for services actually rendered, compensation by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance or by a lender to its duly appointed agent for services actually performed in the making of a loan payment of a bona fide salary, compensation or payment for goods or facilities actually furnished or for services actually performed payments pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and brokers affiliated business arrangements so long as certain requirements are met. An affiliated business arrangement is an arrangement in which a person (or associate) who is in a position to refer business, incident to or a part of a real estate settlement service involving a federally related mortgage loan, has either an affiliate relationship with or an ownership interest of more than one percent in a settlement service provider and either directly or indirectly refers business to that provider or affirmatively influences the selection of that provider. See, 12 U.S.C. §2602.

To qualify for the affiliated business arrangement exemption, a disclosure must be made of the existence of the arrangement, and a written estimate of the charge or range of charges for the service is made at or before the time of the referral. Further, the buyer cannot be required to use the service. Additionally, the only thing of value that is received from the arrangement is a return on the ownership interest. HUD2 has investigated sham affiliated business arrangements. For example, a title company in Florida reportedly paid $3.2 million to settle allegations that it was entering into sham affiliated business arrangements in an attempt to funnel improper payments to builders, real estate agents and mortgage brokers.

Question: Can a real estate broker be compensated by a home warranty company?

Answer: According to HUD Interpretive Rule effective June 25, 2010, HUD interprets Section 8 of RESPA and HUD’s regulations to prohibit payment by a home warranty company to a broker for marketing services.3 See also, HUD Home Warranty Interpretive Rule (11/23/2010.) Depending upon the facts, a home warranty company may compensate a broker for services that “are actual, necessary and distinct from the primary services provided” by the broker if the additional services are not nominal and are not services for which there is a duplicate charge. Additionally, the amount of compensation for the additional services must be reasonably related to the value of those services and not include compensation for referrals of business.

Question: Can a real estate brokerage lease office space to a lender or other settlement service provider without violating RESPA?

Answer: Yes. HUD interprets Section 8 to allow the rental of office space in this situation if the rental payments are reasonably related to the market value of the office space. If the rental payments exceed the market value of the office space, a RESPA violation may have occurred.

Question: Can a real estate broker and title company advertise their services on the same brochure?

Answer: Joint advertising is not prohibited by RESPA. However, if one party is paying less than a pro-rata share for the brochure, there could be a RESPA violation.

Question: Does offering a package of settlement services or offering of discounts to consumers for the purchase of multiple settlement services violate RESPA?

Answer: A package of services or a discount will not be considered a prohibited required use if it is optional to the purchaser. The discount must be a true discount below the prices that are otherwise generally available and must not be made up by higher costs.

Question: Do lender fee programs comply with RESPA?

Answer: Some may and some may not. RESPA does not prohibit a lender from paying the lender’s agent or contractor for services actually performed in the origination or processing of a loan. Thus, the program may comply with RESPA if a real estate agent is actually providing loan services, the appropriate RESPA-required disclosures are made, and the buyer is notified that the buyer is not obligated to use the real estate agent as their loan originator. Do not enter into a compensation agreement with a lender without checking with the designated broker or legal counsel. Also, make sure that you are being paid for actually performing substantial services (see, HUD Statement of Policy 1999-1), the appropriate required disclosures are made, and the buyer is notified that the buyer is not obligated to use the offered services.

TITLE INSURANCE — SECTION 9 (12 U.S.C. §2608; 24 C.F.R. SEC. 3500.16)

Section 9 of RESPA prohibits a seller from requiring the buyer to buy title insurance from a specific title insurance company. Section 9 of RESPA states: (a) No seller of property that will be purchased with the assistance of a federally related mortgage loan shall require directly or indirectly, as a condition to selling the property, that title insurance covering the property be purchased by the buyer from any particular title company. (b) Any seller who violates the provisions of subsection (a) of this section shall be liable to the buyer in an amount equal to three times all charges made for such title insurance. “Required use” means: A situation in which a person must use a particular provider of a settlement service in order to have access to some distinct service or property, and the person will pay for the settlement service of the particular provider or will pay a charge attributable, in whole or in part, to the settlement service.

Question: Is it a RESPA violation if the seller requires the buyer to use a specific title company when the seller is paying for the buyer’s title insurance?

Answer: HUD has indicated that it “will not enforce Section 9 of RESPA against a seller who selects the title insurance company if the seller is paying for the owner’s title insurance policy, and does not require the buyer to use the title insurance company for the simultaneously issued lender’s policy.”

Question: Is it a RESPA violation if the seller requires the buyer to use a specific title company?

Answer: Yes. HUD has indicated that it would take action “in situations where a seller required a buyer to pay the seller an amount toward closing costs, and the seller used a portion of the buyer’s paid closing costs for the owner’s title insurance without providing the buyer with a choice of that title company.”

Question: What is the safest course for a seller who wants to require the use of a certain title insurance policy?

Answer: Based on HUD’s position, the safest course for a seller who insists on using a particular title company is to pay for both the buyer’s title insurance policy and the lender’s title insurance policy. Additionally, the seller should not require the buyer to pay any closing cost that could be attributable to the cost of the title policies.

Question: What are the penalties for a violation of Section 9 of RESPA?

Answer: Pursuant to 12 USC §2608(b), any seller who violates Section 9 is liable to the buyer in an amount equal to three times all charges made for such title insurance. Additionally, the seller may face sanctions from HUD (Section 3500.19(c)) and the Arizona Department of Real Estate (A.R.S. §32-2153(B) (10)).

Question: What is the effect of a seller’s counter offer changing the title company to be used in a transaction?

Answer: If the buyer submits an offer, and the seller responds with a counter offer requiring the use of a different title insurance company, that counter offer has the same legal effect as rejecting the buyer’s offer. Therefore, by submitting a counter offer requesting a different title insurance company, the seller is risking the transaction in its entirety.

 KEY POINTS TO REMEMBER

A broker cannot accept any fee, kickback or “thing of value” for referrals to a settlement service provider. A prohibited “thing of value” under RESPA is interpreted very broadly and may include joint advertising if one settlement service provider is paying more than a pro-rata share, or any other item that would defray the broker’s expenses. Generally, a broker cannot accept any portion of a settlement service charge other than for services rendered. Generally, a seller may not require as a condition of sale that the buyer purchase title insurance from any particular title company. Affiliated business arrangements are allowed under RESPA as long as certain requirements are met.


1. RESPA was amended in 1976 and 1983 (minor revisions); in 1992 (addressing affiliated business relationships and computer loan origination); in 1996 (further revisions, including addressing certain employer payments to bona fide employees) and 2009 (revisions including addressing servicing disclosure states and a new GFE effective January 2010).

2. Effective July 21, 2011, RESPA is administered and enforced by the Consumer Financial Protection Bureau.

3. The RESPA Home Warranty Clarification Act of 2011 (H.R. 2446), which is supported by NAR, may clarify that home warranties fall outside the scope of RESPA.

4. See correspondence from Rebecca J. Holtz, acting Director, Office of Consumer and Regulating Affairs, HUD RESPA/ILS Division dated August 2000 and related enclosures and correspondence available on the AAR website.

 

K. Michelle Lind. Arizona Real Estate. Hillcrest Media Group.

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