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FIL-103-99 Attachment

Practices That might Result in Potential Violations of Section 8 of the Real Estate Settlement Procedures Act

In numerous industries, firms frequently pay commissions to 3rd celebrations for company referrals. Congress looked for to get rid of these types of payments for property loans so that "the expenses to the American home purchasing public will not be unreasonably or unnecessarily pumped up." 1 As an outcome, payments connected to for federally associated mortgage loans need to be sensible settlement for the products, services, or facilities actually offered.

Section 8 of the Real Estate Settlement Procedures Act (RESPA) normally prohibits:

- The payment and receipt of a cost or thing of worth in return for the referral of settlement service company for a federally related mortgage loan, and
- Receipt or payment of any portion or divides of charges (consisting of unearned charges) other than for settlement services in fact performed.
RESPA applies just to "federally associated mortgage loans." 2 These are usually mortgages to consumers that are likewise covered by the Truth in Lending Act. Mortgage loans made for business functions are not covered by RESPA.

To understand which practices can be violations of Section 8 of RESPA, the terms contained in RESPA and the Housing and Urban Development's (HUD) Regulation X, which executes RESPA, need to be comprehended. Some important terms follow:

- "Settlement service" is broadly specified in Regulation X. The term consists of "any service offered in combination with a potential or real settlement." 3 A detailed list of examples of settlement services is consisted of in Section 3500.2 of Regulation X.
- "Thing of worth," also broadly defined, consists of all kinds of settlement such as cash, discount rates, incomes, commissions, fees, and preferential bank rates.4 HUD has actually described the opportunity to win a prize as a thing of worth. For example, a bank can not get in real estate representatives in a swimming pool to win a journey to Hawaii if a particular variety of customers are referred to the bank for a mortgage loan.5.
- "Referral" includes "any oral or written action directed to a person which has the result of affirmatively affecting the selection by anyone of a company of a settlement service or part of a settlement service when such individual will spend for such settlement service or organization event thereto or pay a charge attributable in whole or in part to such settlement service or company." 6 It also consists of "any circumstances in which a person spending for a settlement service or organization occurrence thereto is required to use a specific company of settlement service or organization occurrence thereto." 7.
- "Agreement or understanding" is not particularly defined in Regulation X. However, the regulation does state that" [a] n arrangement or understanding for the referral of service event to or part of a settlement service require not be composed or verbalized but might be established by a practice, pattern, or course of conduct. When a thing of value is received consistently and is connected in any way with the volume or worth of the organization referred, the invoice of the thing of value is evidence that it is made pursuant to an agreement or understanding for the recommendation of business." 8.
Repeated conduct is not an essential element that is needed to show an infraction of Section 8. A violation may be established by revealing either that a payment was made as payment for recommendations of previous company or for the function of securing recommendations in the future. In a casual viewpoint, HUD noted that where there is proof of repeated payments linked in any method with the volume or value of company, an administrative presumption is developed that the payments were made "pursuant to an agreement or understanding." 9

Situations in Which Lenders May Violate Section 8

Fee Splitting and Payments for Services Not Performed - Examiners have noted recent incidents in which the charge collected by a financial institution for a third-party service went beyond the amount the institution in fact paid to that 3rd party. For example, a monetary institution charged clients $25 for a flood risk determination, yet the flood danger decision company that supplied the service was only paid $20. In another example, consumers were charged $40 for a credit report, however the banks just paid $15 to the consumer-reporting company for the consumer report. Examiners also found an occurrence in which an institution charged clients an appraisal examination charge. The cost was handed down to a committee consisted of a number of members of the institution's board of directors, which did not really review the appraisals. HUD has actually believed that these arrangements constitute fee splitting or receipt of unearned charges and therefore breach Section 8( b) of RESPA.10

Contracts with Third-Party Settlement Service Providers - Some banks have contracted with third-party settlement service suppliers for such services as flood risk decisions, and real estate tax and risk insurance coverage services. In exchange for carrying out these services for all loans stemmed by the institution throughout the regard to the contract, some companies have consented to carry out the services for loans that were on the organization's books before participating in the contract for no additional cost or a considerably lowered charge. HUD has figured out that these kinds of contracts remain in violation of Section 8 because they supply a thing of worth for the recommendation of future settlement services.11

Referral Fees from Other Financial Institutions or Mortgage Companies - Some monetary organizations that want to provide a range of residential loan products to some of their consumers do not have the required know-how to offer them. As a result, the organizations often make arrangements to refer their customers to other banks or mortgage business. Payments made pursuant to these referral plans need to be for products and services in fact performed and affordable in a quantity similar to deals within the same market. HUD released a policy declaration on March 1, 1999, attending to a list of the services that must be carried out by the referring celebration for stemming RESPA-related loans in order to receive settlement. This policy statement was released in the FDIC's FIL-21-99, dated March 12, 1999.

Referral Fees From Mortgage Companies to Affiliated Banks' Employees - Some monetary institutions refer property mortgage loan clients to associated mortgage companies. An affiliated mortgage company is often a separate subsidiary of the banks's holding business or a subsidiary of another monetary organization owned by the moms and dad holding company. In order to motivate the banks's workers to refer customers to the associated mortgage company, some mortgage companies have offered to pay a little fee to the staff member whenever the referral results in a loan origination. This practice is specifically prohibited by Section 3500.14( b), which specifies: "A business might not pay any other company or the workers of any other business for the recommendation of settlement service business."

Builder Loans - Residential homebuilders can frequently give domestic loan recommendations for a monetary organization. In numerous instances, the very same lending institution who finances the builder's building and construction costs is also trying to stem loans to the home builder's home purchasing clients. In such cases, the banks needs to be careful not to offer anything of value to the contractor in exchange for the recommendation of these consumers.