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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 lots of industries, firms typically pay commissions to third parties for company recommendations. Congress sought to get rid of these types of payments for property loans so that "the costs to the American home buying public will not be unreasonably or unnecessarily inflated." 1 As an outcome, payments related to settlement services for federally associated mortgage loans must be reasonable payment for the products, services, or centers in fact supplied.

Section 8 of the Real Estate Settlement Procedures Act (RESPA) generally restricts:

- The payment and receipt of a fee or thing of value 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 costs) other than for settlement services in fact carried out.
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 organization functions are not covered by RESPA.

To know which practices can be violations of Section 8 of RESPA, the terms included in RESPA and the Housing and Urban Development's (HUD) Regulation X, which executes RESPA, must be comprehended. Some essential terms follow:

- "Settlement service" is broadly specified in Regulation X. The term consists of "any service provided in conjunction with a potential or actual settlement." 3 A comprehensive list of examples of settlement services is included in Section 3500.2 of Regulation X.
- "Thing of worth," likewise broadly specified, consists of all types of payment such as monies, discounts, wages, commissions, costs, and preferential bank rates.4 HUD has actually described the chance to win a reward as a thing of value. For example, a bank can not go into genuine estate representatives in a pool to win a trip 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 an individual which has the effect of agreeably influencing the choice by anybody of a service provider of a settlement service or part of a settlement service when such individual will spend for such settlement service or business occurrence thereto or pay a charge attributable in whole or in part to such settlement service or business." 6 It also includes "any instance in which an individual paying for a settlement service or business event thereto is needed to utilize a specific provider of settlement service or company event thereto." 7.
- "Agreement or understanding" is not specifically defined in Regulation X. However, the guideline does state that" [a] n arrangement or understanding for the referral of organization event to or part of a settlement service require not be composed or verbalized but may be established by a practice, pattern, or course of conduct. When a thing of worth is gotten repeatedly and is linked in any way with the volume or value of the business referred, the invoice of the thing of worth is proof that it is made pursuant to an agreement or understanding for the referral of service." 8.
Repeated conduct is not an important component that is needed to demonstrate a violation of Section 8. A violation might be developed by revealing either that a payment was made as settlement for referrals of past service or for the purpose of securing recommendations in the future. In a casual viewpoint, HUD noted that where there is proof of repeated payments connected in any way with the volume or worth of company, an administrative anticipation is produced that the payments were made "pursuant to an arrangement or understanding." 9

Situations in Which Lenders May Violate Section 8

Fee Splitting and Payments for Services Not Performed - Examiners have noted current events in which the fee collected by a financial organization for a third-party service surpassed the amount the organization really paid to that third party. For instance, a monetary institution charged customers $25 for a flood threat decision, yet the flood threat determination company that supplied the service was just paid $20. In another example, consumers were charged $40 for a credit report, but the banks only paid $15 to the consumer-reporting company for the consumer report. Examiners also found an event in which an institution charged consumers an appraisal examination fee. The charge was passed on to a committee consisted of numerous members of the organization's board of directors, which did not in fact the appraisals. HUD has actually suggested that these arrangements constitute cost splitting or receipt of unearned fees and for that reason violate Section 8( b) of RESPA.10

Contracts with Third-Party Settlement Company - Some financial institutions have actually contracted with third-party settlement service providers for such services as flood hazard decisions, and genuine estate tax and hazard insurance coverage services. In exchange for carrying out these services for all loans stemmed by the institution during 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 agreement for no extra fee or a considerably reduced fee. HUD has actually figured out that these kinds of arrangements remain in infraction 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 financial organizations that want to offer a variety of residential loan items to a few of their clients do not have the required competence to offer them. As an outcome, the organizations often make plans to refer their consumers to other financial organizations or mortgage companies. Payments made pursuant to these referral plans need to be for items and services really performed and affordable in an amount equivalent to transactions within the exact same market. HUD provided a policy declaration on March 1, 1999, resolving a list of the services that ought to be performed by the referring party for originating RESPA-related loans in order to receive payment. This policy statement was published in the FDIC's FIL-21-99, dated March 12, 1999.

Referral Fees From Mortgage Companies to Affiliated Banks' Employees - Some banks refer property mortgage loan consumers to associated mortgage business. An associated mortgage company is often a separate subsidiary of the banks's holding business or a subsidiary of another monetary institution owned by the moms and dad holding company. In order to encourage the monetary organization's employees to refer customers to the affiliated mortgage company, some mortgage companies have actually used to pay a little fee to the employee whenever the recommendation leads to a loan origination. This practice is particularly restricted by Section 3500.14( b), which mentions: "A business may not pay any other company or the workers of any other business for the referral of settlement service organization."

Builder Loans - Residential homebuilders can frequently be a source of domestic loan referrals for a monetary institution. In numerous instances, the same lending institution who funds the home builder's construction expenses is also attempting to come from loans to the contractor's home buying customers. In such cases, the monetary institution needs to be cautious not to provide anything of value to the contractor in exchange for the recommendation of these clients.