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FIL-103-99 Attachment

Practices That may Lead to Potential Violations of Section 8 of the Real Estate Settlement Procedures Act

In lots of industries, firms commonly pay commissions to 3rd celebrations for company referrals. Congress looked for to remove these kinds of payments for domestic loans so that "the expenses to the American home buying public will not be unreasonably or needlessly pumped up." 1 As a result, payments related to settlement services for federally related mortgage loans must be reasonable settlement for the goods, services, or facilities really supplied.

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

- The payment and receipt of a charge or thing of value in return for the recommendation of settlement service company for a federally related mortgage loan, and
- Receipt or payment of any part or divides of charges (consisting of unearned costs) except for settlement services actually carried out.
RESPA applies only to "federally related mortgage loans." 2 These are generally mortgages to customers that are likewise covered by the Truth in Lending Act. Mortgage loans produced organization purposes are not covered by RESPA.

To know which practices can be infractions of Section 8 of RESPA, the terms consisted of in RESPA and the Housing and Urban Development's (HUD) Regulation X, which carries out RESPA, should be comprehended. Some essential terms follow:

- "Settlement service" is broadly defined in Regulation X. The term includes "any service offered in conjunction with a potential or real settlement." 3 A detailed list of examples of settlement services is contained in Section 3500.2 of Regulation X.
- "Thing of value," likewise broadly defined, includes all types of compensation such as cash, discount rates, incomes, commissions, costs, and preferential bank rates.4 HUD has described the opportunity to win a reward as a thing of value. For instance, a bank can not get in real estate representatives in a swimming pool to win a journey to Hawaii if a specific number of clients are described the bank for a mortgage loan.5.
- "Referral" consists of "any oral or written action directed to an individual which has the result of agreeably affecting the choice by any individual of a supplier of a settlement service or part of a settlement service when such individual will spend for such settlement service or service occurrence thereto or pay a charge attributable in whole or in part to such settlement service or business." 6 It also consists of "any circumstances in which a person paying for a settlement service or company occurrence thereto is required to use a particular company of settlement service or service event thereto." 7.
- "Agreement or understanding" is not particularly defined in Regulation X. However, the policy does state that" [a] n arrangement or understanding for the recommendation of service occurrence to or part of a settlement service require not be written or verbalized but may be established by a practice, pattern, or course of conduct. When a thing of value is received repeatedly and is connected in any method with the volume or worth of the company referred, the receipt of the thing of value is evidence 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 required to demonstrate an offense of Section 8. A violation might be established by showing either that a payment was made as compensation for referrals of previous company or for the function of securing recommendations in the future. In an informal opinion, HUD kept in mind that where there is proof of duplicated payments linked in any method with the volume or value of business, an administrative anticipation is developed 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 kept in mind recent events in which the charge collected by a banks for a third-party service exceeded the quantity the organization in fact paid to that third party. For instance, a monetary organization charged consumers $25 for a flood hazard determination, yet the flood risk determination firm that offered the service was just paid $20. In another example, customers were charged $40 for a credit report, however the banks only paid $15 to the consumer-reporting firm for the consumer report. Examiners also found an event in which an organization charged customers an appraisal evaluation cost. The charge was passed on to a committee made up of numerous members of the organization's board of directors, which did not in fact evaluate the appraisals. HUD has actually suggested that these arrangements make up fee splitting or invoice of unearned costs and for that reason breach Section 8( b) of RESPA.10

Contracts with Third-Party Settlement Service Providers - Some monetary organizations have actually contracted with third-party settlement company for such services as flood threat determinations, and genuine estate tax and hazard insurance services. In exchange for performing these services for all loans stemmed by the institution throughout the regard to the agreement, some firms have consented to perform the services for loans that were on the organization's books before participating in the agreement for no additional fee or a substantially minimized cost. HUD has figured out that these types of arrangements are 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 monetary organizations that wish to use a variety of residential loan items to a few of their customers do not have the essential knowledge to provide them. As a result, the organizations in some cases make arrangements to refer their consumers to other banks or mortgage companies. Payments made pursuant to these recommendation plans need to be for items and services actually carried out and affordable in an amount similar to deals within the very same market. HUD released a policy declaration on March 1, 1999, addressing a list of the services that ought to be performed by the referring party for coming from RESPA-related loans in order to receive compensation. This policy declaration was released in the FDIC's FIL-21-99, dated March 12, 1999.

Referral Fees From Mortgage Companies to Affiliated Banks' Employees - Some banks refer domestic mortgage loan customers to associated mortgage companies. An affiliated mortgage company is typically a different subsidiary of the financial organization's holding company or a subsidiary of another monetary institution owned by the parent holding company. In order to motivate the monetary organization's employees to refer clients to the affiliated mortgage business, some mortgage companies have provided to pay a small charge to the employee whenever the recommendation results in a loan origination. This practice is particularly restricted by Section 3500.14( b), which specifies: "A business might not pay any other company or the staff members of any other company for the referral of settlement service business."

Builder Loans - Residential homebuilders can frequently provide property loan referrals for a financial institution. In numerous circumstances, the exact same lender who finances the home builder's building costs is also trying to originate loans to the builder's home purchasing clients. In such cases, the monetary institution requires to be mindful not to offer anything of worth to the contractor in exchange for the referral of these consumers.