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Everything you need to know about RESPA, explained

Tuesday, June 14, 2016   /   by Nicole Solari

Everything you need to know about RESPA, explained

The Real Estate Settlement Procedures Act has been around since 1974 — but the changes over the past few years, combined with the creation and implementation of the Consumer Financial Protection Bureau (CFPB), have caused some confusion in the industry.


What is the act? What does it mean for agents and for consumers?


Here’s what you need to know about RESPA — explained.


What is RESPA?


It’s the Real Estate Settlement Procedures Act, a consumer protection statute passed by the U.S. Congress in 1974.


The statute has two main purposes:


1.    To help consumers become better shoppers for settlement services; and


2.    To eliminate kickbacks and referral fees that may increase the costs of certain settlement services.


The consumer side of RESPA requires that borrowers receive disclosures at certain times during the mortgage loan transaction that plainly describe the terms of the loan, all settlement service charges associated with the loan and the business relationships between the lender and other settlement service providers, if any.


RESPA also addresses certain industry practices that have in the past been shown to increase the cost of settlement services. Specifically, it prohibits any person (or company) from giving or accepting anything of value in exchange for business referrals. It also prohibits a person from giving or accepting any portion of a charge for a service that wasn’t actually performed.


Where can I find RESPA?


RESPA is codified at Title 12, Chapter 27 of the United States Code, 12 U.S.C. §§ 2601-2617.


Why was RESPA enacted?


In the 1970s, Congress became concerned that mortgage loan applicants were being overcharged for settlement services. A 1972 study by HUD and the Administrator of Veterans Affairs (VA) found that most borrowers were not shopping around for their settlement service providers, and instead, their real estate brokers, closing attorneys and other professionals were referring them to lenders, title insurance companies and other providers.


Who administers RESPA?


From the time RESPA was enacted in 1974 until 2011, HUD administered and enforced the act. In July 2011, those duties transferred to the Consumer Financial Protection Bureau (CFPB), a federal agency created in 2010 by the passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act.


What kinds of loans are governed by RESPA?


RESPA applies to “federally related” mortgage loans that are secured by a mortgage loan on a one- to four- family residential property.


RESPA governs purchase loans, assumptions, refinances, property improvement loans and lines of credit associated with those federally related mortgage loans.


How does RESPA define “settlement service provider”? Who, exactly, does this statute affect?


RESPA defines “settlement services” as “any service provided in connection with a real estate.


Consumer disclosures


What were the consumer disclosures required under RESPA?


Much of RESPA concerns certain disclosures that were required to be given to borrowers at specific times during the mortgage transaction. These disclosures let the borrower know what to expect with regard to the terms of the mortgage loan, how the loan will be serviced and associated settlement costs.


The borrower must also be informed that he has the right to shop around for and choose his own settlement service providers, as well as about what, if any, business relationships his settlement service providers may have with each other.


First, there was the Good Faith Estimate of Settlement Costs, or GFE.


This was given to the borrower within three business days of applying for a loan. The GFE explained what settlement service charges the borrower was likely to pay — but those charges were exactly what the form says: A “good-faith estimate” of what the borrower may have to pay, and not a guarantee, as changing market conditions can affect prices.


Next, there was the Servicing Disclosure Statement, in which the lender or mortgage broker informs the borrower whether it expects someone else will be servicing the loan after it closes.


Perhaps the most talked-about RESPA disclosure form was the Affiliated Business Arrangement Disclosure, which reminded borrowers that they were not required (with certain exceptions) to use the affiliates of a lender, real estate agent/broker or other participant in the settlement.


If they did choose to use the providers recommended by their real estate agent/broker or lender, any affiliations between the companies — whether they were owned or controlled by a common corporate parent or simply had some sort of affiliated business arrangement — had to be disclosed, and the borrower acknowledged with his signature that he understood those relationships.


Next was the HUD-1 Settlement Statement, a form that itemized the services provided to the borrower and the actual fees charged to him. This form was required to be delivered or mailed to the borrower one day before settlement.


Finally, there were the Escrow Account Operation & Disclosures forms. The entity servicing the loan was required to give the borrower an initial escrow account statement at settlement or within the next 45 days. This form showed all of the payments that were to be deposited into an escrow account, as well as all of the disbursements that were to be made from the escrow account for the first year.


The lender/servicer also reviewed the escrow account annually and was required to report to the borrower once per year about the prior year’s activity and any adjustments that the borrower may have to make in the next year.


Prohibited activities


What industry practices does RESPA prohibit?


Namely, offering kickbacks, referral fees and fee-splitting with other settlement service providers in exchange for the referral of business, and charging consumers fees for services that were not actually rendered. This is the “meat” of RESPA and the portion of the statute that affects the real estate industry the most.


Section 8(a) of RESPA, which pertains to business referrals, 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.”


Put more plainly, Section 8(a) means that no settlement service provider may pay — or receive — fees or other items with the understanding or agreement that business will be sent their way.


Section 8(b), which pertains to splitting charges, 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(b) concerns any splitting or sharing of fees by and between the person who performs the legitimate service, as well as the person who provides the referral.


What is a “referral”?


It’s an agreement, understanding or expectation that you will send business to someone, or they will send it to you. And while referring borrowers to companies you have previous experience with or engaging in affiliated business arrangements and other partnership structures are longstanding, legal business practices in the real estate industry — and have been proven by some studies to have consumer benefits — RESPA prohibits you from doing certain things in connection with referring business or receiving business referrals from others.


What is a “kickback”?


A kickback is an illegal fee or rebate paid to someone in order to gain that person’s decision or recommendation for the award of business.


What is a “markup”?


A markup is an increase in price above a third-party vendor’s normal fee — and the parties that are referring business to each other may split the difference as a reward for the referral.


What is a “thing of value”?


It may sound like a mere transfer of money, but it actually means any type of consideration made in exchange for the referral of business — and under RESPA, it’s illegal for a real estate agent or broker to give or receive a thing of value contingent on the referral of business, even if the referral agreement is informal and not in writing, and even if it’s disclosed to the consumer.


You don’t have to avoid settlement service providers entirely to comply with RESPA. You can give or receive “things of value” in the course of doing business — you just can’t do it with the expectation of business referrals, and you can’t defray another provider’s expenses if they are in a position to refer business to you.


What is “fair market value”?


It’s the general market value for a good or service that a non-settlement service provider would pay for that good or service. When demonstrating to attorneys, compliance experts and regulators that you are providing a thing of value at fair market value, you must show that the value of the good or service is commensurate with what anyone would expect to pay for it today.


The whole idea is that providers aren’t paying you a higher or lower rate for goods or services with the expectation that you will be referring business to each other as a reward.


What are some examples of RESPA-compliant interactions I can have with settlement service providers?


The National Association of Realtors (NAR) has issued quite a bit of RESPA compliance guidance to its Realtor members over the years, and here is a short list issued by the association of some common interactions that are legal under RESPA:


·       RESPA allows a title agent to pay for your dinner when business is discussed, as long as those dinners are not a regular occurrence.


·       RESPA allows a home inspection company to sponsor association events when representatives from that company also attend and to post a sign identifying its services and sponsorship of the event.


·       RESPA allows a lender to pay you fair market value to rent a desk, copy machine and phone line in your office to prequalify applicants.


·       RESPA allows a title agent to provide, during an open house, a modest food tray in connection with the title company’s marketing information indicating that the refreshments are sponsored by the title company.


·       RESPA allows you to jointly advertise with a mortgage broker if you pay a share of the costs in proportion with your prominence in the advertisements.


·       RESPA allows a hazard insurance company to give you marketing materials such as notepads, pens and desk blotters which promote the hazard insurance company’s name.


How do I know if something I am doing is legal under RESPA?


RESPA is not black and white; it’s actually pretty gray. There are hundreds, if not thousands, of possible scenarios and business practices that real estate agents and brokers need to make sure are legal under RESPA.


Some of these scenarios may need to be reviewed on a case-by-case basis, and you will most likely need to provide extensive documentation to show that you made every effort to comply with RESPA.


If you aren’t sure if something you are doing can pass the RESPA smell test, you should consult with an attorney, preferably one who specializes in RESPA compliance. And it’s always a good idea to keep up on the latest case law and other legal happenings to see how different courts and regulators are interpreting RESPA and deeming certain activities to be legal or illegal — because since RESPA was enacted, some of those interpretations have conflicted with others, creating confusion about what’s legal and what’s not.


Permissible activities


Are there any marketing activities or business relationships that are permissible under RESPA?


Don’t worry; RESPA is not just a list of don’ts. There are some practices and arrangements that are allowed under the statute, which are described in Section 8(c).


This section provides for the following exceptions that allow the real estate, mortgage, title, escrow and settlement services industries to work together in a legally compliant way:


·       The payment of attorneys’ fees for services actually rendered, by a title company to its duly appointed agent for services actually performed in the issuance of a title insurance policy or by a lender to its duly appointed agent for services actually performed in the making of a loan;


·       The payment to any person of a bona-fide salary or compensation or other 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;


·       An employer’s payment to its own employees for any referral activities;


·       Affiliated business arrangements, as long as some conditions are met;


·       Transactions on the secondary market.


What is an “affiliated business arrangement” (ABA)?


RESPA defines an ABA as an arrangement in which:


A person 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, or an associate of such person, has either an affiliate relationship with or a direct or beneficial ownership interest of more than 1 percent in a provider of settlement services; and


Either of such persons directly or indirectly refers such business to that provider or affirmatively influences the selection of that provider.


In an ABA, bona-fide dividends and capital or equity distributions related to ownership interest or a franchise relationship between entities in an affiliate relationship are permissible. Bona-fide business loans, advances and capital or equity contributions between entities in an affiliate relationship are also allowed, as long as they are for ordinary business purposes and are not fees for the referral of settlement service business or unearned fees.


A return on an ownership interest does not include:


·       Any payment which has as a basis of calculation no apparent business motive other than distinguishing among recipients of payments on the basis of the amount of their actual, estimated or anticipated referrals;


·       Any payment which varies according to the relative amount of referrals by the different recipients of similar payments; or


·       A payment based on an ownership, partnership or joint venture share which has been adjusted on the basis of previous relative referrals by recipients of similar payments.


All ABAs must demonstrate compliance with the following conditions:


·       The person making the referral must provide the consumer with an ABA disclosure statement describing the nature and structure of the relationship between the providers, along with an estimated charge or range of charges generally made by those providers. This disclosure must be made at the time of the referral, or if the lender requires use of a particular provider, at the time of the loan application.


·       No person making a referral has required the consumer to use a particular provider as a condition of representing that consumer;


·       The only permissible thing of value that is received from the arrangement, other than these payments, is a return on an ownership interest or franchise relationship — but even this provision in the RESPA statute is a bit murky, as the CFPB has stated in some of its enforcement actions that it considers an ABA agreement itself to be a thing of value. Many compliance experts disagree with this analysis, but many companies are shying away from ABAs, just to be on the safe side.


Where a lot of companies run into trouble is assuming that the mere labeling of a thing of value determines whether it is a bona-fide return on an ownership interest or franchise relationship. In reality, a thing of value will be determined by regulatory investigators by analyzing facts and circumstances on a case-by-case basis.


A return on franchise relationship may be a payment to or from a franchisee, but it does not include any payment which is not based on the franchise agreement, nor any payment which varies according to the number or amount of referrals by the franchisor or franchisee, or which is based on a franchise agreement that has been adjusted on the basis of a previous number or amount of referrals by the franchiser or franchisees. A franchise agreement may not be constructed to insulate against kickbacks or referral fees — this is called a “sham” ABA.


What is a “joint venture” (JV)?


A JV is similar to an ABA, but the structure provides for the partnering settlement service providers to pool their resources to accomplish a business activity. A JV must be a standalone, bona-fide business with sufficient capital, employees and separate office space, and must perform core services associated with that industry.


Companies in the real estate, mortgage, title, escrow and settlement services began to establish JVs to enhance their purchase mortgage strategies or to enter a new market that may have historically been difficult for them.


In 1996, HUD issued formal guidance establishing a 10-prong test to determine whether a JV is legal:


1.    Does the new entity have sufficient initial capital and net worth, typical in the industry, to conduct the settlement service business for which it was created? Or is it undercapitalized to do the work it purports to provide?


2.    Is the new entity staffed with its own employees to perform the services it provides? Or does the new entity have “loaned” employees of one of the parent providers?


3.    Does the new entity manage its own business affairs? Or is an entity that helped create the new entity running the new entity for the parent provider making the referrals?


4.    Does the new entity have an office for business which is separate from one of the parent providers? If the new entity is located at the same business address as one of the parent providers, does the new entity pay a general market value rent for the facilities actually furnished?


5.    Is the new entity providing substantial services, i.e., the essential functions of the real estate settlement service, for which the entity receives a fee? Does it incur the risks and receive the rewards of any comparable enterprise operating in the market place?


6.    Does the new entity perform all of the substantial services itself? Or does it contract out part of the work? If so, how much of the work is contracted out?


7.    If the new entity contracts out some of its essential functions, does it contract services from an independent third party? Or are the services contracted from a parent, affiliated provider or an entity that helped create the controlled entity? If the new entity contracts out work to a parent, affiliated provider or an entity that helped create it, does the new entity provide any functions that are of value to the settlement process?


8.    If the new entity contracts out work to another party, is the party performing any contracted services receiving a payment for services or facilities provided that bears a reasonable relationship to the value of the services or goods received? Or is the contractor providing services or goods at a charge such that the new entity is receiving a thing of value’ for referring settlement service business to the party performing the service?


9.    Is the new entity actively competing in the market place for business? Does the new entity receive or attempt to obtain business from settlement service providers other than one of the settlement service providers that created the new entity?


10. Is the new entity sending business exclusively to one of the settlement service providers that created it (such as the title application for a title policy to a title insurance underwriter or a loan package to a lender)? Or does the new entity send business to a number of entities, which may include one of the providers that created it?


What is a “marketing service agreement” (MSA)?


MSAs are the newest type of affiliated relationship, and probably the most controversial activity that falls under the purview of RESPA. To date, no regulator has provided a concrete definition of an MSA, or described what kind of litmus test it will use to determine whether an MSA is RESPA-compliant.


An MSA is a contract by which one settlement service provider agrees to market another provider’s products and services. Generally, a real estate broker, developer, title company or mortgage broker will agree to market the service of another provider in exchange for a marketing fee. That fee is supposed to be based on a fair-market value of the marketing or advertising services to be performed, and must be for a bona-fide service or product, and should not be tied in any way to the referral of business.


Some examples of the types of goods and services provided under an MSA are:


·       Displaying another company’s marketing materials and signage at offices, on billboards and in other locations


·       Including another company’s web banner advertisement on your company’s website


·       Email and direct marketing campaigns to another company’s customers or prospects


·       Distribution of fliers, pamphlets and other materials


·       Participation in a company’s internal meetings or events


For more about RESPA see original article at http://www.inman.com/2016/06/07/everything-need-know-respa-explained/