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FIL-103-99 Attachment

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

In numerous industries, firms frequently pay commissions to 3rd parties for business referrals. Congress looked for to remove these kinds of payments for residential loans so that "the costs to the American home purchasing public will not be unreasonably or needlessly inflated." 1 As an outcome, payments associated with settlement services for federally associated mortgage loans need to be reasonable payment for the products, services, or facilities actually offered.

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

- The payment and receipt of a charge or thing of value in return for the referral of settlement service business for a federally associated mortgage loan, and

- Receipt or payment of any portion or splits of charges (including unearned fees) except for settlement services in fact carried out.


RESPA applies only to "federally associated mortgage loans." 2 These are normally mortgages to consumers that are also covered by the Truth in Lending Act. Mortgage loans made for service functions are not covered by RESPA.

To understand which practices can be offenses 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, need to be understood. Some essential terms follow:

- "Settlement service" is broadly specified in Regulation X. The term includes "any service offered in combination with a prospective or real settlement." 3 An extensive list of examples of settlement services is included in Section 3500.2 of Regulation X.

- "Thing of worth," likewise broadly defined, consists of all kinds of settlement such as cash, discounts, salaries, commissions, fees, and preferential bank rates.4 HUD has described the opportunity to win a reward as a thing of value. For example, a bank can not enter property agents in a swimming pool to win a trip to Hawaii if a particular number of consumers are described the bank for a mortgage loan.5.

- "Referral" consists of "any oral or written action directed to a person which has the effect of agreeably influencing the choice by anybody of a provider of a settlement service or part of a settlement service when such person will pay for such settlement service or service incident thereto or pay a charge attributable in entire or in part to such settlement service or organization." 6 It likewise includes "any instance in which an individual paying for a settlement service or business event thereto is needed to utilize a particular company of settlement service or business incident thereto." 7.

- "Agreement or understanding" is not particularly defined in Regulation X. However, the guideline does state that" [a] n agreement or understanding for the referral of service incident to or part of a settlement service require not be written or verbalized but may be developed by a practice, pattern, or course of conduct. When a thing of value is gotten repeatedly and is connected in any way with the volume or worth of the service referred, the invoice of the thing of worth is evidence that it is made pursuant to an arrangement or understanding for the referral of business." 8.


Repeated conduct is not a necessary element that is required to show a violation of Section 8. An offense might be developed by revealing either that a payment was made as payment for referrals of past business or for the purpose of protecting referrals in the future. In an informal opinion, HUD kept in mind that where there is proof of repeated payments connected in any way with the volume or worth of business, an administrative anticipation is produced 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 kept in mind recent events in which the fee gathered by a banks for a third-party service surpassed the quantity the institution in fact paid to that 3rd party. For example, a monetary institution charged customers $25 for a flood hazard decision, yet the flood hazard determination company that offered the service was just paid $20. In another example, customers were charged $40 for a credit report, however the financial organization only paid $15 to the consumer-reporting firm for the consumer report. Examiners likewise discovered an occurrence in which an institution charged clients an appraisal assessment cost. The charge was handed down to a committee made up of several members of the organization's board of directors, which did not really examine the appraisals. HUD has actually opined that these plans make up charge splitting or receipt of unearned charges and therefore break Section 8( b) of RESPA.10

Contracts with Third-Party Settlement Service Providers - Some monetary organizations have contracted with third-party settlement provider for such services as flood threat decisions, and genuine estate tax and danger insurance services. In exchange for carrying out these services for all loans come from by the organization during the regard to the contract, some firms have consented to carry out the services for loans that were on the institution's books before entering into the contract for no additional cost or a substantially reduced charge. HUD has actually determined that these types of agreements are in violation of Section 8 due to the fact that 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 institutions that would like to provide a range of property loan products to some of their customers do not have the needed competence to offer them. As a result, the organizations often make plans to refer their consumers to other monetary organizations or mortgage business. Payments made pursuant to these referral arrangements need to be for items and services actually carried out and affordable in a quantity comparable to transactions within the very same market. HUD released a policy declaration on March 1, 1999, addressing a list of the services that ought to be carried out by the referring celebration for stemming RESPA-related loans in order to receive compensation. 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 organizations refer residential mortgage loan clients to affiliated mortgage business. An associated mortgage business is typically a different subsidiary of the monetary institution's holding business or a subsidiary of another financial institution owned by the parent holding company. In order to encourage the banks's staff members to refer consumers to the associated mortgage business, some mortgage business have actually provided to pay a little fee to the employee whenever the recommendation results in a loan origination. This practice is specifically prohibited by Section 3500.14( b), which states: "A company might not pay any other company or the workers of any other business for the referral of settlement service company."

Builder Loans - Residential homebuilders can typically provide domestic loan recommendations for a banks. In lots of instances, the exact same lender who funds the builder's construction expenses is also trying to stem loans to the home builder's home acquiring consumers. In such cases, the banks requires to be careful not to offer anything of worth to the home builder in exchange for the referral of these clients.