Bulletin: NL000015

Dear Associates:

New Regulations

Revised regulations (Regulation X) for the Real Estate Settlement Procedures Act of 1974 (RESPA) are effective December 2, 1992.

RESPA Closings

RESPA applies to federally-related mortgage loans. These are loans:

• Secured by first liens or subordinate liens (by separate new law and regulations to be issued);
  
  
• Covering one-to-four-family residences (including condominiums and manufactured homes) and;
  
  
• Made by federally-related lenders. These loans include loans by federally-insured banks and savings associations, HUD-insured loans, loans to be sold to FNMA, GNMA or FHLMC, and consumer creditor loans.

RESPA now applies to refinances.

The prior exemptions from RESPA of 25 acres and purchase for resale no longer apply.

HUD-1 - Mortgage Broker Fee
The settlement agent must show the mortgage broker's fee on the HUD-1. You must show the fee, whether paid by the borrower or by the lender. You should disclose the fee on a blank line on the 800 series. You disclose it as "mortgage broker fee", "points paid to mortgage broker", "discount points paid to mortgage broker", "loan origination fee paid to mortgage broker", or similar language.

If a loan is closed in the mortgage broker's name and a short-term advance of lender's funds is made, you must show the compensation to the mortgage broker on the HUD-1. If the settlement agent does not disburse the fee, it should identify it as POC.

If a mortgage broker makes the loan from its own funds or funds for which it has liability (warehouse line) and sells the loan after closing, this is an exempt secondary market transaction. The fees paid by the assignee to the mortgage broker do not have to be disclosed on the HUD-1.

Rebates

• Rebates Prohibited
  RESPA prohibits rebates and referral fees for referral of settlement services.
  
  
• Settlement Services
  Settlement services subject to these rebate prohibitions include:
  
  
  • Title services (including title insurance),
    
    
  • Attorney services,
    
    
  • Conducting of settlement,
    
    
  • Services involving real property taxes or assessments,
    
    
  • Real estate agent services, and
    
    
  • Other services that a settlement service provider requires a borrower or seller to pay for.
  
  
• Examples of Rebates
  The following may be rebates:
  
  
  • A title company receives "special" or "unusual" banking terms.
    
    
  • A title company pays lease or rental payments based on the amount of business referred.
    
    
  • A title company pays for trips and/or payment of another person's expenses.
    
    
  • A title company provides title services to a builder at abnormally low rates or at no charge in a subdivision development. In return, the builder agrees to refer purchasers of completed homes to the title company.
    
    
  • A title company refers business to an attorney. In return, the attorney agrees to provide legal services to the title company, its officers, and employees at abnormally low rates or at no charge.
    
    
  • A broker has a license as a title insurance agent. The broker refers individuals to an unaffiliated title company in transactions in which it is a broker. The broker performs minimal title services (such as placing an application with the title company). The title company pays the broker or arranges direct payment by the purchaser to the broker for the title services.
    
    
  • A title company places a facsimile transmission machine in the office of a mortgage lender so that the mortgage lender can transmit requests for commitments. The title company supplies the FAX machine at no cost or a reduced rental, based on the number of orders received. The furnishing of the FAX machine, copying machines, computer terminals, printers or other like items that will have general use and which are given in exchange for referral of business violates RESPA.
    
    
  • A title insurance agent refers or contracts out all of its business to the contractor that does all the title work and splits the fee with the title insurance agent. If the title insurance agent is a mere shell and provides no substantive services for its portion of the fee, the arrangement with the contractor violates RESPA.
    
    
• Exceptions to Rebates
  RESPA allows:
  
  
  • Bona fide salary,
    
    
  • Normal promotional and educational activities not conditioned on referral of business and not defraying expenses normally incurred by a person in the position to refer business, and
    
    
  • Employer payment to its own employees for referrals.
  
  
• Payment to Another Company or its Employees
  A company may not pay another company or employees of another company for referral of settlement services. This is true even if the companies are affiliated companies. A company whose employee makes a referral to another affiliated company may pay that employee a referral fee. However, the referred company may not reimburse or pay the employer for the referral.
  Example: Company "A" is affiliated with Title Company "B". Employee of Company "A" refers business to Title Company "B". Company "A" may pay its employee for the referral. Title Company "B" may not pay Company "A"s" employee or Company "A" for the referral.
  RESPA prohibits subterfuge payments to avoid this prohibition between affiliated companies.
  
  
• Attorney Title Agent
  An attorney of the buyer or seller receiving compensation as a title agent must perform core title agent services:
  
  
  • The attorney must have liability for these services;
    
    
  • The attorney must evaluate the title search to determine insurability of title;
    
    
  • The attorney must clear underwriting objections;
    
    
  • The attorney must actually issue the policy;
    
    
  • Where customary, the attorney must issue the title commitment, and
    
    
  • Where customary, the attorney must conduct the title search and closing.
    

Controlled Business

Controlled business exists if a person making the referral or an associate of that person has an affiliate relationship or direct or beneficial ownership interest of more than one percent (1%) in a provider of settlement services. Affiliates include companies, if under common control (20% owned), or parents or subsidiaries. Associates include officers, directors, spouse, parent, child, or corporations under common control.

A person who refers controlled business must disclose the relationship and estimated charges at the time of the referral. For an example of the appropriate disclosure, please see the reference section at the end of this bulletin.

The person cannot require use of the referral unless (a) the person is a lender requiring use of an attorney, credit reporting agency, or real estate appraiser, or (b) the person is an attorney arranging title insurance for a client.

The person making the referral must retain the disclosure for five (5) years.

The person in a controlled business arrangement may only receive a return on ownership (e.g., dividends). The return cannot relate to the amount of business referred.

A person in a controlled business arrangement may offer packages of settlement services with bona fide discounts (for use of the package). A package discount does not require use of the service.

Example: Broker owns 1.1% of a title company and makes a referral of the title company to the buyer. The broker must disclose to the buyer its relationship with the title company and the estimated charges, and must not require use of the title company.

Example: Stockholder "A" owns twenty percent (20%) of the stock of Mortgage Company "X" and 20% of stock of Title Company "Y". Mortgage Company "X" refers title business to the Title Company "Y". Since Mortgage Company "X" is an affiliate of Title Company "Y", this is controlled business. Mortgage Company "X" must make the disclosure.

Example: A brokerage firm employs a real estate sales person. An officer of the brokerage firm owns more than 1% of the title company. The real estate sales person refers business to the title company. The real estate firm is an associate of a person (the officer) that owns more than 1% of the title company. Since the sales person represents the brokerage firm in making the referral, this constitutes controlled business.

Sellers Require Title Company Use
A seller cannot require that the buyer purchase title insurance from a particular title company.

Penalties
Penalties for violation of RESPA include debarment (HUD loans), fines not to exceed $10,000 and one (1) year in prison for each violation, and three (3) times the settlement service charge made.

HUD-1 Instructions
HUD has modified the HUD-1 instructions.
For example, the HUD-1 must name all buyers and sellers.
Line 202 concerns conversion of temporary to permanent financing.
The instructions clarify "P.O.C." charges on borrower's deposits. Line 506 shows deposits by the buyer to one who is not the settlement agent.
Lines 801-811 reflect current FHA, VA, and FMHA practices. The VA funding fee should be shown on Lines 904 and 905.
Lines 808-811 discuss CLO (Computer Loan Origination) access fees and mortgage broker fees.
Lines 1100-1113 discuss closings involving multiple attorneys and attorneys acting as title agents.

State Law
Actions that comply with RESPA may still violate state law. You also must consider your state regulation.