Bulletin: NL000058

Dear Associates:

Final Revisions

The Department of Housing and Urban Development (HUD) has published a final Rule (effective January 14, 1997) and interpretations (policy statements) of the Real Estate Settlement Procedures Act (RESPA).

These revisions:

• Analyze allowable computer loan origination (CLO) fees.
  
  
• Set forth factors to determine if an affiliated business arrangement (or joint venture) is an illegal sham.
  
  
• Discuss rental of office space, lockouts, and retaliation.
  
  
• Include a Revised Affiliated Business Arrangement Disclosure (Exhibit 1).

HUD also published proposed changes on payments to employees for referrals. HUD has not determined when the changes on employee referral will be effective.

These rules apply only to "RESPA" transactions. RESPA transactions generally involve first or subordinate liens on one-to-four family improved property.

If state law is more stringent, you also must comply with state law.

New Exemption

RESPA does not apply to business, commercial, or agricultural loans. RESPA no longer applies to one-to-four family residential properties used by individuals for rental.

Computer Loan Origination Systems (CLOs)

The prior regulation allowed payments by borrower for CLO services.

A CLO is a computer system used to provide a consumer with choices of alternative products or settlement service providers on RESPA transactions. The CLO may include prequalification of borrowers, choices of ancillary settlement services, rates and terms of products, collection and transmission of information for applications, and underwriting and funding decisions.

The prior CLO disclosure is no longer required.

The policy statement allows payment for CLO services:

• The consumer may pay for CLO services at or before closing.
  
  
• A settlement service provider (shown on the CLO) may reimburse the consumer for fees charged by the CLO (unless illegal under state law).
  
  
• The CLO may charge settlement service providers for use of the CLO. The fee may be fixed, periodic, or based on the number of closed transactions arising from the CLO.
  
  
• If a CLO charges different fees to different settlement service providers in "similar situations" (e.g., same types of services), the differential payment may be an illegal referral fee.
  
  
• If the CLO lists only one settlement service provider (for a type of service) and only presents basic information on that provider, any payment by the provider for the CLO listing is likely a referral fee.
  
  
• The CLO may pay commissions to its own employees for transactions closed on the system. The settlement service provider listed on the CLO may not pay a referral commission to CLO employee. If the CLO pays commissions for transactions with some settlement service providers and not others, the commission may be an illegal referral fee.
  
  
• The affiliated business arrangement (ABA) regulations apply to CLOs. A CLO must provide the ABA disclosure (Exhibit 1) if it refers business to an affiliate. The affiliate may pay the CLO dividends based on return of ownership.
  
  
• The CLO must make neutral displays of information. The display may rank products on neutral factors, such as price. The display may not always show one provider at the top of a listing if there is no real difference in prices.

Affiliated Business Arrangements

Affiliated Business Arrangements (ABA), formerly Controlled Business Arrangements, are lawful under RESPA if the ABA complies with the existing regulations:

• The Affiliated Business Disclosure must disclose the existence of the arrangement and a written estimate of the charge or range of charges generally made. The disclosure must be made:
  
  
  • at or before the referral if the referral is face-to-face. The disclosure may be evidenced by a notation in a written, electronic, or similar system of records
    
    
  • within three business days after a referral by telephone or electronic media. An abbreviated verbal disclosure of the arrangement and the fact that the written disclosure will follow must be made.
    
    
  • at the time of the good faith estimates, if the referral is made by an affiliated lender.
    
    
• The affiliated party must not require use of the other affiliate.
  
  
• The only thing of value received must be a return on ownership of the affiliate.

Sham arrangements are used as conduits to pay illegal referral fees on RESPA transactions.

HUD has developed a series of questions to determine whether an entity is a bona fide settlement service provider or an illegal sham arrangement under RESPA. A response to any one question may not be determinative.

Example: Title insurer and real estate broker form joint venture title agent. Joint venture title agent enters service agreement with title insurer. Title insurer will provide title examination and title commitment preparation at a charge lower than cost. Joint venture uses title insurer's office space. Employee of title insurer is leased to joint venture to handle closings and prepare policies. Broker is sole source of joint venture's business. This is an illegal sham joint venture used to pay illegal referral fees.

Rental of Office Space, Lockouts and Retaliation

This Statement of Policy addresses several mechanisms that are used to refer business.

• Rental of Office Space: If a provider of settlement services (such as a lender or title company) rents a desk or office space in a real estate brokerage office, it must pay general market value. The market value includes an appropriate proportion of the cost of office services, such as secretary, utilities, and telephone. The market value is the general rental cost (such as the basic rent paid by the brokerage office to the fee owner) and not the market rate among settlement service providers (such as the rent paid by sales persons or other lenders for a desk in the office). Higher rent may be a rebate. Per use rental (e.g., per transaction referred or per closing done) may be an illegal rebate.
  
  
  • Example: A title company pays a "rental fee" to a broker for the conference room for each closing referred by the broker. HUD may view this as an illegal rebate.
    
    
• Lockouts: RESPA does not prohibit lockouts. A settlement service provider may prevent other providers from marketing in the provider's office or control area without violating RESPA. The lockout might violate state law.
  
  
• Retaliation: RESPA does not prohibit retaliation (or disincentives) against employees who fail to make referrals or referral quotas. Retaliation may violate state law. Retaliation may include required quotas, threatened loss of job, loss of benefits, fewer leads, or higher desk fees.