RESPA. Special Report. Inside this special report: Sources quoted in this special report:

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1 Special Report RESPA Inside this special report: Q&A: Business practices 2 Q&A: Gifts 13 Q&A: Fees 20 Sources quoted in this special report: Marx Sterbcow, managing partner, Sterbcow Law Group Jeff Arouh, partner, Holland & Knight LLP Grant Mitchell, senior counsel, Lotstein Buckman LLP, and former senior attorney for RESPA at HUD Herman Thordsen, principal attorney, The Law Offices of Herman Thordsen Rich Andreano, partner, Weiner Brodsky Sidman Kider PC Phil Schulman, partner, Kirkpatrick & Lockhart LLP Tawanna Matthews,HUD s Office of RESPA and Interstate Land Sales Mitch Kider, managing partner, Weiner Brodsky Sidman Kider PC Second Edition September 2006 No doubt about it RESPA is a confusing statute. With much room in the law for interpretation, it s no surprise that so many in the real estate industry have questions about what s permisable and what s not. To help provide some useful guidance, this special report highlights a number of questions asked by RESPAnews.com readers, along with the answers provided by a panel of RESPA-expert attorneys. The questions are divided into three broad categories for easy perusal: Business Practices, Gifts and Fees. Please note that these questions are meant to provide general statute clarifications only. For more in-depth legal advice on specific situations, members of the industry are encouraged to retain private counsel. About this special report: RESPAnews is published by October Research Corporation. Any content in this Special Report should not be substituted for legal advice. Please consult with your attorney on specific questions.

2 2 RESPA Q&A RESPA Q&A: Business practices July 5, 2006 Does a home warranty company offering compensation to Realtors on renewal policies violate RESPA? A business entity may not pay any other business or the employees of any other business entity for the referral of settlement service business. RESPA Section 8(a) Our home warranty company would like to know if we are in compliance with regards to home warranty renewal policies. We offer compensation to real estate agents on these home warranty renewal policies and wonder if this violates RESPA Sections 8(a) and (b). Marx Sterbcow, managing partner of the Louisiana-based Sterbcow Law Group, says: There are four essential terms that are critical to interpreting Section 8 under RESPA: Is a home warranty company (HWC) considered a settlement service? Is there a thing of value given by the HWC to the real estate agents? Is there an agreement or understanding between the HWC and the real estate agents? Can the agreement by the HWC, if they are classified as a settlement service, be construed as them giving something of value to the real estate agents for the referral of past, current, or future business? Section 8 provides two basic rules of prohibition. First, Section 8(a) prohibits the transfer of a thing of value pursuant to an understanding that business will be referred to any person. (a) 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. 12 U.S.C. Sec. 2607(a). Regulation X adds: Any referral of a settlement service is not a compensable service, except as set forth in Sec (g)(1). A business entity (whether or not in an affiliate relationship) may not pay any other business entity or the employees of any other business entity for the referral of settlement service business. Section, Section 8(b) prohibits the splitting of any charge made or received for the performance of a settlement service except for services actually performed. (b) 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. 12 U.S.C. Sec. 2706(b). Regulation X adds: A charge by a person for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee and violates this section. The source of the payment does not determine whether a service is compensable. Nor may the prohibitions of this Part be avoided by creating an arrangement wherein the purchaser of

3 RESPA Q&A 3 RESPA Q&A: Business practices If an agent is going to get compensated for home warranty renewal policies then they should at least fill out the application on the renewal home waranty policy. Marx Sterbcow services splits the fee. 24 C.F.R (c). An HWC typically will be considered a settlement service provider on residential transactions involving federal related mortgages loans on new home warranty policies. The question is whether home warranty renewal policies violate RESPA. The answer is three-pronged: No - Home warranty renewal policies do not violate RESPA because they are outside of the settlement service (residential closing) process. In other words, the policy can be purchased or renewed because the owners of the property have already purchased their home. The renewal policies will be considered a secondary transaction. Yes - A home warranty renewal policy could violate RESPA if a real estate agent doesn t perform any of the necessary functions and is just paid money for not doing any work (not filling out the application) or de minimus work for the amount the agent receives. HUD could look at the payment to a real estate agent as a Section 8(a) and/or 8(b) violation if the renewal payment is given to the agent for doing no work at all or if the amount given is excessive even though the renewal is outside of the settlement service process. Section 8(a)&(b) would probably see this as a kickback for the future referral of business and/or payment for work not done. Undecided - A home warranty renewal policy may or may not violate RESPA if the agent does work on the initial policy and is paid the fair market value for the services performed in connection with the residential transaction involving a federally related mortgage loan and then does no more work but HWC then continues to pay agent every time the consumer renews his/her policy. HUD might rule that this does violate RESPA Section 8(a) and possibly even 8(b) although HUD and the courts haven t given guidance on this issue yet. If an agent is going to get compensated for home warranty renewal policies then they should at least fill out the application on the renewal home warranty policy. If an agent is paid for doing nothing on the renewals, even though the agent did the work on the initial application, I think you would be pushing the limits of HUD and putting yourself at risk. May 9, 2006 Can a mortgage company sell shares to someone licensed in real estate, and then distribute dividends to those shareholders? A mortgage professional asked: Can a mortgage company sel shares to an individual or entity licensed in real estate, and distribute NOI dividends to those shareholders in proportion to their ownership? Marx Sterbcow, managing partner of The Sterbcow Law Group in Louisiana, responds: Generally, a mortgage company can

4 4 RESPA Q&A RESPA Q&A: Business practices The percentage interest of each party in the profits of this mortgage company must be proportional to that party s contribution to the capital of the mortgage company. Marx Sterbcow sell shares to a real estate agent or brokerage and it s possible to distribute net operating dividends to the shareholders (either a real estate agent or a brokerage) in proportion to their ownership in the profit center. However, the mortgage company and its shareholder(s) better consult with an experienced attorney on various state law issues, and it s especialy important to make sure that if real estate agents are involved that compliance with U.S. and state Securities Exchange Commission laws are strictly followed. There are many areas of RESPA business law that make answering a general question like this difficult because it s a broad question. My brief answer is that the mortgage company must make sure that the each owner/investor in the mortgage company is receiving returns based solely on their percentage of ownership interest. In other words, the percentage interest of each party in the profits of this mortgage company must be proportional to that party s (agent/brokerage) contribution to the capital of the mortgage company. Also understand that you can t adjust the dividends to reflect the amount of business that you made or did not make. One word of warning when entering into a business relationship with individual real estate agents such as this: Do your homework on the perils and pitfalls of having real estate agent shareholder owners in your mortgage company, such as what happens if real estate agent X buys $20,000 worth of shares into the mortgage company, agent Y buys another $20,000, and at the end of the year agent X only brings in $5,000 worth of business while agent Y brings in $100,000. How happy will agent Y be when she finds out that agent X will get the same amount of distributed dividends? In other words, make sure that you not only do your legal homework but also your business homework, because you could end up harming your already existing mortgage company. From the real estate brokerage shareholder standpoint, the perils and pitfalls are significantly less but sometimes when you bring in a brokerage as a shareholder, the other real estate brokerages may stop sending you business because they may now view you as the competition. Nov. 29, 2005 Can a mortgage company screen and pre-qualify buyers for FSBOs in exchange for leads? A mortgage company asks: We (mortgage company) utilize a tol free number that allows us to capture calers phone numbers. We have been targeting FSBOs and offering to help market their homes, and we, in turn, get the prospective homebuyer leads. We screen and pre-qualify the buyers for the FSBO owner, but have recently found out that this may be a violation of RESPA because we are providing a service in exchange for leads. Is there a way to do this and not violate RESPA?

5 RESPA Q&A 5 RESPA Q&A: Business practices Marx Sterbcow, managing partner of the Louisiana-based Sterbcow Law Group, responds: Let s look at the statutory rule of RESPA Section 8(a) before I answer this question. Your program could comply with RESPA if you charged the FSBO sellers a reasonable fee for the actual costs that your program costs to provide to the FSBO selers. Marx Sterbcow "Section 8(a) prohibits the transfer of a thing of value pursuant to an understanding that business will be referred to any person. 12 U.S.C. Sec. 2607(a); Reg. X, 24 C.F.R (b). Section 8(a) states that '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. The program that your mortgage company is conducting appears to provide the FSBO sellers with a tollfree phone number that is used to screen applicants and provide free marketing in exchange for the referral of business. Your program in its current form appears to violate RESPA 8(a). So is there a way to do this program and not violate RESPA? For guidance on this issue we need to look at the infamous Coldwell Banker United and Coldwell Banker Richard Smith Realtors HUD settlement case. In that case, seven Austin, Texas, title companies provided Internet-based free virtual home tours to the Coldwell Banker real estate agents, who accepted, in exchange for the referral of business. HUD said the real estate agents for these two brokerages accepted a 'thing of value' in exchange for the referral of settlement services in violation of Section 8(a) of RESPA. As part of the settlement, the title companies agreed that if they would charge a fee that represents their actual costs if they were to provide Virtual Home Tours to the agents. HUD has stated that any fee paid that equals or exceeds the actual cost of the virtual tour to the virtual tour provider shall be deemed a reasonable fee. So, to answer the first part of your question, your program could comply with RESPA if you charged the FSBO sellers a reasonable fee for the actual costs that your program costs to provide to the FSBO sellers. However, the second part of your question under RESPA is troublesome for the mortgage company program. In the Coldwell Banker settlement case, the title companies also agreed to alert real estate agents and Coldwell Banker United and Richard Smith Realtors that these virtual tours, even with the real estate agents paying the actual costs, come with absolutely no expectation of potential or future business. The program in its present form appears to still influence a purchaser s decision as to where they should get a mortgage loan from because you would pre-screen and

6 6 RESPA Q&A RESPA Q&A: Business practices If an agent is given a percentage of the origination fee, HUD requires them to do more than just take a loan application. Phil Schulman qualify the prospective purchasers, which would violate RESPA. In conclusion, my answer is that you should seek competent legal counsel to advise you on other programs that you can implement that don t violate RESPA. Additionally, always make sure you run your program past a licensed attorney in every state in which you are licensed to conduct mortgage business as other state laws might be violated in addition to RESPA. Sept. 28, 2005 If a customer changes loan products midway through the approval process, is a new GFE required? A mortgage company wants to know: "If a loan applicant changes their loan product midway through the approval process, is a new Good Faith Estimate required?" HUD responds: The RESPA rules do not expressly impose any disclosure requirements beyond the initial Good Faith Estimate of settlement costs that must be provided to mortgage applicants within three days of application. However, where the loan product sought by the borrower is subsequently changed and the change results in different estimates of settlement costs, HUD strongly recommends that a new Good Faith Estimate be provided to the borrower. Aug. 24, 2005 For Realtors working as loan officers, what are the RESPA rules? RESPAnews has received a number of questions in recent days regarding the issue of Realtors getting additional compensation for doing work as loan officers/originators. We have answered at least three questions on this issue at various times during the history of the Q&A, so here then is our comprehensive guide to understanding the RESPA regulations surrounding the issue, with answers provided by four of our RESPA-expert attorneys. Question One: Is it a RESPA violation if a real estate agent accepts compensation for originating loans for lenders? No - but this is a tricky area. Phil Schulman of Kirkpatrick and Lockhart warns agents that in some states, individuals assisting in loan origination must be licensed as a mortgage broker. Further, if an agent is given a percentage of the origination fee, HUD requires them to do more than just take a loan application. According to HUD's 1999 Statement of Policy, to be eligible to receive fair and reasonable compensation, a mortgage broker must take information from the borrower and fill out the application as well as perform at least five services from a list of 14 functions. These include: 1.Taking information from the borrower and filling out the application; 2. Analyzing the prospective borrower's income and debt and prequalifying the prospective borrower to determine the maximum mortgage

7 RESPA Q&A 7 RESPA Q&A: Business practices The IBAA letter states that at a minimum, a person should take the loan application and perform at least five common settlement services which HUD identifies. Grant E. Mitchell that the prospective borrower can afford; 3. Educating the prospective borrower in the homebuying and financing process, advising the borrower about the different types of loan products available, and demonstrating how closing costs and monthly payments could vary under each product; 4. Collecting financial information (tax returns, bank statements) and other related documents that are part of the application process; 5. Initiating/ordering VOEs (verifications of employment) and VODs (verifications of deposit); 6. Initiating/ordering requests for mortgage and other loan verifications; 7. Initiating/ordering appraisals; 8. Initiating/ordering inspections or engineering reports; 9. Providing disclosures (truth in lending, good faith estimate, others) to the borrower; 10. Assisting the borrower in understanding and clearing credit problems; 11. Maintaining regular contact with the borrower, Realtors, lender, between application and closing to appraise them of the status of the application and gather any additional information as needed; 12. Ordering legal documents; 13. Determining whether the property was located in a flood zone or ordering such service; and 14. Participating in the loan closing. Question Two: Can a mortgage company compensate a Realtor for doing work on the loan process? A RESPAnews.com member from a mortgage company asked: "If a Realtor does work on the loan process (i.e. order title or appraisal, take initial application) can I legally pay him as long as it is W2'd? I would not charge the borrower. I would pay the Realtor taxed income through my payroll." Grant E. Mitchell, senior counsel with Lotstein Buckman LLP and former senior attorney for RESPA at HUD, said: HUD did issue guidance in 1995 regarding payments to third parties providing mortgage origination services (the so-caled IBAA leter ). This letter indicated that at a minimum a person should take the loan application and perform at least five common settlement services which HUD identifies in the IBAA letter. The letter differentiates between 'hard' services and soft, or counseling, services. While the original IBAA leter was only addressed to one entity, in 1999 HUD favorably referenced it in a Statement of Policy on mortgage broker fees, which effectively enhanced the status of the IBAA letter. The payments for the services in the IBAA letter were approximately $200 in RESPA is a criminal and civil statute with substantial penalties as well as exposure to the class action bar, so no one should enter into such an arrangement without reviewing the

8 8 RESPA Q&A RESPA Q&A: Business practices Any agent that acts as a real estate mortgage broker in any capacity and as a real estate agent in the same transaction is barred from receiving any compensation when an FHA loan is involved. Marx Sterbcow details of the IBAA letter with competent counsel. Also, performing these services may trigger the mortgage broker laws of many states, which is another potential exposure. In September 2003, HUD entered into a cease and desist settlement agreement with an Atlanta-based mortgage broker who was paying real estate agents $400 per application. The mortgage broker also agreed to refund the payments amount and paid a fine to the U. S. Treasury. Be careful out there. In addition to that, Marx David Sterbcow, managing partner of the Sterbcow Law Group LLC, noted: Any agent that acts as a real estate mortgage broker in any capacity and as a real estate agent in the same transaction is barred from receiving any compensation when an FHA loan is involved even if all the RESPA requirements have been met. Question Three: Can a real estate salesperson do double-duty for a client as both agent and loan officer? A RESPAnews.com reader asked: "Can a real estate salesperson also be a loan officer working for a mortgage broker, servicing his clients' loan needs?" Jeff Arouh, partner with Holland & Knight LLP, responded by saying: I am unaware of any provision in RESPA that would prohibit a real estate sales person from also being a loan officer working for a mortgage broker. However, this simple answer does not even begin to scratch the surface of the complex underlying issues that would have to be addressed. Arouh then briefly listed a few of those numerous issues, saying, "First, it must be remembered that it is the real estate broker, not the sales agent, that has the relationship with the client or customer. Similarly, it is the mortgage broker, not the loan officer, that has the relationship with the customer. Accordingly, even though the salesperson may be servicing the client in multiple capacities, there are two different entities providing services. Each of these entities must comply with the federal (RESPA, etc.) requirements as well as the applicable state law requirements. If there is a referral between the companies in contemplation of the payment of a fee, that would, presumably, be covered by RESPA. If there is a relationship between the real estate broker and the mortgage broker, there may be a need for an affiliated business disclosure to be given at the time of the referral." He concluded by saying that "there are any number of permutations and combinations that can come out of this relatively simple question. The answer is likely to depend on the specific facts, many more of which would be required." Aug. 3, 2005 Can a builder with an affiliated mortgage company discourage buyers from using an outside lender? A mortgage company asked: We have been seeing more builders that own their own mortgage

9 RESPA Q&A 9 RESPA Q&A: Business practices companies steer buyers to that entity by telling them that the price would be higher if they went to another lender. They even put similar language into their contracts. Is this a RESPA violation? Rich Andreano, attorney with Weiner Brodsky Sidman Kider PC in Washington D.C. explains: A builder may not increase prices or costs to the buyer if the buyer elects to use a nonafiliated lender. Rich Andreano A builder may ofer discounts to homebuyers to select the builder s affiliated mortgage company. The discounts must be bona fide they may not be offset by higher costs elsewhere in the transaction. However, HUD takes the position that a builder may not increase prices or costs to the buyer if the buyer elects to use a non-affiliated lender. In other words, while discounts below the standard price may be offered to buyers if they elect to use an affiliated mortgage company, a builder may not increase prices above the standard price when buyers select a nonafiliated mortgage company. June 23, 2005 Can a bank lease office space within a Realtor s ofice to set up a mortgage service? A RESPAnews.com reader asked: Can a bank lease ofice space within a Realtor s ofice to set up a mortgage service? What are the implications of that arangement? The Department of Housing and Urban Development (HUD) answered that question in 1996, when it published its Statement of Policy on Rental Office Space, Lock-outs and Retaliation Regulations. That statement, available here: /res0607b.cfm, essentially said the following: In the last few years, the department has received numerous complaints alleging that certain settlement service providers, particularly lenders, are leasing desks or office space in real estate brokerage offices at higher than market rate in exchange for referrals of business. Section 8 of RESPA prohibits a person from giving or from accepting any fee, kickback or thing of value pursuant to an agreement that business incident to a settlement service involving a federally related mortgage loan shall be referred to any person. 12 U.S.C. Sec. 2607(a). An example of a thing of value is a rental payment that is higher than that ordinarily paid for the facilities. The statute, however, permits payments for goods or facilities actually furnished or for services actually performed. 12 U.S.C. Sec. 2607(c)(2). Thus, when faced with a complaint that a settlement service provider is paying a high rent for referrals of settlement service business, HUD analyzes whether the rental payment is bona fide or is really a disguised referral fee. HUD's regulations implement the statutory provisions at 24 CFR

10 10 RESPA Q&A RESPA Q&A: Business practices HUD determines whether the rental payment bears a reasonable relationship to the market value of the rental space provided or is a disguised referral fee and give greater guidance to this analysis. Section (g)(2) of the regulations provides that the department may investigate high prices to see if they are the result of a referral fee or a split of a fee. It states: If the payment bears no reasonable relationship to the market value of the goods or services provided, then the excess is not for services or goods actually performed or provided. The value of a referral (i.e., the value of any additional business obtained thereby) is not to be taken into account in determining whether the payment exceeds the reasonable value of such goods, facilities or services. Thus, under existing regulations, when faced with a complaint that a person is renting space from a person who is referring business to that person, HUD examines the facts to determine whether the rental payment bears a reasonable relationship to the market value of the rental space provided or is a disguised referral fee. The market value of the rental space may include an appropriate proportion of the cost for office services actually provided to the tenant, such as secretarial services, utilities, telephone and other office equipment. In some situations, a market price rental payment from the highest bidding settlement service provider could reflect payments for referrals of business to that settlement service provider from the person whose space is being rented. Thus, to distinguish between rental payments that may include a payment for referrals of settlement service business and a payment for the facility actually provided, HUD interprets the existing regulations to require a general market value standard as the basis for the analysis, rather than a market rate among settlement service providers. In a rental situation, the general market value is the rent that a nonsettlement service provider would pay for the same amount of space and services in the same or a comparable building. A general market value standard allows payments for facilities and services actually furnished, but does not take into account any value for the referrals that might be reflected in the rental payment. A general market standard is not only consistent with the existing regulations, it furthers the statute's purpose. Congress specifically stated that it intended to protect consumers from unnecessarily high settlement charges caused by abusive practices. 12 U.S.C. Sec Some settlement service providers might be willing to pay a higher rent than the general market value to reflect the value of referrals of settlement service business. The cost of an abovegeneral-market-rate rental payment could likely be passed on to the consumer in higher settlement costs. If referrals of settlement service business are taking place in a given rental situation, and the rental payment is above the general market value, then it becomes difficult to distinguish any increase in rental payment over the general market from

11 RESPA Q&A 11 RESPA Q&A: Business practices a referral fee payment. HUD, therefore, interprets Section 8 of RESPA and its implementing regulations to allow payments for the rental of desk space or office space. If the rental payments exceed the general market value of the space provided, then HUD will consider the excess amount to be for the referral of business in violation of Section 8(a). However, if a settlement service provider rents space from a person who is referring settlement service business to the provider, then HUD will examine whether the rental payments are reasonably related to the general market value of the facilities and services actually furnished. If the rental payments exceed the general market value of the space provided, then HUD will consider the excess amount to be for the referral of business in violation of Section 8(a). As an additional consideration, HUD will examine whether the rent is calculated, in whole or in part, on a multiple of the number or value of the referrals made. If the rental payment is conditioned on the number or value of the referrals made, then HUD will consider the rental payment to be for the referral of business in violation of Section 8(a). May 10, 2005 Can a builder stipulate that if a buyer wants an incentive upgrade package, then they must use a specific title company? A real estate agent and RESPAnews.com member asked: Can a builder/developer stipulate in a sales contract that potential buyers must use the builder's choice of title company for closing, if the purchaser wanted an incentive upgrade package: i.e. new carpet, paint, granite tops, etc? I have seen on that it is permissible to do this if the price isn t increased when the buyer opts not to take advantage of the offer, but the question related to mortgage, not title. Marx Sterbcow, managing partner of The Sterbcow Law Group LLC in Louisiana responds: Section 9 and Reg. X prohibit selers of property that will be purchased with the assistance of a federally related mortgage loan from requiring title insurance to be purchased by the purchaser from any particular title company. This prohibition applies to sellers and all agents acting on behalf of the seller, but not other settlement service providers unless they are also sellers in a given transaction. Required Use means a situation in which the purchaser must use a particular provider of a settlement service in order to have access to some distinct service or property, and the person will pay for the settlement service of the particular provider or will pay a charge attributable, in whole or in part, to such settlement service. However, the offering of a package (or combination of settlement services) or the offering of discounts or rebates to consumers for the purchase of multiple settlement services does not constitute a required use. Any package or discount must be optional to the

12 12 RESPA Q&A RESPA Q&A: Business practices purchaser. The discount must be a true discount below the prices that are otherwise generally available, and must not be made up by higher costs elsewhere in the settlement process. See Reg. X, 24 C.F.R (b). The discount must be a true discount below the prices that are otherwise generally available, and must not be made up by higher costs elsewhere in the setlement process. Marx Sterbcow In this particular example, the builder/developer is not requiring the consumer to purchase title insurance through its preferred title company in order to buy the property. Instead it appears that the builder/developer is giving the purchaser the option to purchase title insurance through their preferred title company if the purchaser wants the optional upgrade package on their property. The builder/developer should be extremely careful in this type of arrangement, though, because if this results in higher costs to the consumer who selects the upgrade package option, then the RESPA police won t look too happy, but the plaintifs bar wil be grinning from ear to ear. April 4, 2005 Under RESPA, do last-minute refi rate changes require a new GFE? A member of RESPAnews.com asked: In a refinance transaction, if a loan changes from a fixed rate to ARM at the last minute, does the closing final GFE and HUD-1 satisfy RESPA disclosure requirements, or is there a required waiting period? Herman Thordsen, principal attorney for The Law Offices of Herman Thordsen, responded: You do not state if this is for a lender or a mortgage broker. The answer is slightly different for each. Additionally, the way the question is phrased seems to indicate a bait and switch type of situation since it is exceedingly rare that a lender or broker will find out a fix has to go to an ARM at the very last minute. Further we presume the loans are not high rate high fee loans as defined by Section 32 or Reg Z and as defined by state laws governing high cost high fee loans. With this said, generaly, RESPA only requires one GFE. See 24 CFR Section It is a prudent business practice to give another when there is a dramatic change in the loan product such as is suggested here. Further, the borrower still has three days to rescind, and if the product is changing after the borrower has been given the Reg Z disclosures and the Notice of Right to Cancel, another should be given and allowed three days to rescind. Thus, it is not so much a RESPA problem as a TIL- REG Z problem. March 25, 2005 If a mortgage company adds a Realtor s name to a For Sale sign already in place in front of a home, does the Realtor then need to pay for that advertisement? A RESPAnews.com subscriber recently described a situation and posed the following question: Situation: A mortgage company offers

13 RESPA Q&A 13 (A) monetary contribution would be seen as a Section 8(a) violation because it would help defray the Realtor s costs to put this part on for the Realtor s own customers. Marx Sterbcow RESPA Q&A: Gifts Dec. 7, 2005 Can a mortgage company contribute money or door prizes to a Realtor s customer appreciation party? My mortgage company would like to know if our loan officers are allowed to contribute to a Realtor s customer appreciation party in either of the following ways: 1) A monetary contribution to help pay for the party; or 2) The bringing of door prizes to be given out. Now you ve addressed a similar issue in this Q&A, and HUD has given related guidance in this Q&A, but neither seems to address the above issues exactly. Can you clarify? Marx Sterbcow, managing partner of The Sterbcow Law Group LLC in Louisiana, provided the following response: In order to properly address whether either of the mortgage company s contributions to the Realtor s customer appreciation party are legal under the Real Estate Settlement Procedures Act (RESPA) we must first look at Section 8(a) of RESPA: "Section 8(a) prohibits the transfer of a thing of value pursuant to an understanding that business will be referred to any person. 12 U.S.C. Sec. 2607(a); Reg. X, 24 C.F.R (b). Section 8(a) states that '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.' The first contribution: Let s discuss the monetary contribution by the mortgage company to help pay for the Realtor s party. This monetary contribution would be seen as a Section 8(a) violation because it would help defray the Realtor s costs to put this party on for the Realtor s own customers (the giving/receiving of a thing of value). In essence, your mortgage company is partially funding someone else s party. So instead of the Realtors paying 100 percent of the costs to put their own party on, they are paying (let s say 60 percent) because you wanted them to have the best party they could for their customers, not yours. Clearly this contribution wil be given for some type of referral of business and, even if it s not for the referal of business, it could be easily inferred that the contribution is for the past or future referral of business from the Realtors to your mortgage company. Additionally, this so-called contribution could also lead to a Section 8(b) violation as well as possibly violate the laws of your particular state. The second contribution: The mortgage company s bringing of door prizes to be given out at the Realtor s party follows the law as stated above. Once again the door prizes you have contributed would help defray the Realtors of their own expenses of puting on this customer appreciation

14 14 RESPA Q&A Lenders cannot make a donation to the Katrina fund in the real estate agent s name every time they refer them some business. Ivy Jackson RESPA Q&A: Gifts party, therefore this would give something of value (door prizes) to the Realtors and it could be easily infered that your contribution was given for the referral of business. It doesn t mater if the door prizes are worth $1 or a $1,000,000 the fact that you defered any of the Realtor s costs for their party merely infers that you defrayed their costs for the referral of business. Let me further clarify the second contribution with regards to the door prizes. Even if the door prizes you contributed to the Realtors then went directly to the public or their customers, it still would be considered a violation because you are still defraying the Realtor s costs. *** It should be noted that the above answer is not addressing the legality of monetary compensation for a jointly-held party by both the mortgage company and the Realtors which is open to the public in which they pay their proportional fair market value for the costs incurred, nor is it discussing the legality of marketing or promotional door prizes, as the question did not ask that. It s extremely important to note that before engaging in any type of contribution arrangement, as discussed above, that you seek competent legal counsel to guide you through both RESPA and state laws to make sure that you are not violating any laws. Nov. 11, 2005 Can a lender make donations to hurricane or other relief funds in an afiliated real estate agent s name in exchange for business referrals? Can a lender make donations to hurricane or other relief funds in an afiliated real estate agent s name in exchange for business referrals? HUD s director of RESPA enforcement, Ivy Jackson, says: Trying to get creative with your kickbacks may backfire. We want to praise people for getting involved with charity and making donations, particularly to the Katrina fund, but lenders cannot make a donation to the Katrina fund in the real estate agent s name every time they refer them some business. Some people are always out there thinking, but that s not acceptable. July 27, 2005 Is there a dollar value on gifts that determines whether RESPA is violated or not? A mortgage broker asked: Is there a dolar value that determines whether RESPA is violated or not? I have ceased giving Realtors coupons for free Starbucks coffee because of RESPA, but a friend of mine at a large lender says she can give Realtors coupons or freebies as long as the value stays under $25. Can you help? Phil Schulman, partner with Kirkpatrick & Lockhart Nicholson Graham, responded:

15 RESPA Q&A 15 RESPA Q&A: Gifts Some states do put a dollar limit on the amount you can give someone in a position to refer you settlement service business. Phil Schulman RESPA does not place a dolar value on the thing of value. I doubt the ful force and effect of the Federal Government will come crashing down on a mortgage broker because he gave a real estate agent a coupon for a Starbucks cup of cofee (however, with the prices at Starbucks a latte could soon be going for an amount in excess of $25). Be aware, however, that some states do put a dollar limit on the amount you can give someone in a position to refer you settlement service business. Twenty-five dollars may in fact be the limit in a state, but absent a state-by-state review I can't say which states impose such a limit. July 19, 2005 Is it a RESPA violation for a mortgage company to sponsor a Board of Realtors luncheon? A mortgage company asked: In a recent training for mortgage loan officers we were warned about practices regarding RESPA law. One topic of conversation was the "compensation" to Realtors issue. Our mortgage company is an affiliate member of the local board of Realtors in the areas in which we have offices. One question that we have is in regard to sponsoring the board of Realtors meetings. In the past our competitors have sponsored such events, however before we do the same we would like clarification on the practice in regard to the law. Tawanna Matthews, in HUD's Office of RESPA and Interstate Land Sales, answered: You are asking if it is a violation of the Real Estate Settlement Procedures Act (RESPA) to sponsor your local board of Realtors meeting. You stated that in the past years your competitors have sponsored this event, however, you would like clarification as to whether it violates RESPA. Section 8 of RESPA prohibits anyone from giving or accepting a fee, kickback or anything of value in exchange for referrals of settlement service business involving a federally related mortgage loan. Unfortunately, sponsoring an event, on behalf of an organization that provides services to federally related mortgage loans, may be considered a "thing of value," because it defrays that organization expense. Thus, members of the board of Realtors are in a position to refer business to your company. However, there is nothing under RESPA regulations to prevent joint advertising, as long as each party pays their share of the expense. July 11, 2005 Is it legal for a title company to sponsor an open house for a real estate agent? A RESPAnews.com member asked: I own a title company and one of my best real estate agent clients has asked me to sponsor lunch or give door prizes at her broker open house. The real estate agent is not paying for anything but this is a great opportunity for me to generate more business,

16 16 RESPA Q&A It could easily be construed that you are providing food or door prizes for this real estate agent s open house solely for the referral of future business from the real estate agent. Marx Sterbcow RESPA Q&A: Gifts plus it enables me to market to these agents. Is this legal? Marx Sterbcow, managing partner of The Sterbcow Law Group LLC in Louisiana, provided the following response: This is a terrific question and one that is asked all the time. This is a highly important issue because numerous love leters (warning leters) by HUD s RESPA division have been sent recently to numerous title, mortgage, appraisal, banking, and home warranty companies across the country telling them to stop immediately because what they are doing may be illegal. It is extremely important to note though that the answer to your question also depends solely on the type of open house that the title company is being asked to sponsor. Is this open house a broker open house or is it a consumer open house that is open and marketed to the public? So let s distinguish between the two types of open houses to clear up the massive confusion on this issue: The broker open house (aka Realtor s open house ) is marketed to real estate agents only (typically a real estate agent or broker will open up a home they have listed to other real estate agents to help sell their property). Under this particular scenario, the answer would be that the title company is in technical violation of RESPA Section 8(a) and 8(b) because the real estate agent or broker requested that you (the title company) pay for (sponsor) lunch and/or provide door prizes for an event that the real estate agent or broker is hosting. This is for providing something of value for, or in the hopes of, the referral of settlement service business. Additionaly, the fact that the broker open house is only open to real estate agents or brokers may raise eyebrows. It could easily be construed that you are providing food or door prizes for this real estate agent s open house solely for the referral of future business from the real estate agents. In this instance, you would be deferring expenses normally incurred by the real estate agent thereby providing a thing of value to the real estate agent. Here is what HUD s RESPA division investigators recently wrote in a investigation warning letter to a company allegedly engaging in this type of arrangement: The Department of Housing and Urban Development s Ofice of RESPA and Interstate Land Sales has received a complaint that (fictitious name inserted here) has supplied door prizes and paid for food at a realtor s open house. Under the Real Estate Settlement Procedures Act (RESPA), it is prohibited for any person to give and for any person to receive a fee, kickback or thing of value for the referral of settlement service business. Providing door prizes or food at these open house (in this case a broker s or Realtor s open

17 RESPA Q&A 17 If you stil feel so inclined in providing food or door prizes then make sure you save some money for my legal defense fees. Marx Sterbcow RESPA Q&A: Gifts house) is a thing of value and may violate Section 8(a) of RESPA which provides: (a) Business Referrals No person shall give and no person shall accept any fee, kickback or other 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. You are asked to review the practices of your offices and cease any practices that violate the Real Estate Setlement Procedures Act. This leter is intended as a warning. Any further complaints will result in an investigation into the activities of (fictitious company inserted). Thank you for your anticipated cooperation. In other words if you still feel so inclined in providing food or door prizes in the broker open house (aka Realtor open house) setting to the real estate agent then make sure you save some money for my legal defense fees. I l even let you help pick out the colors on that 50-foot Hatteras yacht that you will be helping me buy in the event that HUD opens a ful investigation I might even take you fishing on it, however that would not be a RESPA violation. The consumer open house is marketed to the consumers (typically a real estate agent or broker will open up a home for consumers to view). The consumer open house allows potential buyers to view the house. Under this scenario, your title company can provide food or door prizes to the public under RESPA Section 8(c)(2) BUT the certain requirements should be met: A. Your title company should have a representative marketing your title company at this consumer open house for consumers; B. Your title company should have a sign by the food indicating that your title company has sponsored and paid for lunch; and C. You should make sure that your title company s representative has marketing material or brochures available and hands them out to the consumers who are at the consumer open house. The consumer open house would be legal if those requirements are present because your title company is marketing and providing something of value to the consumer not the real estate agent. May 31, 2005 Can a Realtor donate money from her commissions to an organization like a school district if they in turn refer business to her? A RESPAnews.com member wanted to know: Can a Realtor donate money from her commissions to an organization like a school district if they in turn refer business to her?

18 18 RESPA Q&A RESPA Q&A: Gifts The school district is not doing any services here other than collecting a fee from the Realtor s commission check Clearly the Realtor s arangement is ilegal. Marx Sterbcow Marx Sterbcow, managing partner of The Sterbcow Law Group LLC in Louisiana, responds: RESPA s Section 8 provides two basic rules of prohibition. Section 8(a) prohibits the transfer of a thing of value pursuant to an understanding that business will be refered to any person. 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 refered to any person. Reg. X adds: A business entity (whether or not in an affiliate relationship) may not pay any other business entity or the employee of any other business entity for the referral of settlement service business. 12 U.S.C. Sec. 2607(a); Reg. X, 24 C.F.R (b). The Realtor is giving a portion of her commission to the school district (a kickback) for the referral of business and thus this would violate Sec. 8(a). Section 8(b) prohibits the splitting of any charge made or received for the performance of a settlement service except for services actually performed. No person shal 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. Reg. X adds: A charge by a person for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee and violates this section. The source of the payment does not determine whether a service is compensable. Nor may the prohibition of this part be avoided by creating an arrangement wherein the purchaser of services splits the fee. 12 U.S.C. Sec. 2607(b); Reg. X, 24 C.F.R (c). The school district is not doing any services here other than collecting a fee (a highly suspicious unearned donation ) from the Realtor s commission check for merely referring business to the Realtor. Clearly the Realtor s arangement is ilegal. In addition, we need to define what the term referal means here: A referral means any oral or written action directed to a person, which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business incident to or part of a settlement service when such person will pay for such settlement service or business incident thereto or pay a charge attributable in whole or in part to such settlement service or business. The answer is no, the Realtor is not allowed to give a portion of her commission or anything else of value to the school district for the referral of business under RESPA. In conclusion, sure the Realtor can participate in this illegal scheme but the Realtor should build up a large cash reserve and make sure they

19 RESPA Q&A 19 When a title company provides moving boxes to a consumer with a logao, this amounts to free advertising for the real estate agent or broker. Thus, the practice is not advisable. Rich Andreano RESPA Q&A: Gifts have a large line of equity in their home. The Realtor will need this so that she can pay off the hefty fines, damage awards, possibly jail time, andphil Schulman s atorney s fees that she will incur which can be typically associated with this type of illegal kickback arrangement. It should be noted that the Realtor s E&O coverage probably won t cover her because a violation of 8(a) and 8(b) is considered fraud. Also if the Realtor s broker is dragged into this then (if the Realtor is an independent contractor) the broker can sue the Realtor for all their legal expenses he incurred as a result of the Realtor breaching the independent contractor contract. The Realtor should also check with her legal counsel to see what state laws she might be violating. May 20, 2005 Can a title company give moving boxes to new homebuyers if they are sent through a Realtor? A title company wants to orchestrate a deal with a moving box manufacturer, so that when a title order is requested, the title rep. can send a 20-pack of boxes to the consumer. The boxes could either be given to the consumer through the Realtor, or they could be shipped to the consumer directly. The boxes would be logoed with something like compliments of your real estate professional. The title company wants to know: Is this an acceptable arrangement under RESPA? Rich Andreano, partner with the Washington D.C. firm Weiner Brodsky Sidman Kider PC, responds: A title company may pay for, and provide a consumer with, moving boxes as a thank you for the consumer using the title company s services. A title company may not provide a thing of value to a real estate agent or broker for the referral of title business by the agent or broker to the company. HUD considers advertising and other promotional items provided at no cost, or below cost, to be a thing of value. HUD has taken action against title companies that HUD alleged were providing free advertising to real estate agents or brokers who often referred business to the title companies. HUD may consider that when a title company provides moving boxes to a consumer with a logo such as compliments of your real estate professional, this amounts to free advertising or free promotion for the real estate agent or broker (whether the title company sends the boxes directly to the consumer or gives them to the real estate professional for delivery to the consumer). Thus, the practice is not advisable. However, HUD acknowledges that joint advertising is permitted under RESPA, provided that the parties pay for the advertising based on the extent to which each party is promoted in the advertising. For instance, if the advertising promotes each party equally, the parties should split the advertising cost equally. Thus, a title company and real estate professional could engage in joint

20 20 RESPA Q&A RESPA Q&A: Fees Even if a mortgage broker actually processes a loan, if the processing fee exceeds the reasonable value of the processing services, there may be a RESPA violation. Rich Andreano April 26, 2006 Can a broker agree to a credit at closing as a lender contribution to pay for a borrower to obtain a home warranty? An originator asked: Can I agree to a credit at closing as a lender contribution to pay for a borower to obtain a home waranty? Herman Thordsen, principal partner of The Law Offices of Herman Thordsen, responds: If the broker is refunding or giving money to the borrower and it is not related to the borrower referring any business to the broker, there is no RESPA violation. However, the broker should read the lender-broker agreement re contributions because it could possibly violate the contractual commitments to the lender. April 18, 2006 Does RESPA have a problem with mortgage brokers charging a processing fee? Does RESPA have a problem with mortgage brokers charging a processing fee, if there is actually a processor working for the brokerage who gets paid solely to process loans? According to Rich Andreano Jr., partner with Weiner Brodsky Sidman Kider PC in Washington, D.C.: RESPA does not prohibit a mortgage broker who processes a loan from imposing a processing fee on a borrower. Of course, the fee must be disclosed in the settlement statement as being charged and received by the mortgage broker. Note, HUD takes the position that a single settlement service provider can violate the fee splitting prohibition under Section 8(b) if it charges a consumer a fee when no, nominal or duplicative work is done, or when the fee is in excess of the reasonable value of the services, goods or facilities provided. Thus, in HUD s view, even if a mortgage broker actually processes a loan, if the processing fee exceeds the reasonable value of the processing services, there may be a RESPA Section 8(b) violation. The United States Circuit Courts of Appeals that have considered this position have rejected HUD s interpretation of Section 8(b). Finaly, state law must be considered. State laws can regulate both the types of fees that may be charged by mortgage brokers and when the fees may be imposed. Feb. 1, 2006 Can a broker or lender charge a flat origination fee, or must there be a line item for total charges? A reader asked: I have a question about a broker, table funder or lender: Can you