Related Articles (OHIO REALTOR and eConnections)

faqs: June 2010: HUD Issues Rule on Home Warranty Fees

Summary: On June 25, HUD published an interpretative rule indicating its position on the payment of a fee to brokers or agents for the sale of home warranties under RESPA. HUD will be accepting comments for 30 days on this rule. In the rule, HUD clarifies that while nothing in RESPA prohibits brokers or agents from referring business to a home warranty company, it does prohibit the agent or broker receiving a fee for such a referral. To evaluate when a payment from a home warranty company (HWC) is an illegal referral. See article on what HUD indicates it’s looking for…

faqs: RESPA rule provides ‘good faith estimate’ revision

Summary: In 1974, the Real Estate Settlement and Procedures Act (RESPA) was enacted to simplify the mortgage settlement process and prevent abusive practices by settlement service providers that unnecessarily increased settlement costs. It is RESPA that requires use of the Good Faith Estimate and HUD-1 Settlement Statement. It is also the federal law that prohibits referral fees between settlement service providers.

faqs: RESPA: Controlled Business Arrangements

Summary: FAQs: A CBA is an arrangement in which an individual/entity has more than a 1 percent ownership interest in more than one settlement service provider and directly or indirectly refers business to that provider. Learn more…

faqs: RESPA: Computerized Loan Origination Systems

Summary: FAQs: A CLO is a computerized loan origination system. A CLO provides a list of lenders and their loan rates to consumers. Learn how to deal with CLOs.

faqs: RESPA: General

Summary: FAQs: Dealing with referral fees and renting/leasing space with a lender.

HUD Issues Rule on Home Warranty Fees (eConnections June 2010)

by Peg Ritenour
Vice President
Legal Services

On June 25, HUD published an interpretative rule indicating its position on the payment of a fee to brokers or agents for the sale of home warranties under RESPA. HUD will be accepting comments for 30 days on this rule.

In the rule, HUD clarifies that while nothing in RESPA prohibits brokers or agents from referring business to a home warranty company, it does prohibit the agent or broker receiving a fee for such a referral. To evaluate when a payment from a home warranty company (HWC) is an illegal referral, HUD indicates it will look at whether:

The compensation for the HWC services provided by the real estate broker or agent is contingent on an arrangement that prohibits the real estate broker or agent from performing services for other HWC companies; e.g. if a real estate broker or agent is compensated for performing HWC services for only one company, this is evidence that the compensation may be contingent on such an arrangement; and Payments to real estate brokers or agents by the HWC are based on, or adjusted in future agreements according to, the number of transactions referred.

Under Section 8(c) of RESPA and other HUD regulations, payment is permitted for bona fide services that are actually performed. These services must be actual and distinct from the primary services the Realtor is providing. HUD has indicated that in determining whether payment to a broker or agent by an HWC is bona fide compensation for actual services, it must review the facts of each case. Factors it indicates would support such a finding are:

• Services–other than referrals–to be performed are specified in a contract between the HWC and the real estate broker or agent, and the real estate broker or agent has documented the services provided to the HWC;
• The services actually performed are not duplicative of those typically provided by a real estate broker or agent;
• The real estate broker or agent is by contract the legal agent of the HWC, and the HWC assumes responsibility for any representations made by the broker or agent about the warranty product; and
• The real estate broker or agent has fully disclosed to the consumer the compensable services that will be provided and the compensation arrangement with the HWC, and has made clear that the consumer may purchase a home warranty from other vendors or may choose not to purchase any home warranty.

In making its analysis of whether payment to a broker or agent violates RESPA, HUD will also look at whether the amount paid is reasonably related to the value of the services actually performed by the broker or agent. HUD pointed out that, in the context of loan origination, it has previously determined that the mere taking of an application is not sufficient work to justify any fee under RESPA. Thus, it appears HUD’s analysis of a fee for merely taking a home warranty application would be the same.

HUD concluded its interpretative rule with the following summary:

(1) A payment by an HWC for marketing services performed by real estate brokers or agents on behalf of the HWC that are directed to particular homebuyers or sellers is an illegal kickback for a referral under section 8;

(2) Depending upon the facts of a particular case, an HWC may compensate a real estate broker or agent for services when those services are actual, necessary and distinct from the primary services provided by the real estate broker or agent, and when those additional services are not nominal and are not services for which there is a duplicative charge; and

(3) The amount of compensation from the HWC that is permitted under section 8 for such additional services must be reasonably related to the value of those services and not include compensation for referrals of business.

It is anticipated that NAR’s Legal Department will be analyzing this rule and most likely will submit comments to HUD. OAR will provide an update on this issue when NAR’s position has been issued.

RESPA rule provides ‘good faith estimate’ revision

by Lorie Garland
Vice president
Legal Services

In 1974, the Real Estate Settlement and Procedures Act (RESPA) was enacted to simplify the mortgage settlement process and prevent abusive practices by settlement service providers that unnecessarily increased settlement costs. It is RESPA that requires use of the Good Faith Estimate and HUD-1 Settlement Statement. It is also the federal law that prohibits referral fees between settlement service providers.

In March of 2008, HUD issued a proposed rule to improve RESPA’s requirements for disclosing settlement costs. In the rule, HUD identified problems with the current settlement process that the rule was designed to improve. One problem identified was that often a buyer’s actual settlement costs listed on the HUD-1 were higher (sometimes substantially higher) than the estimated costs listed on that buyer’s Good Faith Estimate. HUD’s goal was for the Good Faith Estimate to more accurately reflect a buyer’s actual settlement costs. Another goal of the RESPA changes was to give buyers the ability to shop for the best loan terms. The current regulations did not allow buyers to easily shop loans.

The proposed rule was the result of six years of consumer and industry input on needed changes to the RESPA regulations. HUD received over 12,000 public comments regarding the proposed rule. The majority of the comments opposed provisions of the rule. One controversial provision in the proposed rule was a closing script that the closing agent would be required to read at the closing. The closing script included a comparison of the Good Faith Estimate and the HUD-1 and a summary of the borrower’s loan terms. It was estimated that it would take the closing agent 45 minutes to provide the closing script to the borrower. Industry groups, including NAR, as well as two thirds of the members of Congress requested that HUD withdraw the rule. However, after taking into consideration the comments received, HUD modified the rule and filed its final rule on Nov. 12, 2008.

The most significant change provided in the final rule is a new standardized Good Faith Estimate form and a new HUD-1 Settlement Statement. Both documents are effective on Jan. 1, 2010. HUD wanted to give the industry time to make system and operational changes to accommodate the new forms and their requirements.

The new Good Faith Estimate form contains three pages and must be provided by the loan originator within three days of receiving a loan application. The GFE provides a summary of the key terms of the loan and an estimate of the settlement charges. Settlement charges are divided into three categories depending on whether the charge could increase at settlement or not. Some charges cannot increase, some can increase by 10 percent and other charges can increase without restriction. The first page of the GFE contains a total of the estimated settlement charges to allow the borrower to shop for the best loan terms at the lowest cost.

The new HUD-1 Settlement Statement contains three pages. Charges listed on the HUD-1 provide a reference to the relevant line for that charge on the Good Faith Estimate. The third page provides a side by side comparison of the GFE charges and the HUD-1 charges. It also provides a summary of the borrower’s loan terms. HUD added a third page to the HUD-1 and eliminated the controversial closing script that was required in the proposed rule.

The final rule allows lenders to correct violations of RESPA’s new disclosure and cost tolerance requirements. Lenders will have 30 days from the date of closing to correct violations and repay the borrower any overcharges.

The final rule and the new Good Faith Estimate and HUD-1 Settlement Statement forms are available in the RESPA section of HUD’s Web site: www.hud.gov.

RESPA: Controlled Business Arrangements

1. What is a controlled business arrangement (CBA)?
Answer: A CBA is an arrangement in which an individual/entity has more than a 1% ownership interest in more than one settlement service provider and directly or indirectly refers business to that provider.

2. What is a sham CBA?
Answer: Sham CBA’s are business arrangements designed to avoid RESPA’s prohibition on referral fees. HUD provides a list of factors they will consider to determine whether a CBA is bona fide. These factors include how adequately an entity is capitalized, whether it has its own employees, whether it contracts out all or most of its work back to the parent company and whether it incurs the same risks and rewards of any other such business in the marketplace. No single factor is determinative.

3. If a real estate broker refers a buyer to an affiliated lender, must the fact that these settlement service providers are affiliated be disclosed to the buyer?
Answer: Yes. The 1996 RESPA rule contains a CBA disclosure form which must be provided to consumers referred to affiliated entities. The form discloses the affiliation, an estimated charge for the services to be provided, and a notice that the consumer is not required to use the provider and that they are free to shop around to determine if they are receiving the best services at the best rate.

RESPA: Computerized Loan Origination Systems

1. What is a CLO?
Answer: A CLO is a computerized loan origination system. A CLO provides a list of lenders and their loan rates to consumers. The list of provider names on the CLO must be presented in a neutral format.

2. Can the CLO provider charge a fee for providing the CLO service?
Answer: Yes. A reasonable fee can be charged for providing this information.

3. Can a lender reimburse the borrower for payment of the CLO fee?
Answer: Yes. This issue was addressed in the 1996 RESPA rule.

RESPA: General Information

1. Can a lender pay a fee to a real estate broker for referring buyers to the lender?
Answer: No. The referral fee is prohibited under section 8 of RESPA.

2. Is it a RESPA violation for a real estate broker to rent office or desk space to a lender?
Answer: No. However, the rent the broker charges the lender must be the general market rate for the office space leased. Any amount charged in excess of the market rate could be viewed as a means to disquise referral payments. Rent cannot be based on the number or value of business generated from the location.