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FIL-103-99 Attachment

Practices That might Lead to Potential Violations of Section 8 of the Real Estate Settlement Procedures Act

In many industries, companies typically pay commissions to 3rd parties for company recommendations. Congress sought to eliminate these types of payments for residential loans so that "the costs to the American home buying public will not be unreasonably or needlessly pumped up." 1 As a result, payments associated with settlement services for federally related mortgage loans need to be reasonable compensation for the items, services, or centers actually provided.

Section 8 of the Real Estate Settlement Procedures Act (RESPA) normally prohibits:

- The payment and receipt of a charge or thing of worth in return for the recommendation of settlement service company for a federally associated mortgage loan, and

- Receipt or payment of any portion or splits of charges (consisting of unearned costs) other than for settlement services actually performed.


RESPA applies only to "federally related mortgage loans." 2 These are normally mortgages to customers that are likewise covered by the Truth in Lending Act. Mortgage loans produced company functions are not covered by RESPA.

To know 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 comprehended. Some important terms follow:

- "Settlement service" is broadly defined in Regulation X. The term consists of "any service offered in conjunction with a prospective or real settlement." 3 A thorough list of examples of settlement services is contained in Section 3500.2 of Regulation X.

- "Thing of value," likewise broadly defined, consists of all kinds of payment such as cash, discount rates, incomes, commissions, fees, and preferential bank rates.4 HUD has actually described the chance to win a prize as a thing of worth. For instance, a bank can not enter real estate representatives in a pool to win a trip to Hawaii if a particular number of clients are described the bank for a mortgage loan.5.

- "Referral" consists of "any oral or written action directed to an individual which has the effect of affirmatively affecting the selection by anyone of a service provider of a settlement service or part of a settlement service when such individual will spend for such settlement service or service event thereto or pay a charge attributable in whole or in part to such settlement service or organization." 6 It also consists of "any instance in which a person paying for a settlement service or service event thereto is required to use a particular company of settlement service or company incident thereto." 7.

- "Agreement or understanding" is not specifically defined in Regulation X. However, the guideline does state that" [a] n arrangement or understanding for the recommendation of service incident to or part of a settlement service need not be written or verbalized but might be developed by a practice, pattern, or course of conduct. When a thing of value is gotten consistently and is connected in any method with the volume or worth of the organization referred, the receipt of the important things of worth is proof that it is made pursuant to an agreement or understanding for the referral of business." 8.


Repeated conduct is not a necessary component that is needed to show a violation of Section 8. A violation may be established by showing either that a payment was made as settlement for recommendations of past company or for the function of protecting referrals in the future. In an informal opinion, HUD noted that where there is evidence of duplicated payments connected in any method with the volume or value of organization, an administrative presumption is produced that the payments were made "pursuant to an arrangement or understanding." 9

Situations in Which Lenders May Violate Section 8

Fee Splitting and Payments for Services Not Performed - Examiners have actually noted current events in which the charge collected by a banks for a third-party service exceeded the amount the institution really paid to that 3rd party. For instance, a banks charged customers $25 for a flood hazard decision, yet the flood risk determination company that provided the service was just paid $20. In another example, consumers were charged $40 for a credit report, however the financial organization just paid $15 to the consumer-reporting agency for the consumer report. Examiners likewise discovered an incident in which an institution charged clients an appraisal evaluation fee. The fee was passed on to a committee consisted of a number of members of the institution's board of directors, which did not really review the appraisals. HUD has believed that these arrangements make up charge splitting or invoice of unearned charges and therefore break Section 8( b) of RESPA.10

Contracts with Third-Party Settlement Company - Some monetary institutions have contracted with third-party settlement service providers for such services as flood risk determinations, and real estate tax and risk insurance services. In exchange for performing these services for all loans stemmed by the organization during the regard to the agreement, some companies have actually consented to carry out the services for loans that were on the institution's books before participating in the agreement for no extra charge or a substantially decreased fee. HUD has figured out that these kinds of arrangements remain in offense of Section 8 due to the fact that they provide a thing of value for the recommendation of future settlement services.11

Referral Fees from Other Banks or Mortgage Companies - Some financial organizations that wish to offer a range of domestic loan products to a few of their consumers do not have the necessary know-how to provide them. As an outcome, the organizations sometimes make plans to refer their consumers to other banks or mortgage business. Payments made pursuant to these recommendation arrangements need to be for products and services in fact carried out and sensible in an amount similar to transactions within the exact same market. HUD provided a policy declaration on March 1, 1999, resolving a list of the services that need to be performed by the referring celebration for stemming RESPA-related loans in order to get compensation. This policy declaration 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 domestic mortgage loan clients to affiliated mortgage business. An associated mortgage company is typically a different subsidiary of the financial organization's holding business or a subsidiary of another financial organization owned by the parent holding company. In order to encourage the monetary institution's employees to refer clients to the affiliated mortgage company, some mortgage companies have used to pay a little cost to the employee whenever the referral results in a loan origination. This practice is specifically restricted by Section 3500.14( b), which states: "A company may not pay any other business or the staff members of any other business for the referral of settlement service business."

Builder Loans - Residential homebuilders can often give residential loan recommendations for a banks. In numerous instances, the same lending institution who finances the home builder's building and construction costs is also attempting to come from loans to the home builder's home purchasing customers. In such cases, the banks requires to be careful not to provide anything of value to the contractor in exchange for the recommendation of these consumers.