To show its concern over real estate professionals understanding how to comply with kickback regulations in the complex Real Estate Settlement Procedures Act, the National Association of Realtors has issued two white papers that explain in detail some of the guidelines.
The U.S. Department of Housing and Urban Development polices compliance of RESPA, which governs industry kickbacks and payoffs. The real estate industry in the last decade has pushed the limits of the law in order to capture revenues from affiliated businesses with lending and title companies. The NAR handouts focus on the law as it relates to such arrangements, which have become increasingly popular.
One paper discusses how HUD determines whether a mortgage or title company is a sham company formed to illegally funnel compensation to those who refer business. Another paper advises realty agents and brokers on when they can receive a fee from mortgage companies without violating RESPA.
HUD has made clear, according to the handout, that the mere taking of a loan application is not sufficient work to justify a fee under RESPA. But to determine whether a person or company has performed enough loan origination work to justify a fee, HUD examines the specific facts of each case. Those details include whether an agreement calls for certain work to be performed in exchange for such a fee, whether such work was actually performed, whether the services were necessary for the transaction and whether they were duplicative of services performed by others.
HUD generally would be satisfied that no RESPA violation had occurred if a real estate salesperson “took information from the borrower and filled out the loan application, performed at least five additional items on the loan origination services list and received a fee reasonably related to the market value of the services performed,” according to the handout.
Some of the items on HUD’s loan origination services list include taking information from borrowers and filling out applications; analyzing borrowers’ income and debt and pre-qualifying them to determine the maximum mortgages they can afford; collecting financial information such as tax returns and bank statements that are part of the application process; initiating/ordering such things as employment verifications, appraisals and inspections; and assisting borrowers with understanding credit problems.
According to NAR, HUD is particularly concerned that real estate salespeople could receive fees for steering customers to particular lenders, but disguise the fees as compensation for “counseling-type” activities listed in the loan origination services list. If salespeople stick to those counseling activities and receive fees, HUD will want to make sure they’re providing meaningful counseling, not merely steering customers.
The housing department would determine no RESPA violation had occurred if the counseling gave the borrower the chance to consider products from at least three different lenders; the salesperson doing the counseling would receive the same compensation regardless of which lender’s product was ultimately chosen and any payment made for “counseling-type” services is reasonably related to the services performed and not based on the amount of loan business referred, according to the handout.
The other handout dealing with sham companies is much longer and includes examples of possible arrangements that HUD might examine to determine whether they involve shams. While RESPA prohibits giving or receiving fees or kickbacks, it makes an exception for affiliated business arrangements, or ABAs.
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ABAs are arrangements in which a person, such as a real estate agent or broker, is in a position to refer settlement business to a settlement service provider that is owned by the referring party. RESPA allows the referral if the relationship is disclosed to the person referred, the person referred is not required to use the affiliate and the referring party receives payment only in the form of a return on ownership interest.
To qualify for the ABA exemption and be RESPA compliant, the affiliated provider receiving referrals must be a “bona fide” provider of settlement services and not a sham company. To determine that, HUD balances responses to 10 questions, including whether the new company has sufficient initial capital and whether it is staffed with its own employees or has loaned employees of a parent provider.
The white paper also mentions two cases in which HUD found companies to be shams. In March of this year, HUD entered a settlement agreement involving an alleged sham business arrangement between Land Settlement Services Inc. and Land Settlement Services LLC. Land LLC performed no core title services but outsourced all of its work exclusively to Land Inc. HUD determined the arrangement was a sham and that it violated RESPA’s anti-kickback provisions. The companies agreed to end Land LLC’s operations and pay the government $15,000.
HUD has tried to reform the loophole-ridden RESPA, but with no success. The department earlier this year withdrew its proposed changes, citing the need to review public and industry comments.
Concerns remain over RESPA rules and compliance as evidenced by NAR’s handouts.
Steering business from brokers to insurance companies for financial gains is at the center of the current expanding probe of the insurance industry by New York Attorney General Eliot Spitzer and California Insurance Commissioner John Garamendi. The real estate connection may not be too far off if investigations of payoffs and fees deepen.
Although RESPA is designed to prohibit such things, the law has many loopholes, varied interpretations and a lot of money at stake through numerous affiliated business arrangements within the real estate industry. Many insist the industry is in full compliance with RESPA, but others say compliance is spotty at best because of widespread ignorance, misinterpretations, shady dealings and outright law breaking, according to an Inman News special report on RESPA released last year.
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