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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 numerous industries, companies commonly pay commissions to 3rd parties for organization recommendations. Congress sought to get rid of these types of payments for residential loans so that "the expenses to the American home purchasing public will not be unreasonably or unnecessarily pumped up." 1 As an outcome, payments associated with settlement services for federally related mortgage loans should be reasonable settlement for the products, services, or centers really supplied.

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

- The payment and receipt of a cost or thing of value in return for the recommendation of settlement service organization for a federally related mortgage loan, and

- Receipt or payment of any part or splits of charges (including unearned charges) other than for settlement services really carried out.


RESPA applies only to "federally related mortgage loans." 2 These are usually mortgages to consumers that are also covered by the Truth in Lending Act. Mortgage loans produced organization functions are not covered by RESPA.

To know which practices can be violations of Section 8 of RESPA, the terms consisted of in RESPA and the Housing and Urban Development's (HUD) Regulation X, which executes RESPA, should be comprehended. Some important terms follow:

- "Settlement service" is broadly defined in Regulation X. The term consists of "any service provided in combination with a prospective or real settlement." 3 An extensive list of examples of settlement services is consisted of in Section 3500.2 of Regulation X.

- "Thing of value," likewise broadly specified, includes all types of payment such as monies, discounts, incomes, commissions, costs, and preferential bank rates.4 HUD has actually explained the chance to win a prize as a thing of worth. For instance, a bank can not get in property agents in a swimming pool to win a trip to Hawaii if a particular number of clients are described the bank for a mortgage loan.5.

- "Referral" includes "any oral or written action directed to a person which has the result of agreeably affecting the choice by any person of a provider of a settlement service or part of a settlement service when such individual will pay for such settlement service or organization incident thereto or pay a charge attributable in entire or in part to such settlement service or service." 6 It likewise consists of "any circumstances in which a person paying for a settlement service or service event thereto is required to utilize a specific provider of settlement service or business event thereto." 7.

- "Agreement or understanding" is not specifically specified in Regulation X. However, the policy does state that" [a] n contract or understanding for the recommendation of company incident to or part of a settlement service require not be written or explained in words however might be developed by a practice, pattern, or course of conduct. When a thing of value is received repeatedly and is connected in any way with the volume or value of the company referred, the invoice of the thing of worth is proof that it is made pursuant to an arrangement or understanding for the referral of organization." 8.


Repeated conduct is not a vital component that is needed to show a violation of Section 8. An infraction may be developed by revealing either that a payment was made as compensation for referrals of past company or for the function of securing recommendations in the future. In a casual viewpoint, HUD kept in mind that where there is evidence of repeated payments connected in any method with the volume or value of service, an administrative presumption is produced that the payments were made "pursuant to an agreement or understanding." 9

Situations in Which Lenders May Violate Section 8

Fee Splitting and Payments for Services Not Performed - Examiners have noted current events in which the cost collected by a banks for a third-party service surpassed the amount the institution really paid to that 3rd party. For instance, a banks charged customers $25 for a flood risk determination, yet the flood hazard decision firm that offered the service was just paid $20. In another example, clients were charged $40 for a credit report, however the financial institution just paid $15 to the consumer-reporting agency for the customer report. Examiners likewise found an incident in which an institution charged clients an appraisal assessment charge. The cost was handed down to a committee consisted of numerous members of the organization's board of directors, which did not actually evaluate the appraisals. HUD has actually opined that these plans make up charge splitting or invoice of unearned charges and therefore breach Section 8( b) of RESPA.10

Contracts with Third-Party Settlement Company - Some banks have contracted with third-party settlement provider for such services as flood danger determinations, and property tax and hazard insurance coverage services. In exchange for performing these services for all loans come from by the organization during the regard to the contract, some companies have accepted carry out the services for loans that were on the institution's books before participating in the agreement for no additional fee or a considerably minimized fee. HUD has identified that these kinds of contracts are in offense of Section 8 because they supply a thing of value for the recommendation of future settlement services.11

Referral Fees from Other Banks or Mortgage Companies - Some banks that want to provide a range of domestic loan items to some of their consumers do not have the required expertise to use them. As a result, the institutions in some cases make arrangements to refer their clients to other banks or mortgage business. Payments made pursuant to these recommendation plans should be for items and services actually performed and sensible in a quantity comparable to deals within the very same market. HUD released a policy declaration on March 1, 1999, attending to a list of the services that must be performed by the referring party for originating RESPA-related loans in order to get payment. 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 financial institutions refer residential mortgage loan clients to affiliated mortgage business. An affiliated mortgage company is often a different subsidiary of the financial institution's holding business or a subsidiary of another banks owned by the moms and dad holding company. In order to motivate the monetary organization's staff members to refer consumers to the affiliated mortgage company, some mortgage companies have provided to pay a little cost to the employee whenever the recommendation leads to a loan origination. This practice is particularly forbidden by Section 3500.14( b), which mentions: "A company might not pay any other company or the staff members of any other business for the recommendation of settlement service company."

Builder Loans - Residential homebuilders can often be a source of property loan referrals for a banks. In lots of circumstances, the very same loan provider who funds the builder's building costs is also trying to originate loans to the contractor's home purchasing customers. In such cases, the monetary institution needs to be mindful not to offer anything of worth to the home builder in exchange for the recommendation of these consumers.