Original document by former Worldwide ERC® General Counsel Richard H. Mansfield III
Mansfield & Mansfield, Washington, DC
Current as of December 2016
Updated by Worldwide ERC® Government Affairs Real Estate and Mortgage Forum Volunteers
Although there are several federal laws affecting residential real estate transactions, the one that relocation practitioners most commonly deal with is the Real Estate Settlement Procedures Act (RESPA), which regulates “settlement service providers” which are involved with “federally related mortgage” loans. Needless to say, both of these terms have specific definitions which will be examined below.
Background and Basic Components of RESPA
RESPA first became law in 1974, as a result of Congress’ concern over the need for consumer protection for “unnecessarily high settlement changes caused by certain abusive practices” in residential real estate sales. Specifically, the Act regulates (1) disclosure of settlement costs and fees, and (2) referral and other fees among settlement service providers. RESPA deals with disclosure by mandating standardized forms be supplied to the consumer before and at settlement (closing); these forms and the related disclosure requirements were significantly modified effective January 1, 2010 and again under the Dodd-Frank Wall Street Reform and Consumer Protection Act effective October 3, 2015. The rules regarding referral fees (known as “kickbacks” when they are in violation of the Act) were not subject to the modifications, but have been changing by virtue of regulation and court cases over the years. Both of these issues will be discussed below.
Effective July 21, 2011 the enforcement of RESPA was transferred from HUD (U.S. Department of Housing and Urban Development) to a new federal agency, the Consumer Financial Protection Bureau (CFPB). The CFPB is a creation of the Dodd-Frank Act, and is a part of that financial reform legislation. The Bureau has taken an active role in investigating RESPA issues, and constitutes yet another reason for industry members to make certain their compliance mechanisms are in place and active.
While the CFPB enforces RESPA, states are permitted to enact their own laws regulating settlements, so long as their laws are not less stringent than the requirements of RESPA. Most states have laws or regulations on real estate settlements, but in the vast majority of cases, it is RESPA which applies.
RESPA also allows for two methods of enforcement in addition to the normal administrative enforcement powers inherent in the agency. The statute specifically provides that individuals may bring private law suits, including class action suits, against alleged violators; indeed the past decades has witnessed dozens of these suits, not all of which have been successful, of course. Since the statute authorizes the court to award treble (triple) damages and attorney fees to victorious plaintiffs, class action suits are common. In addition to authorizing civil suits, certain sections of the act carry criminal penalties for violations with fines up to $10,000 per violation, and imprisonment up to one year upon conviction.
Thus, it is clear that a basic knowledge of the mandates of RESPA is important to relocation professionals who deal with real estate transactions.
Covered Transactions and Entities
Almost all residential real estate transactions, including refinancing, are covered by RESPA, because it regulated those that involve a “federally related mortgage,” defined as one which has one or more of the following characteristics: 1) a federally regulated lender, 2) a government assisted lender (e.g., FHA, VA), 3) a lender which intends to sell the mortgage to a regulated agency, or 4) a Truth in Lending creditor who lends or invests in residential loans aggregating more than $1,000,000 a year. Basically this covers the vast majority of sales and refinancing, including home equity lines of credit and home improvement loans. Because of the breadth of coverage, it is easier to list those areas not covered; but even in these cases, any doubt should trigger a review by an expert.
Exempt from the RESPA requirements are:
sales where the seller takes back the mortgage;
rental property transactions (more than four units);
temporary financing (e.g., construction financing in most cases, but not construction to permanent loans);
properties of 25 acres or more (even if there is a residence on it);
some mortgage assumptions and conversions (generally where the lender has no rights to approve the assumption); and
commercial and agricultural property.
In the relocation industry, it is common for the employer or relocation management company (RMC) to guarantee and pay off the mortgage of the transferring employee in a tax protected home sale transaction. In this case, the RESPA regulations do not apply to that transaction, although they do apply to the second sale of the property to the ultimate purchaser (unless one of the exemptions listed above applies).
On covered transactions, RESPA prohibits any person or entity from providing or accepting a fee, kickback or other valuable consideration for the referral of “business incident to or a part of a real estate settlement service.” Settlement services are defined broadly to include any service provided in connection with a real estate settlement including, but not limited to:
Not included, as a general rule, are services provided after the closing and repairs performed to the property.
New Disclosure Forms and Requirements
Effective October 3, 2015, a lender and/or broker must use the new Loan Estimate form which is provided to the borrower within three days of the borrower submitting the loan application. This form replaces the early Truth in Lending statement as well as the Good Faith Estimate. The lender must also use the new Closing Disclosure form which the borrower must receive at least three days before closing on the loan. This form replaces the final Truth in Lending statement as well as the HUD-1 settlement statement.
For sample copies of the Loan Estimate and Closing Disclosure, please see: http://www.consumerfinance.gov/policy-compliance/guidance/implementation-guidance/tila-respa-disclosure-rule//
Many of the former disclosure requirements remain in effect with the new disclosure forms. However, there are a few notable new requirements. The Closing Disclosure must be provided to the borrower three days prior to the closing of the loan at the time of settlement on the home. A new form needs to be issued and settlement potentially delayed if there is a significant change to the form. Under the final rule, a significant change is defined as a rate change of one-eighth of one percent or more for loans with irregular payments or periods, a change in the product type, or the addition of a prepayment penalty. Also, the lender and settlement agent may decide amongst themselves as to which will provide the “closing disclosure” form at settlement with the lender responsible for the content.
The proposed rule on the new disclosure requirements had changes over $100 triggering the need for a new “closing disclosure” form and the lender being the only one who would provide the form at settlement. The proposed rule would have also required that lenders must maintain completed “loan estimate” and “closing disclosure” forms in a paper or electronic format that is machine readable. The “machine readable” language, as well as the “all-in” APR provision capturing the full cost of the loan, were dropped in the final rule. Worldwide ERC® submitted a comment letter to the CFPB on key aspects of the proposed rule impacting the mobility industry, which is available at: http://www.worldwideerc.org/gov-relations/Documents/11-2-12CFPBMortgageDisclosureComments.pdf
Disclosures Before Settlement Occurs
An Affiliated Business Arrangement (AfBA) Disclosure is required whenever an affiliate refers the consumer to a settlement service provider with whom the referring party has an affiliated relationship, (one entity has effective control over the other or are both under common control). The referring party must give the AfBA disclosure to the consumer at or prior to the time of referral. The disclosure must describe the business arrangement that exists between the two providers and give the borrower an estimate of the second provider's charges.
However, except in cases where a lender refers a borrower to an attorney, credit reporting agency or real estate appraiser to represent the lender's interest in the transaction, the referring party may not require the consumer to use the particular provider being referred.
The Closing Disclosure form is now the required standard form that lists all charges imposed on borrowers and sellers in connection with the settlement. RESPA requires that the borrower receive the form three days before the actual settlement. The lender or settlement agent must then provide the borrowers with a completed form based on information known to the agent at that time.
Disclosures at Settlement
The Closing Disclosure form shows the actual settlement costs of the transaction. Separate forms may be prepared for the borrower and the seller. The Initial Escrow Statement itemizes the estimated taxes, insurance premiums and other charges anticipated to be paid from the escrow account during the first twelve months of the loan. It lists the Escrow payment amount and any required cushion. Although the statement is usually given at settlement, the lender has 45 days from settlement to deliver it.
Disclosures after Settlement
Loan servicers must deliver to borrowers an Annual Escrow Statement once a year. This document summarizes all escrow account deposits and payments during the servicer's twelve month computation year. It also notifies the borrower of any shortages or surpluses in the account and advises the borrower about the course of action being taken regarding them.
A Servicing Transfer Statement is required if the loan servicer sells or assigns the servicing rights to a borrower's loan to another loan servicer. Generally, the loan servicer must notify the borrower 15 days before the effective date of the loan transfer. As long as the borrower makes a timely payment to the old servicer within 60 days of the loan transfer, the borrower cannot be penalized. The notice must include the name and address of the new servicer, toll-free telephone numbers, and the date the new servicer will begin accepting payments.
Changes to the Forms
The Loan Estimate and Closing Disclosure forms are significantly different from the well-known “Good Faith Estimate”, HUD-1 and other forms they replaced. While the good faith estimate form is gone, lenders still must adhere to providing borrowers with estimates on the Loan Estimate form which are made in good faith. Tolerances for variations in the Loan Estimate are specifically set out in the rule. Loan origination and lender costs are subject to a zero tolerance, i.e., they cannot be changed at all after the form is issued. Settlement services recommended by the lender are subjected to a 10 percent tolerance between the issuance of the form and closing. Title charges are subject to this tolerance if the lender-recommended title company is chosen by the borrower. The tolerance applies to the sum of all the included settlement services. Individual services may exceed the tolerance as long as the total does not exceed 10 percent. The tolerances are as follows:
Charges that may not increase (zero tolerance)
Total charges may increase up to 10% (10% tolerance)
Charges may change without regard to tolerance
Fees (e.g., origination fee) paid to the creditor, mortgage broker, or and affiliate of either
Fees paid to an unaffiliated third party if the creditor did not permit the consumer to shop for a third party service provider for a settlement service
Charges for third-party services where:
1. The charger is not paid to the creditor or the creditor’s affiliate
2. The consumer is permitted by the creditor to shop for the third-party service, and the consumer selects a third party service provider on the creditor’s written list of service providers.
Property insurance premiums
Amounts placed into escrow or similar account
For services required by the creditor if the creditor permits the consumer to shop and the consumer selects a third-party service provider not on the creditors written list of service providers
Charges paid to third-party service providers for services not required by the creditor.
Source: TILA-RESPA Integrated Mortgage Disclosure Rule – Compliance Guide, CFPB, July 2015
A loan originator that violates the good faith requirements, which include the tolerance requirements, is deemed to have violated the statute. However, the rule also provides a loan originator with an opportunity to cure any violation of the tolerance by reimbursing the borrower any amount by which the tolerances were exceeded. This reimbursement may be made at settlement or within 30 calendar days after settlement. In most cases, the CFPB expects that violations will be identified at or before settlement when completing the revised Closing Disclosure forum, which provides a clear format for comparing the charges estimated on the Loan Estimate form with those actually imposed at settlement.
Anti Kickback Requirements
In addition to the disclosure requirements discussed above, RESPA contains strict prohibitions against the payment of unearned fee splitting and referral fees in section 8 of the Act, which also contains exceptions to the prohibitions.
Unearned fee splitting is defined by the Act as follows:
“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 settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed. 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 or not a service is compensable. Nor may the prohibitions of this part be avoided by creating an arrangement wherein the purchaser of services splits the fee.”
A close reading shows that fees may be split so long as an actual good or service is provided; there is much law on the details of what exactly constitutes a proper payment for a good or service, and in some cases the Federal Circuit Courts are split on what is legal and what is not.
The Act defines a referral as:
“A referral includes 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. A referral also occurs whenever a person paying for a settlement service or business incident thereto is required to use a particular provider of a settlement service or business incident thereto. “
Although the law and court cases involving referral fees become more complex in actual application, the basic rule is that there must be four elements in a business transaction for it to be an illegal referral fee: 1) it must involve a federally related mortgage, 2) it must consist of a settlement service, 3) a “thing of value” must be received for a referral, and 4) an agreement or understanding must exist that the “thing of value” is in return for a referral. Each of these terms has a specific definition based on the statute and court cases, which is one of the reasons that expert legal assistance often is required when examining specific cases. “Federally related mortgages” and “settlement services” have been defined above; a “thing of value” in practice means exactly what it says: anything of any value whatsoever is included.
Needless to say, there are several exceptions to the referral fee prohibitions contained in section 8 of RESPA, the most common of which include payments to:
duly appointed agents;
promotional and educational activities;
payments of bona fide salaries, compensation and for goods, facilitates and services
affiliated businesses; or
pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and real estate brokers (real estate referral fees).
Perhaps the most common of these exempted transactions in relocation transactions is the referral fee between real estate brokers.
A far more complex exemption is the affiliated business arrangement (AfBA) exemption. RESPA was amended in 1983 to include a different set of rules for fee splitting among AfBAs (e.g., a real estate brokerage affiliating with a mortgage broker or title company), because of a concern that the then existent rules precluded the consumer from benefiting by virtue of the convenience and economies of “one stop shopping” for settlement services.
While the rules for setting up and running an AfBA are the realm of specialists, the basic rule is that the only thing of value which can be paid or transferred among affiliated business is a return on ownership interest, and then only if the following disclosures have been made in writing to the consumer: 1) the affiliation, 2) the cost of services of the affiliated provider, 3) that the consumer is not required to use the affiliated entity. In 1992 HUD cleared up some ambiguities: 1) an employer may pay an employee for referral activities to an affiliated entity and, 2) discounts or rebates to consumers to entice them to use AfBAs are permissible, but the relationship must still be disclosed.
In addition, HUD issued Statement of Policy 1996-2, which stated that the agency will investigate AfBAs to determine whether the comprising entities are bona fide providers of settlement services or merely "sham" business arrangements that do not qualify for the AfBA exception. According to the Statement, HUD (and now the CFPB) will consider several factors in determining whether an AfBA is a "sham:”
Are the entities reasonably capitalized?
Do they have their own employees?
Do they manage their own affairs?
Do they have an office and pay rent?
Do they provide substantial services?
Are their services substantially provided by employees, rather than subcontractors?
Do they market their services?
Do they provide services in addition to referrals?
In determining whether an AfBA satisfies these criteria, the CFPB considers these factors together and weighs them in light of the facts and circumstances of a specific situation. A negative response to any one of the considerations by itself is not necessarily determinative of a "sham" AfBA. The AfBA, however, does ensure its legitimacy if it satisfies all of these criteria. In sum, the CFPB looks at these factors in determining if the AfBA is running as a separate, legitimate business sharing in all of the risk and rewards that exist with all of the affiliated businesses.
Marketing Service Agreements
A marketing service agreement (MSA) typically is an arrangement between a lender and a real estate brokerage firm for a joint marketing campaign in which the lender then compensates the brokerage firm the fair market value of their advertising services. These partnerships and similar relationships can also involve title insurance agencies as well as other parties involved in real estate transactions. The CFPB has expressed concern over MSAs, perceiving these payments as potential kickbacks and thus in violation of RESPA.
On September 30, 2014, the CFPB announced a settlement with Lighthouse Title in which the company would pay a fine of $200,000 for an arrangement that the CFPB determined violated RESPA. According to the CFPB, Lighthouse Title had entered into MSAs with real estate brokers and others with the intent of having those parties then refer clients to the settlement services of Lighthouse Title. Lighthouse Title based the payments to brokers based, in part, on the number of referrals the company received from each broker. As a result of the Lighthouse Title case and scrutiny of MSAs by the CFPB, a number of large mortgage lenders have announced that they will no longer enter into the arrangements.
While MSAs are not illegal, CFPB Director Richard Cordray has expressed “grave concerns” about the use of MSAs and the “substantial legal and compliance risk for the parties to the agreement.” The CFPB has reviewed numerous MSAs on which the agency has not taken enforcement action and has sought to provide clarification to the industry. On October 8, 2015, the CFPB issued a bulletin on RESPA Compliance and MSAs, noting the substantial risks of violating RESPA posed by entering into a MSA. For a copy of the bulletin, please go to: http://files.consumerfinance.gov/f/201510_cfpb_compliance-bulletin-2015-05-respa-compliance-and-marketing-services-agreements.pdf.
The basis for allowing MSAs under RESPA is the exception contained in Section 8(c)(2): payment for goods or services or services actually performed. This section of RESPA has come under a new interpretation by the CFPB in the PHH case and is currently under appeal, after a three judge panel of the DC Circuit Court of Appeal found that the CFPB had misinterpreted the statute.
ConclusionRESPA is one of the most important federal laws of which relocation professionals dealing with the domestic real estate sale and purchase must be aware. Although its coverage is not universal, most of the U.S. home sales and purchases will be subject to its provisions. In addition, because of its tight regulation of settlement service providers, any company involved in the home sale or purchase process will need to comply with the sections regarding fees and, where applicable, affiliated business relationships.