RESPA The Forgotten Issues.....
The hot debate over Realtors getting fees and computerized loan origination systems has overshadowed some other key RESPA issues. As a result, HUD's expected final regulations may leave the industry still in the dark on critical questions.
It is a law that has been on the books for 16 years. Many people argue that it was ill-conceived. Everyone agrees that it is poorly written and ambiguous. Yet despite its shortcomings, RESPA, an acronym for the Real Estate Settlement Procedures Act of 1974, affects each and every mortgage banker. In fact, it is the one federal law on the books today that can cause a complete restructuring of the nature of the single-family mortgage origination industry and the manner in which the industry conducts its business.
As a result, RESPA remains as controversial today as it was on the day it was enacted. Due to the political and controversial nature of RESPA, the Department of Housing and Urban Development (HUD) for more than seven years has remained paralyzed and unable to implement new RESPA regulations, even though the agency was mandated to do so when Congress passed the Controlled Business Amendment to the act in 1983.
At last, however, the patient appears to be in the recovery room and new regulations are on the verge of being published. (If HUD) General Counsel Frank Keating's schedule is adhered to, those regulations may even be published by the time this article is published.)
The outline of the RESPA final regulations previewed by HUD's general counsel in congressional testimony generated a positive response from the main industry groups who were previously at odds over some of the key provisions. Realtors and mortgage brokers appear to be pleased with HUD's imminent approval of a role for them in computerized loan origination (CLO) systems. While not completely comfortable with this development, most mortgage bankers have recognized that the formal acceptance of CLOs was inevitable and are taking so-lace in HUD's statements that CLOs will have to be "open" multiple lender systems.
Many mortgage bankers also are pleased with HUD's new-found commitment to enforce vigorously the Section 8 anti-kickback provisions of RESPA in an effort to eliminate widely perceived, blatant abuses. Most other segments of the real estate finance community also have indicated general satisfaction with HUD's previewed proposals. However, this satisfaction is likely due to the simple fact that HUD seems to be moving on RESPA. After seven years of waiting for revisions to the RESPA regulations, there is a sense of relief and gratitude at the mere hint of action. Closer scrutiny of the situation, however, reveals that claims of victory may be premature and that it would probably be more appropriate for one to ask whether or not there really is a light at the end of this tunnel.
To better understand where we are today, it helps first to look at what RESPA was intended to do, how it is structured to accomplish its purposes and the issues that have arisen in its administration.
The evolution of RESPA
Enacted as a consumer protection statute in 1974, RESPA's stated purpose was to effect changes in the settlement process "... so that consumers throughout the nation are provided with greater and more timely information on the nature and costs of the settlement process and are protected from unnecessarily high settlement charges caused by certain abusive practices that have developed in some areas of the country." If the truth be told, even though RESPA has a disproportionately significant impact upon mortgage bankers, the abusive practices referenced in the statute at the time it was enacted were perceived to be in the title and escrow industries. To this date, a debate continues as to whether or not RESPA was even intended to apply to the actual making of a mortgage loan.
The statute is structured to accomplish its stated purpose in three distinct ways. First, it imposes certain affirmative disclosure requirements that seek to ensure that buyers and sellers are aware of what their respective settlement costs will be. Second, it makes it a federal crime either to pay or receive certain kickbacks or referral fees that tend to inflate costs to borrowers without any associated benefits. Third, it establishes certain guidelines governing the size of escrow accounts lenders may require for the payment of taxes and insurance.
The disclosure requirements
Lenders have had 16 years to adapt to the basic disclosure requirements of RESPA. These include the issuance of the HUD-written Special Information Booklet within three business days after the receipt of a loan application; the preparation and delivery of a Good Faith Estimate, which sets forth in dollars the amount or range for each settlement service expense a borrower is likely to incur; and the completion of a HUD-1 Settlement Statement, provided at settlement, but which at the borrower's request must be made available for inspection at least one business day before settlement.
Not all lenders have yet adapted to the Controlled Business Amendment disclosure requirements, which will be described later. But then, neither has HUD, which has tried for many years, but failed to implement the final regulations covering these provisions. The recently enacted Cranston-Gonzalez National Affordable Housing Act amended Section 5 of RESPA by requiring certain additional disclosures concerning the transfer of servicing and the administration of escrow accounts. The good news about the new servicing transfer provisions is they will create uniformity by specifically pre-empting any conflicting or more restrictive state laws governing notice to borrowers of servicing transfers that are to be given at the time of loan application or at the time the transfer of servicing is to occur.
Section 8 prohibitions
The consistently controversial aspects of RESPA are the anti-kickback and referral fee provisions of Section 8. Section 8(a) generally prohibits the payment or receipt of "any fee, kickback or thing of value" for the referral of settlement service business. One can, however, pay another party who refers settlement service business to it for the value of services actually rendered, or goods and facilities provided, so long as that payment in no way, shape or form reflects the value of the referral. Section 8(b) of the statute prohibits the splitting of fees received for a settlement service--again, other than for services actually performed.
In 1980, HUD published an interpretative rule that concluded that the referral of settlement service business to an affiliated entity would violate Section 8 of RESPA if there were a distribution of income between the affiliated entities in the form of...