PART
3500 -- APPENDIX B
Appendix B to Part 3500 -- Illustrations of Requirements of RESPA
The following illustrations provide additional guidance on the meaning
and coverage of the provisions of RESPA. Other provisions of Federal
or State law may also be applicable to the practices and payments
discussed in the following illustrations.
1. Facts: A, a provider of settlement services, provides settlement
services at abnormally low rates or at no charge at all to B, a
builder, in connection with a subdivision being developed by B.
B agrees to refer purchasers of the completed homes in the subdivision
to A for the purchase of settlement services in connection with
the sale of individual lots by B.
Comments: The rendering of services by A to B at little or no charge
constitutes a thing of value given by A to B in return for the referral
of settlement services business and both A and B are in violation
of Section 8 of RESPA.
2. Facts: B, a lender, encourages persons who receive federally-related
mortgage loans from it to employ A, an attorney, to perform title
searches and related settlement services in connection with their
transaction. B and A have an understanding that in return for the
referral of this business A provides legal services to B or B's
officers or employees at abnormally low rates or for no charge.
Comments: Both A and B are in violation of Section 8 of RESPA. Similarly,
if an attorney gives a portion of his or her fees to another attorney,
a lender, a real estate broker or any other provider of settlement
services, who had referred prospective clients to the attorney,
Section 8 would be violated by both persons.
3. Facts: A, a real estate broker, obtains all necessary licenses
under state law to act as a title insurance agent. A refers individuals
who are purchasing homes in transactions in which A participates
as a broker to B, an unaffiliated title company, for the purchase
of title insurance services. A performs minimal, if any, title services
in connection with the issuance of the title insurance policy (such
as placing an application with the title company). B pays A a commission
(or A retains a portion of the title insurance premium) for the
transactions or alternatively B receives a portion of the premium
paid directly from the purchaser.
Comments: The payment of a commission or portion of the title insurance
premium by B to A, or receipt of a portion of the payment for title
insurance under circumstances where no substantial services are
being performed by A is a violation of Section 8 of RESPA. It makes
no difference whether the payment comes from B or the purchaser.
The amount of the payment must bear a reasonable relationship to
the services rendered. Here A really is being compensated for a
referral of business to B.
4. Facts: A is an attorney who, as a part of his legal representation
of clients in residential real estate transactions, orders and reviews
title insurance policies for his clients. A enters into a contract
with B, a title company, to be an agent of B under a program set
up by B. Under the agreement, A agrees to prepare and forward title
insurance applications to B, to re-examine the preliminary title
commitment for accuracy and if he chooses to attempt to clear exceptions
to the title policy before closing. A agrees to assume liability
for waiving certain exceptions to title, but never exercises this
authority. B performs the necessary title search and examination
work, determines insurability of title, prepares documents containing
substantive information in title commitments, handles closings for
A's clients and issues title policies. A receives a fee from his
client for legal services and an additional fee for his title agent
``services'' from the client's title insurance premium to B.
Comments: A and B are violating Section 8 of RESPA. Here, A's clients
are being double billed because the work A performs as a ``title
agent'' is that which he already performs for his client in his
capacity as an attorney. For A to receive a separate payment as
a title agent, A must perform necessary core title work and may
not contract out the work. To receive additional compensation as
a title agent for this transaction, A must provide his client with
core title agent services for which he assumes liability, and which
includes, at a minimum, the evaluation of the title search to determine
insurability of the title, and the issuance of a title commitment
where customary, the clearance of underwriting objections, and the
actual issuance of the policy or policies on behalf of the title
company. A may not be compensated for the mere re-examination of
work performed by B. Here, A is not performing these services and
may not be compensated as a title agent under Section 8(c)(1)(B).
Referral fees or splits of fees may not be disguised as title agent
commissions when the core title agent work is not performed. Further,
because B created the program and gave A the opportunity to collect
fees (a thing of value) in exchange for the referral of settlement
service business, it has violated Section 8 of RESPA.
5. Facts: A, a ``mortgage originator,'' receives loan applications,
funds the loans with its own money or with a wholesale line of credit
for which A is liable, and closes the loans in A's own name. Subsequently,
B, a mortgage lender, purchases the loans and compensates A for
the value of the loans, as well as for any mortgage servicing rights.
Comments: Compensation for the sale of a mortgage loan and servicing
rights constitutes a secondary market transaction, rather than a
referral fee, and is beyond the scope of Section 8 of RESPA. For
purposes of Section 8, in determining whether a bona fide transfer
of the loan obligation has taken place, HUD examines the real source
of funding, and the real interest of the named settlement lender.
6. Facts. A, a credit reporting company, places a facsimile transmission
machine (FAX) in the office of B, a mortgage lender, so that B can
easily transmit requests for credit reports and A can respond. A
supplies the FAX machine at no cost or at a reduced rental rate
based on the number of credit reports ordered.
Comments: Either situation violates Section 8 of RESPA. The FAX
machine is a thing of value that A provides in exchange for the
referral of business from B. Copying machines, computer terminals,
printers, or other like items which have general use to the recipient
and which are given in exchange for referrals of business also violate
RESPA.
7. Facts: A, a real estate broker, refers title business to B, a
company that is a licensed title agent for C, a title insurance
company. A owns more than 1% of B. B performs the title search and
examination, makes determinations of insurability, issues the commitment,
clears underwriting objections, and issues a policy of title insurance
on behalf of C, for which C pays B a commission. B pays annual dividends
to its owners, including A, based on the relative amount of business
each of its owners refers to B.
Comments: The facts involve a controlled business arrangement. The
payments of a commission by C to B is not a violation of Section
8 of RESPA if the amount of the commission constitutes reasonable
compensation for the services performed by B for C. The payment
of a dividend or the giving of any other thing of value by B to
A that is based on the amount of business referred to B by A does
not meet the controlled business agreement exemption provisions
and such actions violate Section 8. Similarly, if the amount of
stock held by A in B (or, if B were a partnership, the distribution
of partnership profits by B to A) varies based on the amount of
business referred or expected to be referred, or if B retained any
funds for subsequent distribution to A where such funds were generally
in proportion to the amount of business A referred to B relative
to the amount referred by other owners such arrangements would violate
Section 8. The exemption for controlled business arrangements would
not be available because the payments here would not be considered
returns on ownership interests. Further, the required disclosure
of the controlled business arrangement and estimated charges have
not been provided.
8. Facts: Same as illustration 7, but B pays annual dividends in
proportion to the amount of stock held by its owners, including
A, and the distribution of annual dividends is not based on the
amount of business referred or expected to be referred.
Comments: If A and B meet the requirements of the CBA exemption
there is not a violation of RESPA. Since the payment is a return
on ownership interests, A and B will be exempt from Section 8 if
(1) A also did not require anyone to use the services of B, and
(2) A disclosed its ownership interest in B on a separate disclosure
form and provided an estimate of B's charges to each person referred
by A to B (see Appendix D of this part), and (3) B makes no payment
(nor is there any other thing of value exchanged) to A other than
dividends.
9. Facts: A, a franchisor for franchised real estate brokers, owns
B, a provider of settlement services. C, a franchisee of A, refers
business to B.
Comments: This is a controlled business arrangement. A, B and C
will all be exempt from Section 8 if C discloses its franchise relationship
with the owner of B on a separate disclosure form and provides an
estimate of B's charges to each person referred to B (see appendix
D of this part) and C does not require anyone to use B's services
and A gives no thing a value to C under the franchise agreement
(such as an adjusted level of franchise payment based on the referrals),
and B makes no payments to A other than dividends representing a
return on ownership interest (rather than, e.g., an adjusted level
of payment being based on the referrals). Nor may B pay C anything
of value for the referral.
10. Facts: A is a real estate broker who refers business to its
affiliate title company B. A makes all required written disclosures
to the homebuyer of the arrangement and estimated charges and the
homebuyer is not required to use B. B refers or contracts out business
to C who does all the title work and splits the fee with B. B passes
its fee to A in the form of dividends, a return on ownership interest.
Comments: The relationship between A and B is a controlled business
arrangement. However, the controlled business arrangement exemption
does not provide exemption between a controlled entity, B, and a
third party, C. Here, B is a mere ``shell'' and provides no substantive
services for its portion of the fee. The arrangement between B and
C would be in violation of Section 8(a) and (b). Even if B had an
affiliate relationship with C, the required exemption criteria have
not been met and the relationship would be subject to Section 8.
11. Facts: A, a mortgage lender is affiliated with B, a title company,
and C, an escrow company and offers consumers a package of mortgage
title and escrow services at a discount from the prices at which
such services would be sold if purchased separately. Neither A,
B, nor C, requires consumers to purchase the services of their sister
companies and each company sells such services separately and as
part of the package. A also pays its employees (i.e., loan officers,
secretaries, etc.,) a bonus for each loan, title insurance or closing
that A's employees generate for A, B, or C respectively. A pays
such employee bonuses out of its own funds and receives no payments
or reimbursements for such bonuses from B or C. At or before the
time that customers are told by A or its employees about the services
offered by B and C and/of the package of services that is available,
the customers are provided with a controlled business disclosure
form.
Comments: A's selling of a package of settlement services at a discount
to a settlement service purchaser does not violate Section 8 of
RESPA. A's employees are making appropriate controlled business
disclosures and since the services are available separately and
as part of a package, there is not ``required use'' of the additional
services. A's payments of bonuses to its employees for the referral
of business to A or A's affiliates, B and C, are exempt from Section
8 under section 3500.14(g)(1). However, if B or C reimbursed A for
any bonuses that A paid to its employees for referring business
to B or C, such reimbursements would violate Section 8. Similarly,
if B or C paid bonuses to A's employees directly for generating
business for them, such payments would violate Section 8.
12. Facts. A is a mortgage broker who provides origination services
to submit a loan to a Lender for approval. The mortgage broker charges
the borrower a uniform fee for the total origination services, as
well as a direct up-front charge for reimbursement of credit reporting,
appraisal services or similar charges.
Comment. The mortgage broker's fee must be itemized in the Good
Faith Estimate and on the HUD - 1 Settlement Statement. Other charges
which are paid for by the borrower and paid in advance are listed
as P.O.C. on the HUD - 1 Settlement Statement, and reflect the actual
provider charge for such services. Also, any other fee or payment
received by the mortgage broker from either the lender or the borrower
arising from the initial funding transaction, including a servicing
release premium or yield spread premium, is to be noted on the Good
Faith Estimate and listed in the 800 series of the HUD - 1 Settlement
Statement.
13. Facts. A is a dealer in home improvements who has established
funding arrangements with several lenders. Customers for home improvements
receive a proposed contract from A. The proposal requires that customers
both execute forms authorizing a credit check and employment verification,
and, frequently, execute a dealer consumer credit contract secured
by a lien on the customer's (borrower's) 1- to 4-family residential
property. Simultaneously with the completion and certification of
the home improvement work, the note is assigned by the dealer to
a funding lender.
Comments. The loan that is assigned to the funding lender is a loan
covered by RESPA, when a lien is placed on the borrower's 1- to
4-family residential structure. The dealer loan or consumer credit
contract originated by a dealer is also a RESPA-covered transaction,
except when the dealer is not a ``creditor'' under the definition
of ``federally related mortgage loan'' in 3500.2. The lender to
whom the loan will be assigned is responsible for assuring that
the lender or the dealer delivers to the borrower a Good Faith Estimate
of closing costs consistent with Regulation X, and that the HUD
- 1 or HUD - 1A Settlement Statement is used in conjunction with
the settlement of the loan to be assigned. A dealer who, under 3500.2,
is covered by RESPA as a creditor is responsible for the Good Faith
Estimate of Closing Costs and the use of the appropriate settlement
statement in connection with the loan.
[57 FR 49607, Nov. 2, 1992; 57 FR 56857, Dec. 1, 1992, as amended
at 59 FR 6521, Feb. 10, 1994; 61 FR 13251, Mar. 26, 1996]
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