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RESPA: One-Two-Punch: HUD Follows RESPA Policy Statement With Action
On Friday, November 23, 2001, HUD hit the mortgage lending industry with a series of RESPA enforcement actions totaling $2 million. The enforcement actions, involving five lenders and settlement service providers each involve alleged violations of RESPA's anti-kickback provisions.
This action follows hard on the heels of the policy statement involving the same issues. In that policy statement HUD asserted its interpretation that up-charges (fees added on to the fee charged by a settlement service provider such as a credit reporter) violate RESPA's anti-kickback provisions.
This policy statement was issued in the wake of a court decision, Echevarria v. Chicago Title Co., which held that up-charges not only do not violate RESPA but that HUD does not have the legal authority to conclude otherwise. In a showing of who's on first, HUD announced the enforcement cases only weeks after issuing the policy statements. In retrospect, the policy statement's issuance was probably intended to clear the way for the enforcement actions and was intended to dispose of the reasoning in the Echevarria case.
The five enforcement actions involve five different settlement service providers and slightly different transactions that allegedly violate RESPA.
Conseco Finance Corp.
Conseco's commercial loan division was charged with tying compensation to volume-based referrals from construction companies. Conseco funded manufactured home floor plan inventories at reduced rates in return for the referral of consumer lending business on home sales.
As a mortgage lender subject to RESPA, Conseco's fee reduction, even though it did not directly involve consumers, constituted an illegal kickback to the builder for the referral of business. RESPA prohibits the structure of the transaction and presumes that consumers suffered harm in the form of increased costs on consumer loans to pay for the reduction in rates on the commercial loans.
Central Pacific Mortgage Corp.
This enforcement action, based on a referral from the State of California, charged Central Pacific with overcharges on credit report fees. HUD noted that there were instances of undercharging, however, this did not mitigate the enforcement action. Although HUD found numerous instances of overcharges, it did not find a pattern or practice of illegal conduct. Central Pacific will pay the U.S. a fine of $50,000, set aside $35,000 for settlement with the state of California, and establish a quality assurance program to prevent overcharges in the future.
ARVIDA
HUD charged ARVIDA with violations of RESPA's section 8(b). ARVIDA charged a percentage of the house sales price for closing costs. A portion of the fee was used to pay specific closing costs. ARVIDA retained the remainder of the fee and did not specifically account for what the fee covered.
ARVIDA also imposed a $300 fee on buyers who chose to use their own title agent rather than ARVIDA's affiliate. ARVIDA will refund $45,750 and cease the practices.
The First American Corp.
In a settlement involving the payment of $1.2 million, The First American Corp. was charged with violations of RESPA by offering reduced or free portfolio determinations in exchange for a future commitment on flood hazard and tax determinations. The company's agreements with lenders bound the lenders to use The First American Corp. for servicing new loans. HUD concluded that the agreements amounted to the referrals of future business in exchange for the benefit of the reduced-cost portfolio service.
Proceeds of the penalty paid by The First American Corp. will be used to cover the costs of the investigation and fund non-profit housing counseling services.
Transamerica Corp.
In a similar case, HUD reached an enforcement agreement with Transamerica Corp. HUD found that beginning in 1994-5, Transamerica entered into agreements with lenders that HUD alleges violate RESPA. In its agreements, Transamerica provided reduced-cost flood hazard portfolio reviews in exchange for the future business of determinations on new applications. Transamerica will pay $500,000 for consumer counseling and education.
In both cases involving flood hazard determinations, the enforcement of RESPA actually adds to consumer costs by preventing lenders from taking advantage of a reduced cost for mandatory compliance. These section 8 cases based on flood determination referrals take punitive action against lenders and service providers who used reduced rates to compete for business.
When the changes to the flood determinations took effect, service providers competed for business by offering free or reduced-rate services for the lender's existing portfolio in order to establish a business relationship with the lender. As with credit reports, the function is most efficiently established with a single service provider. This drove the service providers to compete for the business. Lenders - and their customers - were the beneficiaries of this competition.
Now, however, those lenders and service providers must pay more than $1 million for the way in which they offered reduced-cost services. Guess who is really going to pay for this?
Other enforcement
HUD also announced that it has entered into 38 settlement agreements with lenders in 2001. The agreements all involve the referral of flood determinations and tax servicing in exchange for free portfolio reviews. It is worth noting that these actions all involve financial institutions located in FDIC's Boston region.
In announcing these enforcement actions, HUD stated that although settlement service providers have a right to be "reasonably compensated" for services, they don't have a right to collect illegal kickbacks and unearned fees.
The irony here is that, in several of the cases, the fees actually charged could have been structured differently - such as an application fee or an underwriting fee. As such, they would not have been up-charges and would presumably not have "violated" RESPA.
The enforcement actions also create fairly serious compliance problems. The lender must charge the customer only the amount that the lender actually pays for the service. However, these fees may be variable and the precise amount is not known until the lender receives the bill from the service provider. In the case of many settlement services, most notably credit reports, this bill may arrive well after settlement. Although HUD has enthusiastically taken action to convict lenders from imposing inaccurate charges, HUD provides no way to ensure compliance with its interpretation of RESPA.
ACTION STEPS
- Review your GFEs and HUD-1 statements and identify all fees that involve third party settlement service providers.
- Compare the fees charged to the customer with the amount actually billed for the service.
- Compare fees you are paying for services such as flood hazard determination with what other lenders are paying. Make sure you are paying market rates.
- Consider whether it is time to write to your Congressman about the consequences of HUD's interpretation of RESPA's section 8.
Copyright © 2001 Compliance Action. Originally appeared in Compliance Action, Vol. 6, No. 14, 12/01
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