Who is responsible for determining if services were provided?
For each of the next five questions, the following fact situation applies. The bank would like to pay a licensed mortgage broker a fee. Section 8 prohibits kickbacks but does allow payment of a fee for actual services provided. The broker would have to take the application and perform 5 of the 12 services described in Section 8.
Question: Who is responsible for determining if the services were provided?
Answer: In theory, the lender as well as the service provider are both responsible. RESPA prohibits the payment of and the receiving of an unearned fee. However, as a financial institution, assume that you have full responsibility. It simply isn't safe or realistic to rely on a broker's assurances.
Question: How should we determine if the services were actually provided?
Answer: Documentation is always the key here. You are looking for two types of work when you review documentation. First, look for information supporting the work claim. This should include a completed application, verifications provided by the broker, and other documentation of work performed that you would normally compile. If the work performed includes credit counseling, look for a certificate that indicates the customer has completed the counseling program.
Second, you must consider whether this work was accepted by your institution. The test here is that, in order for the work to qualify, you must accept it and not replace or reproduce it. If you find double documents in the file, such as two credit reports, extra verifications of employment, two pest inspection certificates, you should not count that service toward one of the five performed to earn the fee.
Also, determine that the broker and not your institution performed the work. Check the dates of work performed and any indication of who the work was performed for to be sure that the broker and not your institution, arranged for the service.
Question: What are the penalties and who would be the responsible party if it was determined that the services provided did not satisfy Section 8 and were therefore kickbacks?
Answer: Penalties are provided in Section 8 of the act. The general penalty is $10,000. However, a pattern of actions could result in a larger penalty. As for who pays, anyone violating RESPA can be subject to the penalties. This means both the lender and any party that conspired with the lender.
Question: Is there a name for this type of fee, and where on the HUD-1 should it be disclosed?
Answer: The fee would usually be called a broker fee or an origination fee. There is no statutory name for the fee and there really isn't an industry standard name. Creativity tends to run rampant when charging customers fees such as this.
Question: Since the fee is being paid by the bank to the broker, is the fee included in the APR calculation?
Answer: Always be careful to keep Regulation Z and RESPA considerations separate. The fact that something has a specific status under RESPA does not affect its status as a finance charge for purposes of Truth in Lending. This determination should be made looking at TIL only.
§226.4 makes all third party broker fees a finance charge. However, TIL looks at more than this to determine whether a fee is a finance charge. Under TIL, the fee is only a finance charge if the borrower pays it. The amount of this fee that is passed on to the borrower is a finance charge. However, if the lender absorbs the fee, it is not a finance charge because it is not a cost of credit to the customer. The question of whether this is a Section 8 violation of RESPA is a separate consideration.
Copyright © 2004 Compliance Action. Originally appeared in Compliance Action, Vol. 8, No. 15, 1/04
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