Managing Section 8 Risk
When it comes to counting violations, the disclosures and notices generally top the list. They are easy to find and easy to count. Certainly RESPA disclosure violations rank high on the common violations list. The list tends to direct our attention to GFEs and HUD-1s. Both timing and content are violation issues.
But there is a difference between the notice or paper-trail violations and substantive violations. Substantive violations may not happen as frequently - thank goodness - but they are very costly. Substantive violations are also difficult to fix. Paper-trail violations may involve searches, redisclosures and, in the case of TIL and some RESPA violations, restitution. But the substantive violations have much more complex remedies and usually involve some form of public punishment.
When it comes to substantive violations of RESPA, Section 8 is the big one. Section 8 has both civil and criminal penalties. In addition, when a financial institution violates Section 8, it faces several possible enforcement agencies: its regulatory agency and HUD. And there is always the possibility that a creative attorney general will fashion an argument that the substantive violation is also an unfair or deceptive trade practice, in violation of both state and federal law.
In short, managing and preventing Section 8 problems is at least as important as managing other aspects of RESPA compliance. The challenge is that managing and preventing Section 8 violations is much more difficult than making sure the GFEs go out on time with an acceptable accuracy level.
The challenge is that violations of Section 8 start from the opposite end. They are not situations initiated by the compliance department. They are often situations that are not specifically covered in procedures so they don't come to the attention of compliance. To prevent Section 8 violations, it is important to maintain regular communications with the lenders and thus identify creative but illegal ideas before they go too far. To guide you, the chart below identifies the most common problems that institutions encounter with Section 8 and provides ideas on how it happens. Use this information in your regular discussions with lenders. But remember: this list is not comprehensive. Violators are always creative!
Managing Section 8 Risk (Chart)
Copyright © 2005 Compliance Action. Originally appeared in Compliance Action, Vol. 10, No. 10, 9/05
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