More Burden Relief on RESPA
The act contains several changes to RESPA that affect notifications to customers. They are clearly intended to simplify compliance. Whether they in fact do provide some compliance relief will depend on regulations.
Transfer of Servicing
One of the most common violations of RESPA has been drastically changed. The notice provided to the customer at application or within three days which explains the likelihood that the loan will be sold is significantly simplified in the new act.
The new act provides that the creditor must disclose, at the time of application, "whether the servicing of the loan may be assigned, sold, or transferred." This is a minimal requirement compared to the lengthy notice presently required.
However, interpretation of this paragraph is in the hands of HUD. This new requirement could be interpreted to require a printed notice. However, any new notice requirement should be much simpler than the existing notice. Watch HUD closely to see what is proposed.
Controlled Business Arrangement
Controlled business arrangements are to be "controlled" no more. Congress has renamed them "affiliated business arrangements." This is a much friendlier and less suspicious sounding term. Do not, however, confuse it with the defined term "affiliate" in Regulation X. The act makes no mention of the term affiliate relationship that is presently in use. There is potential for confusion but this may be resolved by regulations.
Congress introduced modern realities into the referral notice process. Written notices are required whenever there is a face to face interview or an electronic application. In these situations, providing a written notice before making a referral is actually possible.
Providing written notices before making referrals in response to telephone requests is clearly not possible, at least not within any recognized method of customer service. The act now provides three days to send a referral notice to customers when the request is made over the phone. The provider of the notice would then have to make a reasonable effort to get a written acknowledgment from the applicant.
Compensation for referrals
Congress has delayed the effective date of HUD's new rule on compensa-tion to employees. This portion of the revisions to Regulation X did not take effect on October 7. Instead, the effec-tive date for limitations on compensa-tion to employees making referrals is postponed to July 31,1997.
Business Loan exemption
There is some definitive good news in this. HUD has framed the business loan exemption in RESPA to exclude (and therefore keep as a covered transaction) any loan made to an individual for investment property. Truth in Lending exempts such loans as business loans. HUD has consistently refused to consider a loan to an individual as a business loan transaction.
The new act mandates that the business loan exemption be the same as the exemption under Truth in Lending. This will eliminate the gray area of determining purpose and borrower before deciding whether the loan is exempt. The test will now be purpose alone. Whether the borrower chooses to borrow in a company name or a personal name will no longer be determinative.
- Review your servicing notices. Talk with loan origination staff to find out what customers actually consider useful. Use that information to comment.
- Compile information about telephone and in person applications and estimate how your bank will be affected by the act's new three day period for providing the referral notice. Be prepared to provide realistic numbers and practical suggestions when regulations are proposed.
- Review your bank's fee structure and compensation practices, again, for lending staff and for any staff compensated for making referrals. Changes in compensation for referrals do not need to be made until July 31, 1997. Also, watch for any changes to this rule.
- Make a note to remind commercial lenders about the redesigned business loan exemption in RESPA. But, don't do this until you get regulatory guidance!
- Ask your lending staff to compile a list of affiliates and companies to which you refer customers for settlement services. Compare this to companies named in the HUD-1 disclosures. Set up a schedule to review and update these lists at least every 6 months.
Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 16, 10/96
First published on 10/01/1996