RESPA promises to be one of the looming nightmares of the immediate future. Put together with fair lending, RESPA enforcement concepts could severely restrict the mortgage business. When RESPA was first enacted, no-one thought it would be a 90-lb weakling; but neither did anyone anticipate the many-headed monster that it has become.
In its early days, RESPA was designed to expose the real cost of loans by breaking apart and disclosing specific services and fees. The concern was that unearned fees and kickbacks were concealed in packaged pricing. By requiring item by item disclosures on the HUD-1, the designers of RESPA hoped to expose and eliminate unfair fees.
Bit by bit, RESPA has reached deeper into the settlement process, becoming much more than a disclosure tool. It has become a method for questioning the structure and existence of business relationships and evaluating the fairness or appropriateness of fees.
There are now several business practices that may seriously run afoul of RESPA. The FDIC has published a warning to institutions giving some guidance, but examiner creativity continues to uncover ways to violate this act.
Adding a percentage to settlement service fees
Ignoring the TIL interpretation that such fees are a finance charge and must be disclosed as such, the FDIC now looks at these fees as an illegal kickback. This interpretation brings into question the whole practice of fee add-ons.
In addition, the practice of quoting and charging a set price for a service such as an appraisal, when the actual cost may vary depending on the appraiser selected and the nature of the appraisal, can now haunt the bank in two ways. If the bank charged $250 as a standard fee but the appraiser charged the bank only $225, the bank would be in the position of receiving a kickback of $25.00. But if the bank disclosed and charged the correct amount at closing, the bank could face examiner concerns about Good Faith Estimates that are not consistent with the HUD-1s.
"Tolerances" for GFEs
Increasingly, examiners are comparing GFEs to the HUD-1s and noting variations. Some examiners have transposed the Truth in Lending concepts of accuracy and tolerances for error onto the GFE. Thus, the GFE is being held to a standard of accuracy much like that of the early TIL disclosure for residential mortgage transactions. This ignores the entire concept of "estimate" and uses the GFE to lay the foundation for other RESPA violations.
The real estate industry, from sales to financing, is based on certain types of relationships. These relationships, to the extent that they may harm or confuse customers, are regulated or prohibited by RESPA. Fees for services that are based on percentage amounts are highly suspect under RESPA. The fee - or part of it - becomes a thing of value in return for referrals.
Examples of problems have included extra or fee service performed by a company such as a flood hazard determination firm. Offers to review your existing portfolio for free in return for becoming the bank's certification firm are being written up as kickbacks that violate RESPA. The remedy is to require the bank to pay for the portfolio search.
We are still struggling with the concept of payment as a percentage of the loan amount rather than as a fixed amount fee. HUD has not required the industry to change this practice, but has not clearly stated that it is always legal. Banks are left to evaluate for themselves whether the arrangements can withstand a RESPA challenge.
The only way out of this trend is to change RESPA itself. RESPA needs two major changes. The first is clarification of what kind of fees and fee packages are legal. RESPA goes to the heart of how business generally functions and makes much of it illegal in the real estate arena. The standards HUD has provided in its interpretive letters are not much help. They are not specific in content and they are fuzzy in application. The industry as a whole needs clarification - or help.Second, RESPA should be re-assigned to a regulatory agency where the priority is clear rulemaking to support compliance, not abstinence from rulemaking because it might impede enforcement actions.
- Review all loan settlement service relationships, including those in the commercial loan department that may involve settlement service providers. Evaluate them for consistency with RESPA.
- Review all pricing set by the bank. Determine that the pricing methods and the prices themselves do not violate RESPA. Look especially for add-on fees.
- Maintain a list of directors and their business relationships. Make sure that there are no RESPA issues in the business activities listed.
- Make sure that someone is responsible, at least once a year, for checking of the fair market value of all settlement services and comparing the fees charged by the bank and settlement service providers that the bank uses.
Copyright © 2000 Compliance Action. Originally appeared in Compliance Action, Vol. 4, No. 17 & 18, 1/00
First published on 01/01/2000