Earning RESPA Fees

Can we charge this fee or does it violate RESPA? It is a common question and a very tough one to answer. In the wake of recent court decisions and HUD's policy statement involving RESPA, this is a good time to look closely at the fees being charged and paid relative to mortgage loans covered by RESPA.

It is important to get this right for several reasons. First, ignorance (the favorite claim of some loan officers) is not a defense. In fact, a claim of ignorance simply digs the hole deeper because it is a claim that the loan officer doesn't know how to do the job.

Second, the consequences of errors are severe. Where violations are found, the best a financial institution could hope for is a bad compliance rating. But it could be worse. It could involve civil money penalties - big ones. It would probably involve getting a lot of really bad press because newspapers love stories about how banks cheat customers - and that's how it would get written up. And the ultimate penalty could be jail time. It hasn't happened yet, but the law specifies jail as one of the remedies.

Lenders need to understand that they should never enter into a fee arrangement without first thinking about the work performed to earn the fee. How the fee was earned or justified is the critical first question that RESPA - and anyone enforcing it - will ask. Therefore, it should be the first thing the lender thinks about.

Lenders should also be aware that RESPA prohibits both the receiving of an unearned fee and the payment of an unearned fee. In other words, it is just as illegal to arrange for and pay a fee to an outside settlement service provider as it is to charge and collect one for the lender.

Lending is a business. Lenders are in the business to make a living. Borrowers need the use of more money then they have at the time and are willing to pay for this privilege. Some lenders have taken unfair advantage of borrowers' willingness to pay and have charged excessive fees. RESPA enters the picture to balance the equation between lender and borrower.

The concept is simple: a borrower should pay for what they get and no more. The lender and other settlement service providers should charge for their services but not for things they don't do. They should not, for example, think up a fancy name, attach a fee to it, and ask the customer to pay it when in fact the settlement service provider has done nothing more than a little creative writing.

HUD has published a list of services that would justify earning money. This list is not comprehensive or exclusive. Other services may justify a fee. But the list gives guidance on what is justifiable as "work" and, by omission, what is not. Lenders should be familiar with this list. They should learn it and use it.

As far as referrals go, no one can charge or pay for the referral. The mere act of a referral - valuable as referrals may be in the business world - cannot be compensated under RESPA. Perhaps the best way to explain or justify this rule is that there is not really a way to calculate the value of a referral that would be fair to the consumer. Nor may a lender substitute another "service" for compensation when the real motive is to compensate for the referral. Only what HUD defines as work may be compensated.

To give guidance, HUD has published a list of the activities that can count toward earning a fee. The actual list includes fourteen items that typically occur in taking and processing a mortgage application. In order to earn a fee, the payee should perform at least five tasks from this list. If the lender or another settlement service provider duplicates or re-performs the task, the first provider cannot be compensated for the task. In effect, the second performance means that the first one was not acceptable. Use HUD's list for training.

In order to earn a fee, the service provider must be doing at least 5 of the following 14 activities:

Taking information from the borrower and filling out the application.
Analyzing the prospective borrower's income and debt and pre-qualifying the prospective borrower to determine the maximum mortgage that the prospective borrower can afford.
Educating the prospective borrower in the home buying and financing process, advising the borrower about the different types of loan products available, and demonstrating how closing costs and monthly payments would vary under each product.
Collecting financial information (tax returns, bank statements) and other related documents that are part of the application process.
Initiating or ordering VOEs and VODs.
Initiating or ordering requests for mortgage and other loan verifications.
Initiating or ordering appraisals.
Initiating or ordering inspections or engineering reports.
Providing disclosures, including TILs and GFEs, to the borrower.
Assisting the borrower in understanding and clearing credit problems.
Maintaining regular contact (with the borrower, Realtors, and lender) between application and closing to apprise them of the status of the application and to gather any additional information as needed.
Ordering legal documents.
Determining whether the property was located in a flood zone or ordering such a service.
Participating in the loan closing.