I just thought that I would throw this open for comment.
Issue Date: RESPA News Monthly
February 2008, Posted On: 2/11/2008
Breaking News: HUD violating RESPA?
On Feb. 11, HUD abruptly canceled an FHA referral program for real estate brokers just days after attorney and RESPAnews columnist Howard Lax pointed out to agency officials that it seemed to violate RESPA. What did the program promise and why did HUD pull the plug so fast? Could HUD face a RESPA lawsuit for the alleged violations? What should you do if you encounter this program? Read on for the exclusive scoop.
Column by Howard Lax.
Which is blacker, the pot or the kettle? It is Oscar time. The award for Best Performance Sticking a Foot in Mouth goes to HUD Secretary Alphonso Jackson for his portrayal of a bona fide Cabinet Member.
A HUD press release issued on Nov. 15, 2007, stated that Jackson announced an incentive program for sales of HUD homes at a HUD-sponsored foreclosure prevention workshop for Detroit homeowners.
Under the new program, HUD will pay an extra $500 (above the usual real estate commission) to any real estate broker who sells a HUD owned home and convinces the borrower to obtain FHA insurance for the financing of the home. Compare this with the offer of only $250 more in real estate commissions if the buyer obtains any other type of financing or mortgage insurance. The press release states:
“….real estate brokers can obtain a $500 bonus when borrowers utilize FHA financing and a $250 bonus if borrowers use other financing options. The incentives are available through September 30, 2008.”
What!? Did we just hear the Secretary of HUD knowingly announce a criminal kickback program? Yup, we sure did! Mortgage insurance is a settlement service, and HUD is not exempt from Section 8 of RESPA.
HUD made an offer to pay a referral fee, and any real estate broker that takes HUD up on this offer (lord, we hope that none of them do) seals the agreement to accept a fee for making a referral. HUD offered a similar program at the end of 2006 called “FHA Brings the Holidays Home,” but the program ran for only a few weeks and nobody recognized the Section 8(a) violation.
So, aside from the fact that Jackson could go to jail for aiding and abetting a crime under 18 USC §2, what has HUD done to mitigate this disaster? Well, things only got worse for HUD and Secretary Jackson.
It seems that many of the HUD Homeownership Centers picked up on this program and followed their fearless leader into kickback land by advertising the program. These include web pages put up by HUD Homeownership Centers or HUD Offices in New Mexico, Arkansas, Louisiana, Michigan, Oklahoma, Texas, Philadelphia, Utah, Colorado, Wyoming, Montana, and Ohio, some of which are also in Spanish. The Atlanta Homeownership Center even developed a poster for distribution, describing this program and stating that the kickback program is effective for sales dating back to September 7, 2007.
This advertising is working well, since various HUD property managers, the Unofficial FHA Mortgage Guide, law firms, real estate networks, title agencies, and FHA approved mortgagees are now advertising this incentive program.
HUD cancels program I contacted one of HUD’s attorneys on Thursday, Feb. 7, 2008, about this program, and asked him if HUD would comment for this story.
HUD spokesman Brian E. Sullivan responded on Feb. 11, 2008 as follows:
“The intent of this program was to help stabilize neighborhoods and to prevent blight in the wake of rising foreclosures. But because this program may also leave some with the perception that this is contrary to the spirit of RESPA, we’ve stopped it.
“We have frequently offered incentives to encourage the sale of foreclosed properties. For example, we have offered incentives to encourage the sale of our properties to owner-occupants. In response to the subprime mortgage crisis, we extended this incentive as a way to match desperate homeowners with a safer, more secure loan program. Again, since this may leave some with the impression that this is inappropriate, we have stopped this particular campaign.”
This program was an excellent example of why RESPA outlawed referral fees. HUD should be lowering its FHA insurance premium by $250 to attract new business. Paying a referral fee to a real estate broker instead of cutting the borrower’s closing costs confirms that FHA insurance is overpriced, and that referral fees drive up the borrowers’ closing costs.
Sullivan pointed out that HUD reduced the FHA insurance downpayment requirement from three percent to $100 for buyers (owner/occupants) of HUD homes in areas where HUD has a significant inventory of homes. This raises another interesting potential issue (reverse redlining) that we may cover in a future column. What is the ethnic composition of neighborhoods that have a significant inventory of HUD homes? Section 2(1) of the Michigan Mortgage Lending Practices Act, and perhaps the Fair Housing Act, require uniform application of lending criteria and prohibit practices that have a disparate impact along some protected classification (such as race). However, “Special Purpose Credit Programs” are permitted under Section 8 of Federal Reserve Board Regulation B irrespective of some discriminatory aspects.
Will HUD face RESPA suit? The date in the poster creates a well defined class of borrowers who are eligible to sue HUD. We suspect that there may be limited interest in chasing potential legal fees for litigating on behalf of a limited number of class members. However, HUD should not breathe easy because it canceled this program. A lawsuit would ordinarily be delayed since a class action specialist would want to find a plaintiff and file in a jurisdiction where the courts permit recovery of three times the amount of the settlement service fee (e.g. three times the amount of the FHA insurance premiums) rather than file the lawsuit in a jurisdiction that limits damages to three times the amount of the kickback.
Please note that I called “shotgun” and thereby claim first dibs on potentially bringing a qui tam action under the Federal False Claims Act. I always said that I would be rich if I had a dime for every RESPA violation that is not reported to HUD.
Action items What should you do about this HUD program?
If you work for a depository institution, you may be obligated to file a Suspicious Activity Report (SAR) disclosing Secretary Jackson’s program under the Bank Secrecy Act. We trust that at least a few dozen SARs will be sent to banking regulators.
If you work for a non-depository institution, title agency, or title company, call your attorney. I am sure that your attorney would love the opportunity to call Secretary Jackson as a witness in any RESPA litigation to explain how RESPA permits HUD to pay referral fees.
If you are a real estate professional, think twice before accepting the extra $250 fee from HUD for steering a buyer to an FHA loan. If HUD insists on disbursing an extra $250 when you sell a HUD home, ask HUD or the title agency to revise the HUD-1 and recut the $250 check directly to the buyer so that there is no inference of a RESPA violation.
After all, they are human too, believe it or not! Having dealt with FHA for a number of years, the last sentence is definitely debatable.
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