An area of increasing liability for brokers is that of the Real Estate Settlement Procedure Act (RESPA). Passed in 1975, this law has been the recent focus of concern as the Department of Housing and Urban Development (HUD) has stepped up its enforcement of this law. To avoid violations and assure compliance, it is important for brokers to be familiar with the provisions in RESPA.
General Requirements
Transactions Covered
- The provisions of RESPA apply to all settlement services for federally related mortgages, including title searches, title insurance, preparation of documents, termite inspections, surveys, closings, services rendered by real estate licensees, etc.
Requirements of the Act
- A uniform procedure must be followed for all federally related transactions.
- This includes the truth-in-lending disclosures, written explanation of settlement costs, good faith estimates of settlement cost, use of a uniform settlement statement, etc.
- Prohibitions Commonly Involving Real Estate Licensees
Title Companies
- A buyer may not be required to utilize the services of a certain title company for title insurance. Violation of this section can result in damages of three times the charges for the insurance.
“Kick-backs” or “Naked Referrals”
- Paying or receiving a fee or thing of value for referring business related to settlement without actually rendering service is prohibited by RESPA (i.e., receiving a referral fee from a title insurance company).
Affiliated Business Relationships
Definition: an affiliated business relationship exists where there is a diversified corporation that packages real estate related services.
- An “ABA” will be found to exist where one individual or firm has more than 1% interest in a company to which it refers business.
- Such affiliated business relationships are permitted as long as an “Affiliated Business Arrangement Disclosure Statement” on a separate piece of paper is given to the party(s) no later than the time the referral is made to the affiliated business. This must include a disclosure of the relationship between the referring company and the business providing the settlement service along with an estimate or range of charges generally made.
- If such disclosure is properly made, the referred services may be provided at a discounted rate.
- The only thing of value that may be received from the arrangement is a return on ownership interest or franchise relationship. An employee may be compensated by his employer for referring business to an affiliated company. Real estate licensees who act as independent contractors would not be eligible for compensation under this exception. The provider or other third party cannot compensate the employees of the affiliated company that made the referral, nor can it reimburse the other company for the fees it paid its employee for the referral.
- A party cannot be required to use the affiliated company’s services as a condition for settlement of a loan or purchase of a property.
Computerized Loan Origination (CLO)
- Borrowers are permitted to pay real estate brokers for helping them select a mortgage and pre-qualifying them for financing. This allows a broker to utilize an office computer to call up a menu of mortgage products and begin the loan process electronically.
- The fee charged to the borrower must be disclosed in writing and must be paid by the borrower; it cannot be paid by the mortgage broker.