Virginia Real Estate Settlement Services

MARKUPS and JUNK FEES
Part 1.
Once litigation subsided over mortgage broker fees, borrowers increasingly challenged miscellaneous lender compensation. Borrowers claimed that document preparation fees greatly exceeded the actual cost of preparing closing documents, underwriting fees exceeded the cost charged by automated underwriting systems, credit report fees exceeded the cost of the credit report, and that some lenders were making excessive profits from “junk fees.” These claims took two forms.
First, borrowers claimed that lenders cannot make a profit from third party services. These profits are termed “markups.” Second, borrowers claimed that lenders cannot charge excessive fees, far above the cost or the value of services provided. These profits are termed “overcharges” or “overages.” HUD supported markup and overcharge claims in amicus briefs filed in various borrower lawsuits.

We will be continuing with the series on Affinity Relationships beginning tomorrow

The “little brother” of Section 8(a) of RESPA is Section 8(b):
“No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.”
Section 8(b) prohibits a mortgage broker or a title agent from taking a fee without providing substantial services. That much was established in two HUD Statements of Policy. HUD Statement of Policy 1999-1 defined the minimal services that a mortgage broker must perform to earn a fee. HUD Statement of Policy 1996-4 defined the core title services that a title agency must perform to earn the title insurance premium. The Statement of Policy covering mortgage broker fees was needed to stem a tide of litigation that threatened to swamp the mortgage broker industry. The Statement of Policy regarding title insurance services was needed to stem business arrangements that allowed referral sources to earn a fee without providing much in the way of services.
The minimal services that a mortgage broker must perform were first espoused by HUD in an informal letter to the Independent Bankers Association of America, dated February 14, 1995. This letter identified fourteen services that a mortgage broker may perform to originate a mortgage loan. These include:
(a) Taking information from the borrower and filling out the application;
(b) 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;
(c) 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 could vary under each product;
(d) Collecting financial information (tax returns, bank statements) and other related documents that are part of the application process;
(e) Initiating/ordering VOEs (verifications of employment) and VODs (verifications of deposit);
(f) Initiating/ordering requests for mortgage and other loan verifications;
(g) Initiating/ordering appraisals;
(h) Initiating/ordering inspections or engineering reports;
(i) Providing disclosures (truth in lending, good faith estimate, others) to the borrower;
(j) Assisting the borrower in understanding and clearing credit problems;
(k) Maintaining regular contact with the borrower, realtors, lender, between application and closing to apprise them of the status of the application and gather any additional information as needed;
(l) Ordering legal documents;
(m) Determining whether the property was located in a flood zone or ordering such service; and
(n) Participating in the loan closing.
These fourteen services were incorporated into a formal Statement of Policy and published by HUD on March 1, 1999. HUD’s Statement of Policy required a mortgage broker to provide five services from the list above in addition to taking the loan application. HUD also recognized that services (b), (c), (d), (j), and (k) on the list above were “counseling type” services that could provide more of a substantive benefit to the lender than to the borrower. Hence, a mortgage broker’s services would be closely scrutinized if the mortgage broker provided only these five “counseling services.”
HUD acknowledged that these are not the only services that a mortgage broker may provide, and that some of these services may be provided through technology rather than the efforts of a mortgage broker. Nevertheless, the important principle of this Statement of Policy is that it provided a safe harbor for mortgage brokers. Mortgage brokers could earn a fee by providing a limited number of identifiable services. Furthermore, the mortgage broker’s total compensation should be measured against the totality of the services provided. Class action lawsuits that separately measured the services provided to the mortgage lender and services provided to the borrower against the amount that each party paid were no longer viable.
HUD also published a Statement of Policy establishing minimum title agency services. HUD stated:
“Section 8(c)(1)(B) specifically exempts payments of a fee ‘by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance.’ A more general provision, section 8(c)(2), exempts the ‘payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.’ (See also 24 CFR 3500.14(g)(1).)….
“To qualify for a section 8(c)(1)(B) exemption, the attorney title insurance agent must ‘provide his client with core title agent services for which he assumes liability, and which includes, at a minimum, the evaluation of the title search to determine insurability of the title, and the issuance of a title commitment where customary, the clearance of underwriting objections, and the actual issuance of the policy or policies on behalf of the title company.’”
More specifically, HUD defined five services that a title agent must perform to earn the entire title insurance premium:
“’Core title services’ are those basic services that a title insurance agent must actually perform for the payments from or retention of the title insurance premium to qualify for RESPA’s section 8(c)(1)(B) exemption for ‘payments by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance.’ In performing core title services, the title insurance agent must be liable to his/her title insurance company for any negligence in performing the services. In considering liability, HUD will examine the following type of indicia: the provisions of the agency contract, whether the agent has errors and omissions insurance or malpractice insurance, whether a contract provision regarding an agent’s liability for a loss is ever enforced, whether an agent is financially viable to pay a claim, and other factors the Secretary may consider relevant.
“‘Core title services’ mean the following in Florida:
a. The examination and evaluation, based on relevant law and title insurance underwriting principles and guidelines, of the title evidence (as defined below) to determine the insurability of the title being examined, and what items to include and/or exclude in any title commitment and policy to be issued.
b. The preparation and issuance of the title commitment, or other document, that discloses the status of the title as it is proposed to be insured, identifies the conditions that must be met before the policy will be issued, and obligates the insurer to issue a policy of title insurance if such conditions are met.
c. The clearance of underwriting objections and the taking of those steps that are needed to satisfy any conditions to the issuance of the policies.
d. The preparation and issuance of the policy or policies of title insurance.
e. The handling of the closing or settlement, when it is customary for title insurance agents to provide such services and when the agent’s compensation for such services is customarily part of the payment or retention from the insurer.”
Controversy exists regarding core title services and retained risk, even after this guidance was published. For example, title plants provide an electronic document that mimics Schedule B of a title commitment. HUD’s position is that “if the title insurance company provides its title insurance agent with a pro forma commitment, typing, or other document preparation services, the title insurance agent is not ‘actually performing’ these services. As such, the title insurance agent would not be providing ‘core title services’ for the payments to come within the section 8(c)(1)(B) exemption.” What level of scrutiny of the title search is required before the commitment can be generated from the search document? Does the agency fulfill its obligation to provide all “core title services” if the title agent simply accepts the document provided by the search service and pushes a few keys to create the commitment?
Controversy also exists regarding the sharing of risks between insurance companies. State insurance commissioners recently fined several title insurance companies for entering into reinsurance agreements with title companies owned by builders. The reinsurance agreement paid the builders’ reinsurance companies a fee that was disproportionate to the risk that the reinsurer absorbed. The commissioners found that splitting the insurance premium, without absorbing substantial risk, violated state insurance codes and RESPA.
HUD has not officially established minimum or core services that other settlement service providers must perform to earn a fee. Therein lies a problem. Section 8(b) implies that splitting a fee by agreement is illegal if no services are performed. However, is a modicum of service all that is necessary to earn a substantial fee? Furthermore, is it illegal to take a fee without providing a service when there is no second party that knowingly splits the fee? Without guidance from HUD, the issue of what other settlement service providers must do to earn a fee was

Howard A. Lax of Lipson, Neilson, Cole, Seltzer & Garin, P.C.,Part 4. No thing of value

The classic example is the lender that rents space in a title agency’s building and refers borrowers to the title agency for title insurance. An illegal kickback could exist if the title agency were giving something of value to the lender. If the lender is paying market rates or above market rates for rent, it is not receiving anything of value for its referrals. If, however, the lender is paying below market rent, the difference is presumed to be a benefit for the referral of settlements service business.
The discounted value of title services was the basis of significant litigation in Michigan over the past several years. Assume that title agencies charge $25 to a builder for the owner’s title policy, and the buyer pays the remainder of the basic fee for the mortgage policy. Does the discount represent a benefit paid to the builder for referring business to the title agency?
There are good arguments on each side of this issue. The title agency has less work to write title commitments for the lots because the title agency is able to perform one search for the whole project, and then just provide an update for each lot. On the flip side, the reduced cost of the owner’s policy is an inducement for the builder to send all of his title business to the one title agency, and refer all borrowers there as well. If the title agent were truly lowering its fees due to decreased work, it would lower the basic insurance fee (to benefit the borrower and the builder).
Furthermore, title insurance is priced according to the amount of coverage. The $25 premium is not related to the level of risk assumed by the title underwriter. The implication is that the significantly discounted insurance premium is a kickback. Two large settlements occurred in Michigan cases, resulting in title companies paying tens of millions of dollars in damages for overcharging borrowers for title insurance on new construction.

Part 3. No referral
Selling leads is not an illegal kickback because there is no a referral. A lead company finds consumers who are willing to apply for a loan, but the lead company does not take any action directed at the consumer to influence the consumer to use any particular lender. Only the lenders that buy leads solicit consumers to apply for a loan. Why don’t lenders buy leads from the public at large? A lender that gives the borrower $50 for giving him the names of friends and relatives who are looking to refinance or to buy a home is purchasing a list. The borrower is not asked to do anything to influence friends and relatives to use the lender.
However, the borrower cannot refrain from telling his friends about the lender, and the lender expects this to occur. Even if the lender ordered the borrower not to solicit for the lender, the lender cannot guaranty that the borrower will refrain from making referrals. If the borrower breaks his promise, and talks about the lender after receiving his $50, both the lender and the borrower are liable for a violation of Section 8.

Part 2. No agreement
It is easy to presume that an agreement exists when the person making the referral receives a benefit from the recipient of the referral. It is difficult to prove that an agreement exists if (a) the thing of value does not directly benefit the party providing a referral, or (b) the thing of value does not originate from the person receiving the benefit of the referral. You need to show the existence of some independent action by one of the parties tying the payment to the referral when there is an indirect benefit.
Take the example where a mortgage lender offers to pay for the cost of the title commitment for any borrower referred to him by a real estate salesperson. The lender’s payment of a title premium defrays the seller’s cost, not the Realtor’s costs. The real estate salesperson is making the referral, not the seller. If there is no agreement or understanding tying the seller’s benefit with the referral by the real estate salesperson, the payment is legal.
However, if the real estate salesperson used the mortgage lender’s payment to negotiate his commission (with the lender’s knowledge), that action ties the payment to the referral, and the payment is an illegal a kickback.
Let’s try this one more time. A mortgage broker gives coupons to builders for $1,000 off the buyer’s closing costs in return for the referral of home buyers for a loan. The coupon defrays the buyer’s cost, not the builder’s costs. Ordinarily, the buyer cannot be a party to a kickback in his own loan, and the coupons are legal. However, if the builder uses the coupon to negotiate up his construction price, there is a kickback. Furthermore, if the mortgage lender gives the coupons only to builders who give him referrals, there may be a kickback.
Our third example demonstrates the effect that an intervening borrower will have on a referral fee. A lender pays $100 to a church for each member who closes a loan. The church advertises the loan program to its members and encourages them to borrow from the lender. If the lender writes the check to the church, it is a kickback. If the lender writes the check to the borrower, who then voluntarily signs the check over to the church, there is no kickback. The borrower cannot be a party to a kickback in his own loan transaction since the borrower is protected by RESPA. Hence, the borrower breaks the connection between the settlement service provider and the church making the referral for a fee.
Change the facts a little. The lender buys the church membership list and solicits the members. Loan officers attend the church picnic to pass out fliers advertising loan products. If the lender pays for access to the picnic (other than the cost of the meal and other activities for the loan officers), there may be a kickback. If the church endorses the lender, there may be a kickback. If the lender hires the pastor to take applications, there may be a kickback (depending on whether the pastor is a bona fide employee of the lender).

by attorney Howard A. Lax of Lipson, Neilson, Cole, Seltzer & Garin, P.C.,
[Lax explains the basics of RESPA Section 8 and describes how to establish relationships that don’t violate the law. ]

Part 1.
Think of an illegal kickback as a three-legged stool. If any of the three legs are missing, the stool falls over. The same is true under RESPA. If any of the three elements of a kickback is missing — or an exception exists for one of the elements — the transaction is not illegal.
The three elements of an illegal kickback include: (1) an agreement, (2) a referral, and (3) something of value. If any one element is missing, the activity is not prohibited by Section 8 of RESPA. Each element must be evaluated individually.

Part 5.
Illegal kickbacks are like a three-legged stool
Think of an illegal kickback as a three-legged stool. If any of the three legs are missing, the stool falls over. The same is true under RESPA. If any of the three elements of a kickback is missing, or an exception exists for one of the elements, the transaction is not illegal. Our next segment will give you examples of various transactions with a missing leg that do not offend RESPA.

Part 4.
Referral
“Referral” is defined two ways. First, a referral includes any oral or written action directed to a person that has the effect of affirmatively influencing the person to use a particular settlement service provider and pay a fee for the service. Second, a referral also occurs whenever a person paying for a settlement service is required to use a particular provider of a settlement service. “Required use” means a situation in which a person must use a particular provider of a settlement service and pay their fee in order to have access to some distinct service or property.

There are exceptions that do not constitute a “referral.”

First, providing a bundle of services that is significantly discounted from the cost of the individual services does not constitute a “required use” of the provider of the services. For example, a lender that negotiates with settlement service providers for substantially reduced charges so that an origination fee of $300 covers the AUS, credit report, and appraisal services does not require the use of the AUS service, credit bureau and appraiser if the ordinary actual cost of the services provided individually would be $400.

Second, a mortgage originator can buy leads if the person selling the leads does not mention the name of, or do anything to influence the consumer to contact, the broker, lender or other settlement service provider. No endorsements, no hints, no nothing. The broker or lender does all the soliciting of the lead. There are several important caveats to buying leads that will be discussed in future segments.

Part 3.
Agreement or understanding
You know an agreement exists when you see it. An agreement or understanding for the referral of settlement service business can be oral, written, or established by a practice, pattern or course of conduct. When a thing of value is received repeatedly and is connected in any way with the volume or value of the business referred, the receipt of the thing of value is evidence that it is made pursuant to an agreement or understanding for the referral of business. Requiring the borrower to use a particular service provider infers that an agreement or understanding exists for the referral of business.
There are several exceptions to this definition. First, the borrower cannot be a party to a kickback in his own loan transaction. Defraying the borrower’s closing costs to persuade the borrower to take a loan is not a kickback. Paying a borrower to refer friends and family is an illegal kickback. Second, some Federal Appellate Courts have ruled that unilaterally increasing the price of a third party service fee (and keeping the difference) is not an illegal kickback because there is no agreement. There is a split of opinion on this issue, with HUD and state regulators opposing this practice.