Virginia Real Estate Settlement Services

Part 3.
Competition led to modest range wars in certain markets. Some real estate brokers and their favored title agencies began charging a documentation fee to the buyer if the buyer permitted the lender’s title agency to close the transaction. Section 9 of RESPA prohibits sellers from directly or indirectly requiring borrowers to use a specific title agent. Litigation ensued, alleging that the documentation fee is a condition of selling the property that indirectly requires the buyer to use the seller’s preferred title agency.
Recently, a Minnesota real estate broker was attacked for violating fiduciary duties to its customers. Revising the title commitment order form and real estate broker advertisements to specify that real estate brokers and title agencies are independent contractors (comparable to the Mortgage Origination Agreement used by mortgage brokers) may address some state law issues, but it will not resolve RESPA claims. The result of this litigation may not be known for several years.

Part 2.
Joint ventures between title agencies and real estate brokers work well, provided that there is a sufficient volume of referrals to make the joint venture profitable. The real estate broker partner refers sellers to the affiliated title agency to purchase the owner’s policy. The title agency charges the seller the basic title insurance premium (less any reissue credits), and charges the buyer a “split premium” or “simultaneous issue” premium for the lender’s policy.
For example, if the basic premium for a $100,000 policy is $500, and both the owner’s policy and the lender’s policy were purchased from the same agency, the seller pays $500 for the owner’s policy and the buyer pays 40 percent of the basic premium for the lender’s policy ($200, or less if the mortgage loan is less than the purchase price). If the seller and the buyer purchase title insurance from different title agencies, each party would pay $500 for their policy.
The buyer, faced with the choice of paying $200 or $500 for the same policy, would choose the seller’s agency to simultaneously issue the lender’s policy. The title agency that issues the lender’s policy must close the loan so that the lender receives a first lien letter, closing protection letter, and final policy without standard exceptions. Hence, the buyer was usually locked into the real estate agent’s affiliated title agency without any contractual requirement to use that agency.
This scenario changed as lenders established their own joint ventures with title companies. Most title underwriters now offer simultaneous issue premiums for the lender’s policy that allow lender affiliated title agencies to effectively compete with real estate broker affiliated title agencies. The lender will direct borrowers to an affiliated title agency to issue the lender’s policy and close the loan. The borrower pays the same premium to the lender’s affiliated title agency that would be charged by the agency issuing the owner’s policy. Sometimes the lender’s affiliated title agency will charge a below market closing fee to entice the borrower to use its services.

Part 1.
Special title agent rules lead to special litigation
Some of the usual avenues of developing business are not available to title agencies. Section 9 of RESPA states:
“No seller of property that will be purchased with the assistance of a federally related mortgage loan shall require directly or indirectly, as a condition to selling the property, that title insurance covering the property be purchased by the buyer from any particular title company.”
This means that one of the title agent’s best source of referral business — the form purchase agreement given to the seller — cannot specify that the buyer will use a particular title agent to purchase the mortgagee title insurance policy.
Furthermore, some state laws and rules prohibit or restrict affinity relationships by (a) limiting the amounts that title agencies and underwriters can spend on marketing, (b) prohibiting rebates to insured parties or reductions in filed rates, or (c) prohibiting payments for leads. Hence, title agencies and companies engage in joint ventures to generate referral business more than other settlement service providers.

Part 6.
Other exceptions
Several other exceptions are listed in the statute and regulation; however, these exceptions have not been used to establish affinity relationships between different types of settlement service providers. These include:
a. Cooperative brokerage arrangements. HUD will not examine the split of bona fide real estate broker commissions. Real estate professionals are subject to RESPA in all other respects.
b. The split of title premiums between the title agent and the title underwriter. HUD will not question whether a typical 80%-20% split is reasonable.
c. Bona fide attorney fees.
HUD has authority to create other exemptions, but that is unlikely.

Part 5.
xvi. REALIZATION OF PROFIT OR LOSS. A person who can realize a profit or suffer a loss as a result of the person’s services (in addition to the profit or loss ordinarily realized by employees) could be an independent contractor (or a partner), but the person who cannot is an employee. For example, if a person is subject to a real risk of economic loss due to significant investments or a bona fide liability for expenses, such as salary payments to unrelated employees, that factor indicates that the person is an independent contractor. The risk that an employee will not receive payment for his or her services, however, is common to both independent contractors and employees, and thus does not constitute a sufficient economic risk to support treatment as an independent contractor.
xvii. WORKING FOR MORE THAN ONE FIRM AT A TIME. If an employee performs services for several unrelated firms at the same time, that factor generally indicates that the person is an independent contractor. However, a person who performs services for related employers may be an employee of each business.
xviii. MAKING SERVICE AVAILABLE TO GENERAL PUBLIC. The fact that a person makes his or her services available to several firms on a regular and consistent basis indicates an independent contractor relationship.
xix. RIGHT TO DISCHARGE. The right to discharge an employee is a factor indicating an employee-employer relationship. An employer exercises control through the threat of dismissal, which causes the employee to obey the employer’s instructions. An independent contractor, on the other hand, cannot be fired so long as the independent contractor produces a result that meets the contract specifications.
xx. RIGHT TO TERMINATE. If the employee has the right to end his or her relationship with an employer at any time he or she wishes without incurring liability, that factor indicates an employer-employee relationship.

Part 4.
xi. ORAL OR WRITTEN REPORTS. A requirement that the employee submit regular or written reports to a manager or main office indicates a degree of employer control.
xii. PAYMENT BY HOUR, WEEK, MONTH. Payment by the hour, week, or month generally points to an employer-employee relationship, provided that this method of payment is not just a convenient way of paying a lump sum agreed upon as the cost of a job. Payment made by the job or on a straight commission generally indicates that the worker is an independent contractor.
xiii. PAYMENT OF BUSINESS AND/OR TRAVELING EXPENSES. An employer ordinarily pays employee business and/or traveling expenses. An employer, to be able to control expenses, generally retains the right to regulate and direct employee business activities.
xiv. FURNISHING OF TOOLS AND MATERIALS. Employers ordinarily furnish significant tools, materials, and other equipment (e.g. laptop and loan origination software) to allow employees to complete their work.
xv. SIGNIFICANT INVESTMENT. Persons that invest in employer facilities that are not typically maintained by employees (e.g. computer system leases) tend to be independent contractors. On the other hand, lack of investment in the employer’s business indicates dependence on the employer for such facilities and, accordingly, the existence of an employer-employee relationship. Special scrutiny is required with respect to home offices.

Part 3.
vi. CONTINUING RELATIONSHIP. HUD will ask whether there is a continuing relationship between the employee and employer. A continuing relationship may exist where work is performed at frequently recurring although irregular intervals.
vii. SET HOURS OF WORK. Set hours of work indicate employer control of the employee. Part time employees should have regular work hours, and all employees subject to minimum wage or overtime requirements should complete time sheets to document regular hours.
viii. FULL TIME REQUIRED. True employment is indicated if (a) the employee must devote substantially full time to the employer’s business, (b) the employer controls the amount of time the employee spends on the job, or (c) the employer restricts the employee from doing other gainful work. An independent contractor is free to work when and for whom he or she chooses.
ix. DOING WORK ON EMPLOYER’S PREMISES. The employer presumably controls the employee’s activities if work is performed in the employer’s offices, especially if the work could be done elsewhere. Work done off the premises of the employer, such as originating loans from home, indicates some freedom from control. However, this fact by itself does not mean that the person is not an employee. Control over the place of work is also indicated when the employer has the right to compel the employee to travel a designated route, to canvass a territory within a certain time, or to work at specific places as required.
x. ORDER OR SEQUENCE SET. The fact that an employee must perform services in the order or sequence set by the employer shows that the employee is not an independent contractor. Often, the employer does not set the order of the services or sets the order infrequently. It is sufficient to show control, however, if the employer retains the right to establish a sequence of job functions.
xi. ORAL OR WRITTEN REPORTS. A requirement that the employee submit regular or written reports to a manager or main office indicates a degree of employer control.
xii. PAYMENT BY HOUR, WEEK, MONTH. Payment by the hour, week, or month generally points to an employer-employee relationship, provided that this method of payment is not just a convenient way of paying a lump sum agreed upon as the cost of a job. Payment made by the job or on a straight commission generally indicates that the worker is an independent contractor.
xiii. PAYMENT OF BUSINESS AND/OR TRAVELING EXPENSES. An employer ordinarily pays employee business and/or traveling expenses. An employer, to be able to control expenses, generally retains the right to regulate and direct employee business activities.
xiv. FURNISHING OF TOOLS AND MATERIALS. Employers ordinarily furnish significant tools, materials, and other equipment (e.g. laptop and loan origination software) to allow employees to complete their work.
xv. SIGNIFICANT INVESTMENT. Persons that invest in employer facilities that are not typically maintained by employees (e.g. computer system leases) tend to be independent contractors. On the other hand, lack of investment in the employer’s business indicates dependence on the employer for such facilities and, accordingly, the existence of an employer-employee relationship. Special scrutiny is required with respect to home offices.

Part 2.
HUD evaluates twenty factors outlined in IRS Revenue Ruling 87-41 to determine whether a person is a “bona fide” employee or an independent contractor. Unfortunately, we do not know how may of these factors must be satisfied under HUD scrutiny, or which factors weight more heavily than others. The twenty factors are:
i. INSTRUCTIONS. A person who is required to comply with other persons’ instructions about when, where, and how he or she is to work is ordinarily an employee. HUD will ask whether the employer has the right to require compliance with instructions.
ii. TRAINING. HUD will ask whether the employer trains employees by requiring an experienced employee to work with a new employee, by corresponding with employees, by requiring employees to attend staff meetings, or by using other methods, and whether the employer wants work performed in a particular manner.
iii. INTEGRATION. An employee must necessarily be subject to a certain amount of control by the owner of the business. Integration of the employee’s services into the employer’s operations generally shows that the employee is subject to direction and control of the employer.
iv. SERVICES RENDERED PERSONALLY. HUD will ask what services must be rendered personally by the employee to accomplish the required work and to achieve the expected results.
v. HIRING, SUPERVISING, AND PAYING ASSISTANTS. Management responsibility for hiring, supervising, and paying assistants shows control over employees on the job. Independent contractor status is indicated if the employee hires, supervises, and pays assistants to do work for the employee. HUD will examine a written employment contract to determine whether the person is an employee who follows management direction, or whether the person is an independent contractor who provides materials and labor and under which the contractor is only responsible only for the attainment of a result.

Bona Fide Employment.
Part 1.
Here we take an in-depth look at number five: Bona fide employment
Section 14(g)(iv) and (vii) of HUD’s Regulation X permit:
“(a) A 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;” and
“(b) An employer’s payment to its own employees for any referral activities.” (emphasis added)
Settlement service providers should be able to hire pure “finders” and “rainmakers” that have no responsibilities other than to generate new clients for a settlement service business and its affiliates. However, HUD gave us a different message in a settlement agreement with Znet Financial. HUD fined Znet for paying $400 to real estate salespersons for each application for credit completed for Znet. Znet claimed that the real estate salespersons were employees being paid bona fide compensation, but HUD disagreed.
This settlement sends a clear message that certain employees must perform substantive services (similar to a mortgage broker’s services) to earn bona fide compensation. That is not what the rule says, but that is how HUD enforces its rule. HUD will only allow an employer to compensate bona fide employees. Furthermore, compensation may only be paid for settlement services benefiting the employer. For example, HUD will allow a company to compensate employees for referring new business to their employer, but HUD will fine a company for paying compensation to employees for referring business to the employer’s affiliate.

PART 6.
Keep good business records, including payroll records and employee performance reviews, for the joint venture. Require written employment agreements and/or maintain written employee policies and handbooks. Document all agreements between the parties to the joint venture. Maintain complete customer files. Establish information security policies and procedures. These records are your primary line of defense if HUD investigates the operation of the joint venture.
More can be written about Section 8 of RESPA, and will be in the future. Be creative in your affinity relationships, but stay within the bounds of the law. Remember that any affinity relationship that pays more than is reasonable may be improper, and deserves greater scrutiny. Make money the old fashioned way by working for it, and you will prosper.