Virginia Real Estate Settlement Services

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.

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 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.

This information comes from RESPA NEWS and is written by attorney Howard A. Lax of Lipson, Neilson, Cole, Seltzer & Garin, P.C. (See complete bio below). In this weekly column, Lax will explain the basics of RESPA Section 8 and describe how to establish relationships that don’t violate the law.

Making money the ‘old-fashioned way’ Part 3.

This column is the first in a series of sixteen segments. In the coming weeks, we will discuss the limitations of RESPA, the exceptions to the rule, and various frameworks for establishing affinity relationships that avoid violations of federal law. The sixteen segments will be organized into two broad sections. First, we will discuss the definition of a kickback, and its exceptions in an academic exercise. You must understand what is prohibited to understand what is allowed. Second, we will discuss various methods of establishing affinity relationships that do not violate RESPA.
Does RESPA Apply?
The first question a law professor would ask is whether the transaction is subject to RESPA. RESPA only applies to “federally related transactions.” Any person or entity originating one million dollars or more of residential mortgage loans in a calendar year that is also subject to disclosure requirements of the Truth in Lending Act (TILA) generates “federally related transactions.”
Any transaction that is assisted with money from the federal government, or is insured or guaranteed by the federal government, or is sold to FNMA or FHLMC, is a “federally related transaction.” Hence, we perceive all mortgage transactions as subject to RESPA, but that is not the case. The following are exempt from RESPA:
o Typical one-time seller financing that is not valued at over one million dollars, or the seller does not engage in a sufficient number of transactions to be subject to TILA.
o Business purpose credit transactions that are exempt from TILA. For example, a mortgage loan to an investor to acquire residential rental property is a business purpose loan that is not subject to TILA or RESPA.
o Cash transactions are not subject to RESPA.
HUD also carved out other loans from RESPA by rule:
o Loans secured by 25 contiguous acres are not subject to RESPA.
o Loans secured by multi-family housing (5 or more units).
o Loans secured solely by land that will not be developed for at

Making money the ‘old-fashioned way’ Part 2.

written by attorney Howard A. Lax of Lipson, Neilson, Cole, Seltzer & Garin, P.C. for RESPA NEWS. Lax will explain the basics of RESPA Section 8 and describe how to establish relationships that don’t violate the law.

Most real estate professionals and home builders are looking for supplemental sources of income. Section 8(c) of RESPA gives us a number of exceptions to the prohibition against kickbacks.
The most useful exception in Section 8(c) of RESPA is the “goods and services” exception. A settlement service provider may pay for substantive goods and services, even when the payee refers consumers to the provider for settlement services. The payment must be earned for goods and services, not for the referral of mortgage loan customers, and not for services that duplicate services already provided as part of the loan origination process.
Just as lenders “bundle” settlement services, real estate agents, builders, and other referral sources may “bundle” their services to benefit mortgage brokers and lenders, and receive fair compensation for these services. Mortgage brokers and lenders, to a lesser extent, may bundle services and sell these to title agencies.
There are a number of ways for mortgage brokers and mortgage lenders to interact with real estate professionals, title agencies, residential builders, and others, to earn additional income by utilizing this exception. The keys to developing these affinity relationships are (a) to find a “bundle of services” that benefits both parties, and (b) to identify the market rate payable for these services. The parties must then identify the goods and services provided in a written agreement, and to pay no more than market rates for the goods and services. Any amount in excess of market rates will be inferred to be a kickback for the referral of business.
Adding services to a transaction, or providing cash rebates to the borrower as part of the “bundle,” gives the borrower an incentive to choose to receive mortgage origination services or title and escrow services through the affinity relationship. This drives additional compensation to the affinity partners. The result is a win-win arrangement for the mortgage professional, the affinity partner, and the consumer.

Recently in other parts of the Country the Title Industry has come under close scurtiny for what is referred to as ABA [Affliated Business Arrangements] and Affinity Arrangements. Alot of these arrangements are nothing more than illegal kickback schemes.

This is a copy or an Article from RESPA NEWS. The column, written by attorney Howard A. Lax of Lipson, Neilson, Cole, Seltzer & Garin, P.C. (See complete bio below). In this weekly column, Lax will explain the basics of RESPA Section 8 and describe how to establish relationships that don’t violate the law.
Making money the ‘old-fashioned way’
Part 1.
An Introduction
Affinity relationships are a wonderful means of developing a supplemental income stream. Unfortunately, many affinity relationships are implemented outside of the framework of Section 8 of RESPA. Many times, this is the result of misunderstanding what RESPA requires, and what it does not. This is evident from the settlements entered into by real estate brokers, mortgage brokers, and title companies who were found by HUD to have violated Section 8 of RESPA. Section 8 of RESPA prohibits certain “kickbacks,” but that does not explain when a “kickback” is illegal and when it is not.
Consumers understand “kickbacks” as rebates. You buy a product from a retailer, and the manufacturer gives you some of your money back. Businesses understand kickbacks as “referral fees.” You work as my employee to find a customer for my goods and services, and you earn a commission. Both of these examples are “kickbacks,” but neither example is prohibited by RESPA. Therein lies the confusion. A reasonable person does not understand why “scratching someone’s back” can be an illegal kickback if it benefits both parties, and what “magic bullet” makes it a legitimate relationship.
Section 8(a) of RESPA prohibits paying or receiving any fee or other thing of value (even a referral) in return for the referral of “settlement services” in a “federally related transaction.” Section 8(b) of RESPA states that a person cannot accept a settlement service fee, or a split of a settlement service fee, in a “federally related transaction” without providing “settlement services.” Just as the commandment, “Thou shall not kill” does not elucidate the exceptions for self defense, military action, and police action, the above prohibitions do not describe the exceptions to the rule.

From: FIDELITY NATIONAL TITLE -
Some interesting statistics from the Company on claims:

1. From a numbers perspective, 2005 claims increased 44% over 2004,
and 2006 claims increased 14.2% over 2005

2. 60% of all claims opened are for RECENT policy years (two years
or less).

3. Three years ago, Fraud was not in our top ten claims categories.
In 2006, it was in the top three categories (the other two are closing
errors, and search errors).

4. In 2002, nationally there were $293 million of mortgage fraud
losses. In 2005, the mortgage fraud losses were over $1 billion
dollars.

5. In 2005, there were 4,963 cases of robbery, burglary, and larceny
with total losses of $42.1 million dollars.

6. AND, in 2005, there were 5,041 cases of financial institution fraud
with total losses of $2.7 billion dollars.

Remember, Mortgage Fraudsters (MFs) can not succeed without using the closing entity as a vehicle. These Mortgage Fraud nasty folks understand how the process works, and they know how to both manipulate the system and manipulate the closing in order to be successful. You cannot be too careful.