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Daily Real Estate News  |  May 16, 2007  |   Even In Slow Markets, RESPA Laws at Full Force
WASHINGTON – A slowing real estate market isn’t stopping enforcement of the Real Estate Settlement Procedures Act.

The 1974 law governing payments for settlement services continues to catch real estate practitioners, builders, and mortgage and title companies in its net, said attorney and RESPA expert Phillip Schulman, speaking Tuesday at the REALTORSŪ Midyear Legislative Meetings & Trade Expo in Washington, D.C.

It has been four years since the U.S. Department of Housing and Urban Development announced it was tripling its RESPA enforcement staff and beginning to coordinate its enforcement efforts with state attorneys general and federal and state financial regulators. Since then, there have been dozens of enforcement actions.

In recent actions, HUD settled with a group of builders in Memphis who had profited from a sham arrangement to provide title services and with a group of real estate practitioners in Tulsa, Oklahoma, who had teamed up in a legitimate mortgage joint venture but improperly split the profits. RESPA violations can result in steep fines and up to a year in prison.

Staying out of the RESPA net starts with understanding the law’s purpose, said Schulman. RESPA’s goal is two-fold:
  • To provide consumer disclosure about the cost of settlement service
  • To prevent kickbacks for the simple referral of business

What's Considered a Kickback?

Determining what is an illegal kickback is pretty straightforward, Schulman said. An illegal kickback occurs when a thing of value is given pursuant to an agreement to provide referrals for settlement service business on a federally related mortgage loan. If any of the five elements are missing — the thing of value, the agreement, the referrals, the settlement service, or the federally related mortgage loan (a purchase-money loan or refinance but not a commercial or investor loan) — there’s no RESPA violation.

A thing of value could be a bottle of expensive champagne, tickets to a sporting event, or payment of a real estate practitioner’s continuing education fees. HUD sets no bottom limit on what’s acceptable, Schulman said. But there is a rule of reason, he added. “No one’s going to prison over a holiday gift of an inexpensive bottle of wine.”

There’s also a difference between giving a real estate practitioner tickets to a sporting event and taking a real estate practitioner to a sporting event, during which business is discussed. The latter has a clear business purpose, Schulman said, and therefore isn’t a violation of RESPA.

Affiliated Business Arrangements Can Spell Trouble

Where real estate companies and other settlement service providers typically run into RESPA problems, Schulman said, is in the creation of affiliated business arrangements. Such arrangements enable companies to provide one-stop-shopping for consumers. One example is a joint lending venture between a mortgage broker and a real estate broker in which each owns 50 percent of the business and each gets 50 percent of the profit.

Setting up legal arrangements isn’t simple, said Schulman, joking that if it’s good for the settlement provider and good for the consumer, it’s probably a violation of RESPA. Generally, to operate an affiliated business arrangement legally, you need to:
  • Disclose to consumers your interest in the affiliated company
  • Tell consumers the cost of the service
  • Explain there’s no required use, i.e., consumers are free to go elsewhere for the service without penalty

A bona fide affiliated business arrangement also has to meet a number of HUD criteria. Among them: It must be sufficiently capitalized, have real employees, have a real office, and provide a real service. A simple referral arrangement masquerading as a business venture won’t cut it, Schulman said.

RESPA also allows real estate practitioners and other settlement service providers to set up marketing agreements, in which they split the cost of advertising and other joint promotions. For example, Schulman said, there’s no problem with a mortgage company paying for an ad on a moving van the real estate company provides to its buyers. If challenged by HUD, however, the parties need to show that the amount paid for the ad was reasonable and customary for the service provided.

Schulman warned that, in addition to knowing the federal rules, practitioners should know their state rules, too. Asked if referral fees paid by a mortgage lender in Mexico on transactions involving properties there would violate the law, Schulman said, not the federal law but state law may prohibit such payments.

At its Web site, HUD provides details on recent settlements with RESPA violators, as well as detailed RESPA information. NAR maintains information on staying on the right side of RESPA, too, at

— By Stacey Moncrieff for REALTORŪ Magazine Online

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