Section 8 of RESPA and Services Performed

Issue/Inquiry

During an examination of residential mortgage loans, the federal examiner asks the Bank whether the mortgage brokers who had been paid a fee had fulfilled the “five things” requirement before receiving compensation. What is the examiner referring to?

Response Summary

Under Section 8 of the Real Estate Settlement Procedures Act (“RESPA”), a mortgage broker is not allowed to receive a fee except for services actually performed. The U.S. Department of Housing and Urban Development (“HUD”) has identified a number of such services, which are typically part of a residential mortgage transaction. A mortgage broker is required to perform at least five of these services in order to qualify for compensation.

Response Detail

Section 8 of RESPA was enacted in 1974 to prohibit “kickbacks” for the referral of residential mortgage settlement services. As implemented by Regulation X, any person who gives or accepts a fee, kickback, or “thing of value” (e.g., payments, commissions, gifts, tangible items, or special privileges) pursuant to an agreement or understanding for the referral of settlement business involving a federally related mortgage loan is in violation of Section 8. Any referral of a settlement service is not a compensable service, except as a permitted exception. 12 CFR 1024.14(a),(b).

In addition, no person shall give, accept, or split any portion or percentage of any charge made or received for the rendering of a real estate service for a transaction involving a federally related mortgage loan other than for services actually performed. 12 CFR 1024.14(c).

For the purposes of RESPA, a “federally related mortgage loan” is a loan made by a federally-insured lender (or insured by HUD or intended to be sold to Freddie Mac or Fannie Mae) and secured by one-to-four family residential structures. 12 CFR 1024.2.

A violation of the RESPA prohibition against fees or kickbacks consists of giving a payment or thing of value pursuant to an agreement or understanding, resulting in a referral.

Exceptions from the RESPA prohibition against fees or kickbacks include the following:

• A payment by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance
• A payment pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and real estate brokers
• Normal promotional and educational activities that are not conditioned on the referral of business and that do not involve the defraying of expenses that otherwise would be incurred by persons able to refer settlement services or business incidents thereto
• An employer’s payment to its own employees for any referral activities. 12 CFR 1024.14(g).

If none of these exceptions pertain to the arrangement between the Bank and the mortgage brokers, then the question is whether there were goods or facilities actually furnished or services actually performed for the total compensation paid to the mortgage broker. In making the determination as to whether compensable services are performed, HUD has identified the following services as being normally performed during the origination of a loan:

1. Taking information from the borrower and filling out the application
2. 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
3. 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
4. Collecting financial information (tax returns, bank statements) and other related documents that are part of the application process
5. Initiating/ordering verifications of employment (“VOE”) and verifications of deposit (“VOD”)
6. Initiating/ordering requests for mortgage and other loan verifications
7. Initiating/ordering appraisals
8. Initiating/ordering inspections or engineering reports
9. Providing disclosures (truth in lending, good faith estimate, others) to the borrower
10. Assisting the borrower in understanding and clearing credit problems
11. Maintaining regular contact with the borrower, realtors, and lender during the application and closing process to appraise them of the status of the application and gather any additional information as needed
12. Ordering legal documents
13. Determining whether the property was located in a flood zone, or ordering such service
14. Participating in the loan closing

In order to qualify for compensation, the mortgage broker is expected to perform at least five of these identified activities. The services described in b, c, d, j, and k are typical counseling services. In order for the services to be considered as counseling rather than steering, the mortgage broker is expected to have the consumer consider products from at least three different lenders, and should receive the same compensation regardless of the lender selected. 64 Federal Register 10080, 10085; FIL-21-99.

In this case, the mortgage brokers have received a fee, which is considered a thing of value. Therefore, the records of the Bank should document the services provided by the mortgage broker in return for the fee. The services provided should encompass at least five of the activities or services identified above.

This response is for informational purposes only and is not intended for legal guidance.

This entry was posted on Monday, December 23rd, 2019 at 6:00 am.