Legal Opinion: GPC-0001

Index: 8.420

Subject: RESPA Enforcement

November 5, 1991

MEMORANDUM FOR: Patrick J. Neri, Assistant Inspector

General for Investigation, ZI

FROM: Peter Race, Assistant General Counsel, Office of

Program Compliance, GPC

Emmett N. Roden, III, Assistant General Counsel

Inspector General and Administrative Proceedings, GPI

SUBJECT: RESPA Enforcement

As a follow-up to our meeting on October 25, 1991, this

memorandum summarizes the provisions of the Real Estate

Settlement Procedures Act (\"RESPA\"), 12 U.S.C. 2601, et seq.,

for which HUD has enforcement authority, and which may arise

during the course of IG investigations.

One of the primary purposes of RESPA was to eliminate

kickbacks and referral fees in the settlement process of

residential real estate transactions involving federally related

mortgage loans. Section 8 of RESPA, 12 U.S.C. 2607, provides

that:

\(a\) No person shall give and no person shall accept

any fee, kickback, or thing of value pursuant to any

agreement or understanding, oral or otherwise, that business

incident to or a part of a real estate settlement service

involving a federally related mortgage loan shall be

referred to any person.

\(b\) 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 (c) sets out certain situations which are not

prohibited by section 8 (a) and (b). These provisions permit

payments made to attorneys, title agents, or lenders for services

actually rendered, payments of bona fide salaries or other

payments for goods or facilities actually furnished, or payments

made pursuant to real estate agent cooperative brokerage

agreements.

\"Controlled business arrangements\" are also exempt from the

Section 8 prohibitions so long as certain provisions are met. An

example of a controlled business arrangement is a real estate

agency which also owns a title insurance agency and the real

estate agents refer buyers to the affiliated title company. If

the real estate agents (1) disclose the existence of the

controlled business arrangement and provide written estimates of

the title insurance charges to the buyers, (2) do not require the

use of the particular title company, and (3) do not receive any

\"thing of value\" for their referral other than a return on their

ownership interest in the title company, then the statutory

requirements have been met. If, on the other hand, the title

company pays the real estate agents \$50 for each referral made,

or the real estate agent does not provide a written estimate of

the title insurance charges, or the form contracts used by the

real estate agency require the use of the particular title

company, then the exemption requirements are not met and there

may be evidence of a Section 8 violation.

The criminal penalties for violating Section 8 of RESPA, 12

U.S.C. 2607 (d)(1), provide that any person who violates the

provisions of Section 8 shall be fined not more than \$10,000 or

imprisoned for not more than one year, or both. The Secretary

has authority to seek civil injunctive action under 12 U.S.C.

2607 (d)(4) for violations of 8. There is a three year statute

of limitations for government enforcement actions for violations

of 8 and 9 (which prohibits sellers from requiring any

particular title company as a condition of sale) of the Act.

In November 1990, Congress amended Section 10 of RESPA, 12

U.S.C. 2609, and provided HUD with authority to impose money

penalties for the failure of lenders or servicers to submit to

borrowers initial or annual escrow statements as required by the

Act. In any given twelve month period, HUD may impose a penalty

not to exceed \$100,000 upon lenders or servicers who have not

intentionally violated the Act. For intentional violations,

however, the \$100,000 limit does not apply.

The following are examples of cases where IG investigators

may find evidence of RESPA Section 8 violations.

EXAMPLE 1.

FACTS: \"A\" is an FHA insured lender that has a promotion

designed to encourage real estate agents to refer loan business

to A. For each loan that is referred and settled, the agent

obtains a point. Five points qualifies for a trip to Hawaii.

COMMENTS: Here the lender is offering a vacation incentive in

exchange for the referral of loan business. HUD would consider

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this a violation of Section 8 that may deserve criminal action.1

The lender and any person who accepts the vacation under this

plan would be in violation of Section 8.

EXAMPLE 2.

FACTS: \"A\" is a title company that has entered into agreements

with lawyers to be title agents. These lawyers merely order

title insurance from A for the clients they represent and

otherwise do no title agent work. The lawyers receive a portion

of the title insurance premium for \"title agent work.\"

COMMENTS: The statutory exemption for payments by a title

company to its duly appointed agents for services actually

performed in the issuance of a title insurance policy is

inapplicable when the only \"work\" that is done is the placement

of a title order. This is especially true where the \"work\" that

is performed is something that the client is already paying the

lawyers to do in their legal capacity. The lawyers and A are in

violation of Section 8 if the lawyers receive a portion of the

title insurance premium for the mere referral of the title

business.

EXAMPLE 3.

FACTS: \"A\" is a credit reporting company. A places fax

machines, printers, lap top computers and other pieces of

equipment in the offices of various lenders in exchange for the

agreement by the lenders to use A exclusively for all credit

reports.

COMMENTS: If the equipment A provides can be used for purposes

other than the ordering and delivery of the credit reports, then

the acceptance of the equipment by the lenders, in exchange for

the referral of credit reporting business raises serious

questions as to whether they have received a thing of value and

1Note, when considering RESPA violations that involve the

making of a mortgage loan, it is important to be aware of the

adverse decision in United States v. Graham Mortgage Corp., 740

F.2d 414 (6th Cir. 1984). In Graham, the Sixth Circuit concluded

that the making of a mortgage loan was not a real estate

settlement service within the definition of that term found at

Section 3 (3) of the Act, 12 U.S.C. 2602 (3). HUD and the

Department of Justice strongly disagreed with this opinion. HUD

has been attempting to clarify the RESPA regulations to

specifically address this matter. The Department of Justice had

recommended that HUD pursue other criminal cases involving

referral fees and mortgage loans in other circuits to create a

conflict with the Sixth Circuit opinion.

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Section 8 violations have occurred.

EXAMPLE 4.

FACTS: \"A\" is a real estate company that enters into an

agreement with a title company, \"B\", which creates a third

entity, \"C\", a title agency. B agrees to refer all home buyers

to C for title insurance and fails to identify the controlled

arrangement to the referred home buyers. C does no actual title

work; instead C contracts out all the title work to B. The

referred home buyer pays C for title insurance charges and C pays

B for the actual title work performed. A\'s dividend from C is

directly proportionate to the number of referrals A makes to C.

COMMENTS: The exemption for a controlled business arrangement

has not been met because there is no disclosure to the home buyer

and because the dividend payment to A is proportionate to the

number of referrals A makes to C. C is doing no actual work for

the fee it receives. The dividend payment to A is a disguised

referral fee from B. All parties would be subject to Section 8

violations.