29238 Federal Register / Vol. 61, No. 111 / Friday, June 7, 1996 / Rules and Regulations

DEPARTMENT OF HOUSING AND

URBAN DEVELOPMENT

24 CFR Part 3500

[Docket No. FR–3638–F–06]

RIN 2502–AG26

Office of the Assistant Secretary for

Housing—Federal Housing

Commissioner; Amendments to

Regulation X, the Real Estate

Settlement Procedures Act:

Withdrawal of Employer-Employee and

Computer Loan Origination Systems

(CLOs) Exemptions

AGENCY: Office of the Assistant

Secretary for Housing-Federal Housing

Commissioner, HUD.

ACTION: Final rule.

SUMMARY: In this final rule, the

Department of Housing and Urban

Development is revising Regulation X,

which implements the Real Estate

Settlement Procedures Act of 1974

(RESPA). This rule completes a process

that started with a public hearing and

comment period on August 6, 1993,

followed by a proposed rule published

on July 21, 1994.

In the interest of protecting

consumers from practices prohibited by

RESPA, while making available to

consumers the potential benefits of

innovative business arrangements, this

rule withdraws an exemption for

employer-employee payments,

introduces two more-limited

exemptions for payments that would

otherwise be prohibited by the statute—

employer payments to managerial

employees and employees who do not

perform settlement services in any

transaction. In addition, to relieve any

uncertainty, the rule adds an additional

exemption to clarify that payments

made to an employer’s own bona fide

employee for generating business for

that employer are permissible. The rule

also revises certain controlled business

disclosure requirements. HUD has

chosen to use its exemption authority

under Section 8(c)(5) of RESPA, having

consulted with other Federal agencies as

required by that provision, as well as

the authority under Section 19(a) of

RESPA, to permit these payments.

The rule also withdraws an

exemption for payments made by

borrowers for computer loan origination

(CLO) services, because the exemption

was found to be of little benefit to

consumers or the loan origination

industry. However, in order to assure

that consumers in the mortgage lending

marketplace continue to benefit from

technological innovation,

simultaneously with the publication of

this rule, the Department is issuing a

Statement of Policy analyzing payments

for CLOs under the RESPA regulations.

In addition, the Department is

simultaneously publishing two other

Statements of Policy on issues raised by

comments on the proposed rule,

although not directly related to the

proposed rule, and which involve

interpretation rather than new

rulemaking.

EFFECTIVE DATE: This rule is effective on

October 7, 1996.

FOR FURTHER INFORMATION CONTACT:

David Williamson, Director, Office of

Consumer and Regulatory Affairs, Room

5241, telephone (202) 708–4560; or, for

legal questions, Kenneth Markison,

Assistant General Counsel for GSE/

RESPA, or Grant E. Mitchell, Senior

Attorney for RESPA, Room 9262,

telephone (202) 708–1550. (The

telephone numbers are not toll-free.) For

hearing- and speech-impaired persons,

this number may be accessed via TTY

(text telephone) by calling the Federal

Information Relay Service at 1–800–

877–8339. The address for the abovelisted persons is: Department of Housing

and Urban Development, 451 Seventh

Street, SW, Washington, DC 20410.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act Statement

The information collection

requirements regarding controlled

business disclosures (Appendix D of

this rule) have been approved by the

Office of Management and Budget,

under the Paperwork Reduction Act of

1995 (44 U.S.C. 3501–3520), and

assigned OMB control number 2502–

0265. An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless the collection displays a valid

control number.

The Department has eliminated the

CLO disclosure statement which

previously was contained in Appendix

E to the RESPA rule. Based on prior cost

estimates, the Department estimates the

annual savings to business from

eliminating this paperwork requirement

to be $3,247,100.

I. Events Leading to Today’s Final Rule

A. History of CBAs and CLOs

1. Controlled Business Arrangements

In 1983, Congress enacted the

‘‘controlled business arrangement’’

amendment to RESPA. This

amendment, codified under section 461

of the Housing and Urban-Rural

Recovery Act of 1983 (HURRA) (Pub. L.

98–181, 97 Stat. 1230) established that

controlled business arrangements do not

violate RESPA, provided that:

(a.) The relationship between the

person performing settlement services

and the person making the referral is

disclosed, along with the estimated

charges of the provider;

(b.) Consumers are not required to use

an affiliated settlement service provider,

except under certain specified

exemptions under Section 8 of RESPA;

and

(c.) Nothing of value is received by

the referring party, beyond a return on

ownership interest or franchise

relationship or payments otherwise

permissible under Section 8(c) of

RESPA.

Following the enactment of these

amendments, HUD issued several

informal legal opinions concerning the

extent to which employers could pay

referral fees to employees. The opinions

stated that bona fide full-time

employees could be compensated for

generating business for their own

employers, as this would be within the

scope of their employment. These

opinions also made clear that

uncompensated referrals to affiliated

companies were not prohibited. HUD

did not, however, broadly approve

compensation to employees for referrals

to affiliated companies.

2. Computer Loan Origination Systems

(CLOs)

During the 1980’s, a number of private

companies and trade organizations

began to develop systems where some or

most of the usual mortgage origination

services could be performed by

computers. These computer services

frequently linked real estate brokerage

offices to lenders or other settlement

service providers. Concerns were raised

to HUD regarding the interplay of these

systems with Section 8 of RESPA,

particularly whether the existence of

such systems could result in illegal

steering or compensation for referrals of

business, or whether the use of the

systems would allow the operators to

impose charges for activities which

represented little or no actual services.

Several developers of such systems and

potential competitors asked HUD for its

views on payments made in connection

with these systems under RESPA.

In the mid-1980’s, HUD issued several

informal interpretations generally

concluding that payments for CLO

systems did not violate Section 8 of

RESPA. The opinions stated that, so

long as payments by the lenders (or real

estate brokerage offices) went to cover

‘‘operational fixed costs’’ of the CLO

services, no referral fees existed.

Moreover, the opinions stated that
Federal Register / Vol. 61, No. 111 / Friday, June 7, 1996 / Rules and Regulations 29239

1The 1992 final rule was a marked departure

from HUD interpretations in recent years. After the

issuance of the May 1988 proposed rule, which led

to the 1992 final rule, HUD’s position, expressed in

a number of General Counsel’s opinions, was that

an employer could not compensate its employee for

referrals to other business entities (including

affiliates). These opinions only indicated that an

employer could compensate its employees for

generating business for that employer (not to

affiliates).

2Plaintiffs in Mortgage Bankers Association of

America v. United States of America, No. 92–2699

(D.D.C.), and Coalition to Retain Independent

Services in Settlements (CRISIS) v. Cisneros, No.

92–2700 (D.D.C.), filed separate actions seeking a

declaration that the ‘‘employee exception’’

provision was invalid and injunctive relief

enjoining implementation of this provision. The

MBA suit also alleged that the CLO provision was

invalid. These suits were dismissed without

prejudice, that is, subject to reinstatement. A

hearing regarding the Department’s progress in

issuing revised regulations is scheduled for October

1996.

borrower payments to CLOs were

analogous to arrangements whereby

borrowers voluntarily pay mortgage

brokers for locating lenders.

Accordingly, the Department concluded

that such payments were not pursuant

to a prohibited ‘‘agreement or

understanding’’ under Section 8(a) of

RESPA and thus, were not proscribed by

Section 8(a) of RESPA.

On two subsequent occasions, the

Department revisited RESPA’s role in

payments for CLO services through

informal opinions. Both cases involved

payments to CLO operators from either

lenders or real estate brokers. In these

two opinions, the Department

concluded that such fees did not violate

Section 8(b) of RESPA so long as the

fees were reasonably related to services

actually rendered. Controversy

continued to surround the use of CLO

systems, with many mortgage bankers

opposing, and realtors supporting,

HUD’s position. All opinions were

withdrawn pursuant to a final rule

published on November 2, 1992 (57 FR

49600) under RESPA (hereinafter ‘‘final

rule’’ or ‘‘1992 final rule’’).

In May 16, 1988, HUD opened up this

matter for review and discussion

without specifically mentioning CLOS,

by proposing a rule (53 FR 17428,

17438) that would have added an

exception under § 3500.14, to allow the

following:

Voluntary payment by a borrower to a

person who has acted as a mortgage broker

or has otherwise assisted in bringing the

lender and borrower together, provided that

such voluntary payment is disclosed on both

the good faith estimate of settlement costs

and the HUD–1 settlement statement and is

not a condition of the loan or other

settlement service.

The 1992 final rule did not adopt the

so-called ‘‘mortgage broker exception’’,

but did adopt a CLO exemption.

B. The 1992 Rule

On November 2, 1992, HUD

published the 1992 final rule, which

became effective on December 2, 1992.

The 1992 final rule contained

provisions implementing congressional

amendments to RESPA regarding

controlled businesses and created an

exemption for payments by borrowers to

computer loan origination systems. The

final rule also updated the original

RESPA regulations, which had not been

amended since 1976.

1. Employer-Employee Exemption

The 1992 final rule went beyond

HUD’s previous positions, as articulated

through informal legal opinions that

were withdrawn by the 1992 final rule,

and created an exemption for payments

by an employer to its own employees for

any referrals of settlement service

business. Employees were thus allowed

to receive compensation from their

employers for generating business for

their own employer or for any other

business entity (including affiliates).

The final rule contained a stricture, in

§ 3500.14(b), that the business entity

receiving the referrals of settlement

business could not directly or indirectly

compensate anyone for such business.

The rule did not limit this exemption to

controlled business arrangements. The

exemption, however, had little utility

for entities outside an affiliate business

setting, since it was unlikely that an

employer would pay its own employees

for making referrals to unaffiliated

individuals or companies. As noted,

while the rule permitted an employer to

compensate its own employees for

referrals, it also indicated that if the

business entity receiving the referral

reimbursed the employer of the

employees making the referrals, Section

8 of RESPA would be violated.1

Following the 1992 final rule’s

issuance, two lawsuits were filed

objecting to provisions of the revised

regulations as inconsistent with the

statute and claiming failure by the

Department to comply with the

Administrative Procedure Act in the

rule’s promulgation.2 In addition, upon

assuming office, HUD officials in the

new Administration were inundated

with comments about the final rule.

The Department received allegations

that the final rule created uncertainty

about whether referral fees were in fact

prohibited by RESPA. Some entities

critical of the 1992 final rule

characterized the provision permitting

employers’ payments to their own

employees for referrals as broadly

sanctioning referral payments. The trade

and business press frequently restated

this position without examination. Also,

some commenters claimed that the

creation of an employer-employee

exemption from the prohibition on

referral fees prompted some persons to

set up sham employer-employee

relationships to shield prohibited

referral fees, and it prompted others to

‘‘extort’’ referral fees from other

settlement service providers on the

premise that HUD now allowed such

compensation. While the final rule was

not intended to permit sham

arrangements, neither did it clarify the

extent of the employer-employee

exemption. Commenters argued that the

final rule failed to establish a bright

line, comprehensible to industry

participants, between permissible and

impermissible activities.

2. CLO Exemption

The 1992 final rule also introduced a

CLO exemption, which provided that

borrower payments to CLO systems

were exempt from Section 8 so long as

a specified disclosure was made. The

1992 final rule did not adopt the

mortgage broker exception proposed in

the May 1988 proposed rule. The

Department reasoned that well-informed

choices by consumers did not require

special protection under RESPA.

Moreover, this exemption was intended

to prevent RESPA’s restrictions against

unearned fees from unduly inhibiting

the development of technology which

could permit consumers to shop, apply

for and/or obtain mortgage loans

electronically. CLO systems were not

specifically defined in the 1992 rule.

C. A Public Dialogue

Given the controversy over the 1992

final rule, the Secretary determined that

a review of the previous policy—

primarily concerning the exemptions for

employer payments to employees and

borrower payments to CLOs—was

needed. The review would particularly

focus on the final rule’s impact on

consumers. The Secretary articulated

three principles to guide that review:

1. HUD’s responsibility is to protect

the consumer—not to mediate among

industry interests.

2. HUD should regulate multimillion

dollar industries responsibly—

principally by acting quickly to end

uncertainty.

3. Technological and business

arrangement innovations have the

potential to provide significant

consumer benefits, and HUD does not

serve consumers well if its regulations

unduly stifle such advancements.

On July 6, 1993, in an effort to ensure

that the views of all interested parties
29240 Federal Register / Vol. 61, No. 111 / Friday, June 7, 1996 / Rules and Regulations

3As discussed, infra, HUD announced in a July

21, 1994, proposed rule that it would not propose

new rules on this issue and would consider

preemption questions on a case-by-case basis. Since

HUD has not changed its position on this issue, this

final rule does not address the issue further.

4A more comprehensive discussion of the issues

presented, the Secretary’s initial position on further

amendment of the RESPA regulations, and a

summary of the hearing testimony and the

comments received are contained in the preamble

of the proposed rule.

5This proposal was consistent with congressional

admonitions. See H.R. Rep. No. 123, 98th Cong., 1st

Sess. 76 (1983) (controlled business provisions are

not intended to change current prohibitions against

unearned fees, kickbacks, or other things of value

in return for referrals of settlement service

business).

6 In accordance with section 8(c)(5) of RESPA,

HUD consulted with the other agencies listed before

exercising its authority under section 8(c)(5).

7These requirements are described in Part II,

Section C, of this preamble.

8Twenty-one CLO operators accepted the

Department’s invitation and demonstrated their

systems to officials of the Department and to the

public during an all-day session on September 30,

1994.

were heard, the Department published a

‘‘notice of written comment period and

informal public hearing’’ (58 FR 38176),

inviting testimony and written

comments on the following four

provisions of the final rule:

• Issue 1—The ‘‘employer-employee’’

exemption. Section 3500.14(g)(2)(ii) of

the 1992 final rule, which provided that

Section 8 of RESPA does not prohibit

‘‘an employer’s payment to its own

employees for any referral activities

* * *.’’

• Issue 2—The ‘‘computer loan

origination’’ (CLO) exemption. Section

3500.14(g)(2)(iii) of the 1992 final rule,

which provided that Section 8 of RESPA

does not prohibit ‘‘any payment by a

borrower for computer loan origination

services, as long as the disclosure set

forth in appendix E is provided the

borrower.’’

• Issue 3—Preemption policy. Section

3500.13(b)(2) of the 1992 final rule,

which provided that ‘‘in determining

whether provisions of State law or

regulations concerning controlled

business arrangements are inconsistent

with RESPA * * * the Secretary may

not construe those provisions that

impose more stringent limitations on

controlled business arrangements as

inconsistent with RESPA, as long as

they give more protection to consumers

and/or competition.’’ 3

• Issue 4—Controlled business

disclosure policy. Section 3500.15(b)(1)

of the 1992 final rule, which provided

for a written disclosure in controlled

business situations regarding the

ownership and financial relationships

between referring and referred-to

parties, and for certain timing and other

methods for disclosure.

On August 6, 1993, HUD conducted a

public hearing, which produced

testimony and documents from 36

interested parties. The request for

written comment generated 1,526 public

comments on these four issues.

D. The 1994 Proposed Rule

Following a detailed examination of

the testimony and comments, HUD

published a proposed rule (59 FR 37360,

July 21, 1994) 4 containing substantial

revisions to the RESPA regulation. The

proposed rule discussed the views

expressed in response to the pre-rule

solicitation of public comment and took

positions on each of the earlierpresented four major issues, inviting

further public comment in light of the

additional revisions to the RESPA

regulation that HUD was proposing.

The proposed rule reflected the

Secretary’s conclusion that the 1992

final rule’s employer-employee

exemption was too broad. In the

proposed rule, HUD proposed to

withdraw this exemption because it

compromised the statute’s purpose of

protecting the consumer from being

referred to settlement service providers

because of financial gain to the referrer,

rather than because of the quality and

price of the services. The proposed rule

would have removed an exemption that

permitted an employer to pay

employees referral fees for referrals to

an affiliate business entity.5 The

proposed rule rejected the view that all

employer payments to its employees for

referrals to third-party settlement

service providers should be exempt.

When HUD viewed the payments from

the perspective of the consumer, it was

clear that payments by the employer to

an employee, who performs settlement

services, for third-party referrals were

indistinguishable from payments

directly from the third-party settlement

service provider. While HUD has the

authority to exempt all employer

payments for third-party referrals under

its Sections 8(c)(5) 6 or 19(a) authority,

the Secretary concluded in the proposed

rule, as a policy matter, that such a

broad exemption was inconsistent with

the purposes of RESPA. In this final

rule, the Secretary is exercising this

authority under Sections 8(c)(5) and

19(a) to exempt employer payments to

their employees in those circumstances

where adequate consumer protection

exists.

In adopting the proposed rule, the

Department also recognized that

Congress had clearly established that

controlled business arrangements were

permissible under certain conditions. In

the interest of avoiding undue

interference with the internal operations

of controlled businesses, expressly

permitted under the 1983 amendments

to RESPA, the proposed rule would not

have prohibited the payment of bonuses

and compensation to managerial

employees in controlled businesses for

such purposes as the generation of

business among affiliates provided,

however, that:

1. No employee or agent could receive

compensation from his or her employer

or any other source when the

compensation is tied on a one-to-one

basis to, or is calculated as a multiple

of the number or value of, referrals of

business to an affiliate business entity;

and

2. The compensation of agents or

employees who routinely are in direct

contact with the public could not be

based, in whole or in part, on the value

or number of referrals made to affiliated

entities.

These clarifications were designed to

minimize any incentive that a person in

a position to make or influence a referral

might have to make a referral based on

his or her own, or his or her employer’s,

financial interests, without requiring

HUD to interfere unduly with the

internal operations of controlled

business arrangements.

As it relates to the regulation of

payments to CLO systems, the proposed

rule reflected a determination that it

was desirable to amend the final rule to

establish minimum standards for

qualified systems, payments to which

would be exempt from Section 8. Under

§ 3500.14(g)(3) of the proposed rule,

‘‘qualified’’ systems would have had to

meet a number of specific regulatory

requirements.7 The proposed rule also

asked for advice as to whether to create

a similar exemption for payments by

lenders to operators of ‘‘qualified’’

CLOs.

To assist in the promulgation of a

final rule, the Secretary requested

comments and invited information on

the effect of all of the above proposals

on the settlement services industry and

consumers. As an additional vehicle for

obtaining public input, on September

30, 1994, as part of the rulemaking

process, the Department conducted an

open house for operators of CLO

systems to demonstrate their systems to

HUD and to the public.8

Later in the rulemaking process, in

August and September 1995, the

Department convened two working

group meetings of interested industry,

government, and public officials, to

obtain their individual input and to
Federal Register / Vol. 61, No. 111 / Friday, June 7, 1996 / Rules and Regulations 29241

9Three-hundred fifty-seven comments were

received, but three were found to be duplicate

copies of other comments.

10Not included as ‘‘attorney comments’’ were

comment letters written by house counsel for banks,

lenders, or other organizations communicating,

through counsel, on their own behalf.

11 It was not always clear from a commenter’s

remarks, or from the commenter’s business

letterhead, whether the commenter spoke for a

multiple-service entity. Accordingly, some

commenters classified here as lenders, mortgage

brokers, real estate brokers, or other categories may

also, in fact, be multiple-service business entities.

further explore the development and

use of CLOs.

E. Today’s Final Rule

Today’s final rule addresses the

comments received in response to the

proposed rule and considering the

comments, promulgates rules relating to

Issues 1 (the employer-employee

exemption), Issue 2 (payments to CLOs),

and Issue 4 (controlled business

disclosure format). With respect to Issue

1, the rule withdraws the employeremployee exemption and introduces

three more-limited exemptions designed

to recognize the variety of business

organizations without doing damage to

RESPA’s core objective of consumer

protection. On Issue 2, the rule

withdraws the CLO exemption and

issues a related Statement of Policy that

illustrates how CLO payments and

activities are analyzed under the

existing and new RESPA regulations. As

discussed, supra, respecting Issue 3, the

proposed rule did not propose any

changes to the preemption provisions,

for the reasons explained in the

proposed rule, and, therefore, requested

no comments. On Issue 4, the rule

revises the Controlled Business

Arrangement Disclosure Statement.

In reading this preamble, the reader

should be aware that HUD’s RESPA rule

was recently streamlined through a

separate rulemaking (61 FR 13232,

March 26, 1996). This streamlining

caused several provisions of the RESPA

rule to be renumbered. Except as is

otherwise indicated in the context of the

preamble, this rulemaking refers to

provisions by their current section

number, incorporating all revisions to

date as a result of the streamlining and

today’s rulemaking.

II. Analysis of Issues in Final Rule

A. Overview of the Public Comments

The Department received 354 9

comments on the July 21, 1994,

proposed rule. Of these, 100 were from

attorneys, most of whom stated that they

were, or previously had been, actively

engaged as settlement lawyers. Only 2

comments from attorneys were

identified by the writers as written on

behalf of clients; the remaining 98

appeared to be individually originated

comments by the attorneys or law firms

on their own behalf.10 An additional 73

comments came from bank holding

companies, banks, or other mortgage

lenders; comments were received from

46 real estate brokers; 34 comments

were from mortgage brokers; 19 were

identifiable as multi-service real estate

service organizations; 11 14 comments

were from title company executives, 9

comments came from credit unions; 8

from CLO service providers; and 6

commenters identified themselves as

consultants. One comment was received

from a journalist, one from a mortgage

insurance firm, one from a credit

reporting service, and one from a

student, and three comments were

received from persons whose

professional interest in the rule could

not be determined.

Twenty-two State, local, or regional

organizations representing portions of

the real estate brokerage, lending, and

settlement industries provided

comments, as did 16 organizations

classified as national advocacy

organizations.

Attitudes toward the proposed rule

varied greatly, not only according to the

professional background of the

commenters, but also according to

whether a commenter was engaged in a

controlled business arrangement. For

this reason, lenders and other settlement

service providers expressed a wide

variety of views concerning the rule.

The majority (but by no means all) of

the comments received from real estate

brokers and agents favored the existing

regulatory structure (the 1992 final rule)

and sought to discourage changes in the

rule which, they argued, would impede

their ability to provide benefits to

consumers.

Issue 1 (the employer-employee

exemption) attracted the greatest

attention among commenters. Virtually

all commenters, on both sides of the

issue, were at least moderately

dissatisfied with the proposed rule’s

revisions. Commenters who opposed

any authorization of referral payments

frequently thanked the Department for

the effort made in the proposed rule to

limit the practice, but virtually all of

these commenters were displeased that

the Department was proposing to

exclude from RESPA coverage certain

compensation to managerial employees

in controlled businesses.

On the other hand, commenters who

wanted referral payments to employees

to continue to be allowable expressed

strong opposition to the proposed rule’s

limitation on such payments.

Additionally, many of these

commenters asked for clarifications

concerning the scope of the

‘‘managerial’’ exemption.

Issue 2 (the CLO exemption) was the

second-most-frequently addressed

subject. A significant minority of the

commenters who addressed the issue

credited the Department with a good

effort at better defining ‘‘CLO services’’

in the proposed rule, and there was

some positive support for the HUD

definition. However, most commenters

who addressed the CLO question found

fault with HUD’s proposed disposition

of the issue, with the proposed CLO

definition, or both. A wide variety of

suggestions for further refinement of the

definition was provided.

Issue 3 (the preemption issue) drew a

few comments, even though the

Department had not requested any

comments on it and had determined in

the July 21, 1994 proposed rule not to

propose new rules on this issue. The

Department stated in the proposed rule

that ‘‘setting out comprehensive and

informative preemption standards

present[ed] an almost insurmountable

task, in the absence of a wide array of

specific fact situations that are raising

preemption issues.’’ The Department

determined to consider preemption

questions on a case-by-case basis.

Accordingly, the final rule does not

address this issue.

Issue 4 (the controlled business

arrangement disclosure statement)

attracted a significant amount of

comment. In general, commenters on

both sides of the other issues were

undisturbed by what they perceived as

the somewhat minor changes in the

controlled business disclosure statement

that HUD proposed to adopt. There

were, however, a number of technical

suggestions, and significant criticism of

what was regarded as the unduly

negative tone of language proposed to be

employed in the Appendix D format to

suggest that consumers shop for

services. Additionally, commenters

continued to identify unresolved

questions about the disclosure form and

to suggest modifications of both its

language and its applicability.

What follows is a more

comprehensive discussion of the views

expressed by the commenters on Issues

1, 2, and 4, together with the

Department’s rule-making decisions.

B. Issue 1: Withdrawal of EmployerEmployee Exemption

1. In General

In the proposed rule, the Department

proposed the withdrawal of the existing

regulatory exemption that permits
29242 Federal Register / Vol. 61, No. 111 / Friday, June 7, 1996 / Rules and Regulations

employers to pay referral fees to their

own employees for referring settlement

service business to business entities,

including those within an affiliate

relationship. This exemption applied

whether or not employers were in an

affiliate or ‘‘controlled business’’

relationship, but practically only

benefited affiliate arrangements, as an

employer was unlikely to compensate

its employees for referrals to unaffiliated

providers. The proposal included a

limited exemption for payment of

bonuses for managerial employees who

did not deal with the public, provided

such bonuses were not correlated on a

one-to-one basis or calculated as a

multiple of the number or value of any

referral of settlement service business by

the employee or the employee’s

organizational unit to an entity affiliated

with the employer or principal.

2. The Public Comments

Virtually all of the comments from

attorneys approved of the proposal to

eliminate the employer-employee

exemption. (About 30 percent of all the

comments received on the proposed

rule were from law firms providing

settlement services, and the

overwhelming majority of attorney

comments were focused upon the

employer-employee exemption.) The

combined comments of the Attorneys

General of 11 States commended the

Department for focusing the rule’s

impact on consumers and for

articulating, as the first of HUD’s

guiding principles, the protection of the

consumer, rather than the mediation of

industry interests. They called the

proposed rule a ‘‘vast improvement’’

over the November 2, 1992, rule.

Some major industry organizations

expressed support for the withdrawal of

the exemption. For example, the

Mortgage Bankers Association expressed

its ‘‘substantially favorable reaction’’ to

the changes HUD was proposing. MBA

called employer-paid referral fees

‘‘fundamentally inconsistent with the

purposes of RESPA,’’ and approved the

proposed rule’s elimination of the

exemption for fees paid to employees

with direct contact with consumers.

The basic premise of these

commenters, who wanted a total

withdrawal of the employer-employee

exemption, was that Section 8(a) of

RESPA should be construed to prohibit

all ‘‘compensated referrals,’’ and any

standard less than this bright line test

opened up this civil and criminal

statute to unnecessary ambiguity and

uncertainty. These commenters

generally maintained that no exceptions

or exemptions should be made.

In contrast, comments favoring the

retention of the employer-employee

exemption argued that the 1992

formulation of the regulations had not

yet had time to work and be measured,

much less to be found insufficient. One

diversified real estate, finance,

management, and insurance company

from Illinois argued that ‘‘controlled

business arrangements’’ was an

unfortunate misnomer that left the

impression that great control was being

exercised over consumers. The

commenter’s own company, it was

claimed, had a ‘‘capture rate’’ of only

around 14 percent of its real estate

customers choosing to use its mortgage

services:

This means that at least 86 percent of those

customers still seek a different mortgage

provider. This hardly represents a coercive

customer problem that’s needing more

regulation * * *. The real danger in

attempting to further regulate companies

such as ours [is that it] will result in reduced

customer choice which we clearly provide,

and retarding competition * * *

An Illinois local office of a

nationwide finance organization argued

strenuously that the elimination of

employer-employee referral fees would

change little.

* * * [I]n the absence of any referral

compensation, employees will not

discontinue referring consumers to affiliate

settlement service providers. This is because,

when dealing with the consumer, the

employee is an agent of the employer and, as

such, acts in accordance with [his]

employer’s direction. * * * [A]rguments that

not paying a referral fee to an employee will

result in an employee acting independently

of the employer’s interests [are] simply not

based on reality.

The Real Estate Services Providers

Council (RESPRO), an advocate of the

1992 final RESPA rule, stated its

continuing support of a regulatory

environment that would permit

unfettered ‘‘one-stop shopping’’ for real

estate services. RESPRO favored both

management compensation and frontline employee compensation based

upon profits or on the amount of

referred business the manager/employee

was responsible for producing. HUD’s

proposed rule suggesting the

withdrawal of the exemption in the

1992 final rule has, RESPRO

commented, stifled companies from

developing one-stop shopping programs

in the most cost-efficient manner. The

new proposed rule ‘‘would significantly

decrease cost efficiencies within

diversified companies by preventing

them from utilizing their own

management to carry out the company’s

one-stop shopping goals.’’

HUD’s apparent objective in

regulating referrals, RESPRO argued,

was to eliminate the possibility of

adverse steering. However, HUD’s

principal concern appears to be focused

on perceived abuses in the real estate

sales industry, and the examples of

abuses cited by HUD (and by

commenters responding to the earlier

request for comments) involved real

estate brokers and salespersons.

RESPRO argued that the 1994 proposed

rule’s prohibition on employeremployee referral payments goes far

beyond any rule necessary to reduce

adverse steering, and that the rule

deprives diversified companies of the

efficiencies they need to lower costs to

consumers and would place diversified

companies at a competitive

disadvantage, relative to independent

competitor companies.

Comments from the National

Association of Federal Credit Unions

(NAFCU) also opposed the elimination

of the RESPA exemption for employeremployee referral fees.

Another commenter who opposed the

elimination of the exemption and stated

its support for the 1992 RESPA

regulation was the National Association

of Neighborhoods (NAN). NAN’s

comments expressed concern that the

proposed rule’s changes would reduce

competition and consumer choice by

limiting the ability of one class of

providers—diversified companies—to

offer homebuyers services on a costefficient basis. NAN also expressed

concern about the effect of the revisions

on the Community Reinvestment Act,

noting the Federal Reserve Board’s

earlier comments that restrictions on

employee referral-based compensation

might be ‘‘detrimental to future

innovations and developments in

community lending.’’

A mortgage finance consultant from

Virginia cited recent legislative

proposals in Pennsylvania that would

restrict the percentage of business

referrals permitted in a realtor-mortgage

banker controlled business arrangement.

The commenter noted that Congress had

rejected similar proposals in the 1983

amendments to RESPA:

In my experience, all of the attempts to

limit CBAs have been motivated by industry,

not to protect consumers or to provide lower

fees or better service, but to keep another

industry from entering the business. I would

urge HUD to ensure that congressional intent

is followed by allowing CBAs to exist in the

states unfettered by the kinds of restrictions

that were rejected in the 1983 CBA

amendments to RESPA.

Many supporters of controlled

business arrangements reiterated their

earlier contentions that ‘‘one-stop
Federal Register / Vol. 61, No. 111 / Friday, June 7, 1996 / Rules and Regulations 29243

12 The commenter described a circumstance in

which a mortgage broker entered into an exclusive

agency agreement with a lender to deliver mortgage

loan applications to the lender. The mortgage

broker used its exclusive agents (who were not

otherwise engaged in performing settlement

services) to generate these loans. The commenter

represented that the consumer was at all times

aware of the exclusive relationship between the

agent and the mortgage broker and lender

principals.

Payments by a mortgage lender to its exclusive

agents reasonably related to services actually

performed, in the circumstances described, fall

under the exemption in Section 8(c)(1)(C) and 24

CFR 3500.14(g)(1)(iii). Thus, HUD concluded that

the requested clarification to address the issue

raised by the commenter was not necessary.

13 In addition, pursuant to 24 CFR 3500.14(g)(3),

any person who is in a position to refer settlement

service business, such as an attorney, mortgage

lender, real estate broker or agent, or developer or

builder, may continue to receive payments for

providing additional settlement services as part of

a real estate transaction, if such payments are for

services that are actual, necessary, and distinct from

the primary services provided by that person.

shopping’’ leads to greater efficiency in

the settlement process and to costsavings for borrowers. Several of these

commenters objected strongly to the

proposed withdrawal of the employeremployee exemption, and urged that the

Department reconsider and retain the

existing employer-employee exemption.

The National Association of Realtors

(NAR) supported HUD’s clarification of

the meaning of the November 2, 1992

rule, as set forth in the preamble of the

July 21, 1994 proposed rule, which

indicated that real estate agents were

normally ‘‘independent contractors’’

and therefore not employees within the

meaning of the rule. Such agents,

therefore, could not receive referralbased compensation. NAR counsel,

however, requested clarification that an

employer may legitimately compensate

its own employees ‘‘for the generation of

its own business.’’ Another commenter

(Commercial Credit Corporation)

wanted a clarification in the final rule

that RESPA did not apply to the

compensation arrangements for the

generation of settlement service

business by either an employee or an

agent of a settlement service provider, in

a particular multi-layered business

structure, who originated settlement

services business exclusively for that

settlement service provider.12

3. The Final Rule’s Approach—

Overview

After a complete review of all

comments and points of view, the

Department withdraws the broad

employer-employee exemption. HUD

has determined that a broad exemption,

as contained in the 1992 rule,

unnecessarily allows persons who serve

consumers and gain their trust to

receive referral fees, in contravention of

the express intent of Congress in

enacting Section 8(a). However, to allow

controlled business arrangements to

operate and provide beneficial services

and packages of services to consumers,

the rule establishes three exemptions for

permissible payments by employers to

bona fide employees. Specifically, the

exemptions permit employer payments

to their own bona fide employees for

referrals of business if:

(a.) The employee is a managerial

employee, and the payment is not

calculated as a multiple of the number

or value of referrals.

(b.) The employee does not perform

settlement services in any transaction;

prior to the referral the employee

provides the person being referred a

written disclosure in the format of the

Controlled Business Arrangement

Disclosure Statement, set forth in

Appendix D to this part; and the referral

is to a settlement service provider which

has an affiliate relationship with the

employer or in which the employer has

a direct or beneficial ownership interest

of more than one percent. For purposes

of this exemption, the marketing of a

settlement service or product of an

affiliated entity, including the collection

and conveyance of information or the

taking of an application or order for the

services of an affiliated entity, does not

constitute the performance of a

settlement service. Under the

exemption, marketing of a settlement

service or product also may include

incidental communications with the

consumer after the application or order,

such as providing the consumer with

information about the status of an

application or order; marketing may not

include serving as the ongoing point of

contact for coordinating the delivery

and provision of settlement services.

(c.) The payment is to that employer’s

own employees for generating business

for the employer itself—but not its

affiliates. The Department believes that

it was clear that such payments were

permissible payments under RESPA.

However, because some commenters

indicated uncertainty regarding this

position, and it is HUD’s intent that

such payments continue to be

permissible, the rule clarifies the issue

with a new exemption providing that

payments made to bona fide employees

for generating business for their

employer are permissible under

§ 3500.14(g)(1)(vii). This exemption

means that an employee may accept

payments for referrals to its own

employer. In an affiliated relationship,

the employer is only the business entity

for whom the employee directly

works.13

These new exemptions provide that

payments must be to a bona fide

employee. Individuals may not be hired

on a part-time basis to make referrals

because of their access to consumers as

settlement service providers. Sham

employment arrangements, such as a

title company paying a one hour

‘‘salary’’ to a real estate agent who

provides a referral, and issuing a W–2

for ‘‘services’’ rendered to justify

compensating a referral, are, and will

continue to be, violations of RESPA.

The Secretary has authority to create

exemptions under Section 19(a) of

RESPA for classes of transactions as

may be necessary to achieve the

purposes of the Act. 12 U.S.C. 2617(a).

In addition, under Section 8(c)(5) of

RESPA, the Secretary may create

regulatory exemptions for ‘‘such other

payments or classes of payments,’’ after

consulting with various Federal

agencies. 12 U.S.C. 2607(c)(5). The three

exemptions created under this final rule

are issued pursuant to the Secretary’s

clear authority to create reasonable

exemptions to further the purposes of

the Act.

In creating these new exemptions,

HUD is not directly regulating wages to

bona fide employees. Rather, HUD is

creating an exemption for certain

payments within an employment

context that otherwise would be

prohibited by Section 8(a). The

Secretary believes that such payments to

bona fide employees are not designed as

a subterfuge to facilitate kickbacks

among affiliated companies.

The exemptions for managerial

employees and employees who do not

perform settlement services in any

transaction are explored in detail below.

4. Managerial Employees

a. The Public Comments. Several

commenters supported allowing

compensation to managerial employees

based on referrals and criticized the

formulation regarding managerial

compensation in HUD’s proposed rule.

NAR supported the idea of

compensation for managerial employees

or others who are not sales agents or

otherwise involved in the direct

provision of settlement services. At the

same time, NAR asked that the proposed

definition of ‘‘managerial employee’’

clarify that mere possession of a broker’s

license or a salesperson’s license to sell

real estate would not affect an

individual’s status as a managerial

employee. Many States, NAR indicated,

require managers in the real estate
29244 Federal Register / Vol. 61, No. 111 / Friday, June 7, 1996 / Rules and Regulations

business to hold licenses as brokers or

sellers.

NAR counsel, responding separately

to the proposed rule on behalf of the

organization, further elaborated on the

national organization’s position

regarding referral payments. He

distinguished ‘‘primary services’’ from

‘‘secondary services,’’ and argued:

NAR recognizes that the historic and

legitimate thrust of Section 8(a) of RESPA has

been to prohibit compensation for referrals

by persons who are ‘‘in a position to refer

settlement business,’’ understood as referring

to real estate professionals providing

settlement services (‘‘primary services’’) to

whom consumers may look for advice

regarding sources of other required

settlement services (‘‘secondary services’’)

with the expectation that such advice will be

based on professional knowledge and

experience and not tainted by additional

compensation payable by the highest bidder

for the referral.

He suggested that HUD prohibit

referral-based payments for any

individual who has significant contact

with consumers regarding the provision

of a settlement service, where a

principal part of the individual’s

income consists of compensation based

on settlement services performed for the

person’s employer or an affiliate. The

prohibition against sharing of

compensation related to a ‘‘secondary

service,’’ NAR counsel argued, could

apply to all services performed by the

secondary service provider and not just

to specific referrals. He asserted that

HUD could more easily enforce his

suggestion than HUD’s proposal, since

HUD’s rule evidently required proof of

an actual ‘‘referral’’ by the initial service

provider.

* * * [A] regulation based on

identification of actual referrals will likely

prove unworkable, leading either to no

enforcement or to adoption of presumptions

that might exceed HUD’s authority.

Additionally, NAR counsel argued

that the proposed rule’s ‘‘managerial

exemption’’ would unduly complicate

the ability of a diversified company to

devise workable incentive

compensation schemes for managers.

NAR counsel further suggested a change

to the definition of ‘‘managerial

employee’’ to exclude situations

wherein a managerial employee may,

from time to time, act as a direct service

provider. (In such circumstances, the

NAR-suggested definition would not

permit referral-based compensation in

addition to the sometime-manager’s

commission.) NAR counsel added, in

comments varying somewhat from the

stated NAR position:

In general, we do not believe that the

permissibility of compensation should turn

on status as an ‘‘employee’’ vs. ‘‘independent

contractor,’’ provided that the independent

contractor is one whose services are provided

exclusively for a single principal and who is,

therefore, in the eyes of the consumer,

indistinguishable from an employee.

MBA stated its concern about the lack

of clarity in the ‘‘managerial employees’’

exemption in the proposed rule, seeking

to narrow the category of persons

eligible for payments for referrals:

We believe it is imperative to have more

detail in the definition, so that the lending

and real estate broker industries will know

exactly where the line is between ‘managerial

employees’ and those that have ‘routine

contact with the public.’ For example, if a

person manages a branch office and

consequently has supervisory control over all

of the staff that deal directly with the public,

in which category does that person fall? We

strongly urge that such a person [not be]

eligible for the exemption because of his or

her involvement with the public implicit in

the supervisory role * * *.

* * * [U]sing real estate offices as

examples, office managers and real estate

brokers can exercise considerable influence

over the activities of the independent agents

through manipulation of the terms and

conditions of their work * * *.

MBA asked that the term

‘‘managerial’’ be further defined to

include only individuals working at

‘‘higher corporate levels’’ where there

would be no opportunity to steer

consumers. It was urged that the

definition be amended to clarify that

only employees who do not work in

offices where consumers regularly visit

could qualify for the managerial

exemption. The National Association of

Mortgage Brokers (NAMB) also asked

that HUD revise the rule to elaborate on

the definition of ‘‘employees’’ to make

clear that the term excludes

independent contractors and real estate

agents.

RESPRO favored both management

compensation and front line employee

compensation based upon profits or on

the amount of referred business the

manager/employee was responsible for

producing. RESPRO claimed that the

proposed rule’s restrictions on

compensation for managerial personnel

were so vague that they would,

effectively, prohibit all management

compensation in one-stop shopping

programs. One of HUD’s Fact/Comment

Illustrations in the proposed rule

indicated that ‘‘Nothing in the RESPA

rule prohibits bonuses or other

compensation based, in part, on the

generation of business by A (a lender) to

B and C (a title company and escrow

company) being paid to managerial

employees who are not routinely in

contact with customers.’’ However,

RESPRO claimed, the text of the

proposed rule is not consistent with the

statement in the quoted Fact/Comment

illustration.

The American Bankers Association

(ABA) objected to the managers’

compensation provision of the proposed

rule as ‘‘too narrow,’’ and advocated

that all employees of banking

institutions should be able to receive

compensation or bonuses based on their

referral of business within the bank or

to affiliates. Even if HUD were to retain

only the managerial exemption, the rule

needs modification, ABA said, to clarify

the circumstances under which an

employer could legitimately compensate

a manager.

In contrast, many of the attorneys

commenting on the rule (virtually all of

whom supported the withdrawal of the

employer-employee exemption) were

highly critical of the proposal to allow

the payment of referral-related bonuses

and compensation to managerial

employees in controlled businesses,

under conditions set out in the

proposed rule. The managerial

exemption was regarded as an

‘‘enormous loophole’’ in the new rule

that would substantially overwhelm the

benefits these commenters expected

from the proposed elimination of the

exemption for fees to line employees.

Typical of attorney comments received

was one from an Alabama practitioner

who said he ‘‘applauded’’ HUD’s partial

change of position ‘‘to eliminate the

objectionable ‘employee bonus/kickback

scheme’.’’ However, the commenter

said, ‘‘by creating the manager bonus

loophole, you have simply encouraged

and promoted indirect schemes to

circumvent basic consumer protection.’’

The attorney ‘‘implored’’ HUD to ‘‘stop

playing politics with the basic rights of

consumers that the Real Estate

Settlement Procedures Act was designed

to safeguard.’’ Similar views were

expressed by a Memphis attorney:

If HUD allows bonuses to be paid to real

estate managers even though the bonuses are

not strictly calculated on the basis of the

referral business, but merely takes it into

account as a factor, the managers and the

agents will find a way to tie the bonuses

directly to the amount of business generated.

HUD will have ‘‘opened the door’’ to the

abusive practices of kickbacks, tie-ins, fee

splittings, controlled business practices, and

conflicts of interest that existed prior to

RESPA and which RESPA has largely

eliminated.

Once the door is opened, everyone will

stampede through it.

The American Bar Association’s

General Practice Section and Standing

Committee on Lawyers’ Title Guaranty

Funds echoed the ‘‘loophole’’ complaint

of other practitioners:
Federal Register / Vol. 61, No. 111 / Friday, June 7, 1996 / Rules and Regulations 29245

Prohibiting ‘‘one-to-one’’ Basis Referral

Fees will not eliminate the payment of

referral fees* * *. Allowing [managerial]

payments* * * would be a dramatic

departure from the Act’s congressional intent

and basically would render the previously

mentioned withdrawal of the employeremployee exemption impotent.

The combined comments of the

Attorneys General of eleven States

opposed the proposed new

‘‘managerial’’ exemption.

HUD cannot allow compensation systems,

even for managerial employees, which

depend, even in part, on the level of

employee referrals to affiliated

companies* * *. [Managerial referral

compensation] will still create strong

incentives within the company to make as

many referrals to affiliated companies as

possible, regardless of whether those referrals

are in the consumers’ best interest or not.

A large number of other real estate

professionals also submitted objections

to the proposed modified managerial

exemption. These commenters, along

with most of the lawyer-commenters,

believed that controlled business

arrangements constituted unfair

competition, or that they invariably

would lead to increased costs for

consumers. Whether the payment is to

an employee who is in contact with the

consumer for a business referral

generated by that employee to the

employer or to an affiliate business

entity, or whether the referral-related

payment is to a managerial employee,

the objectors believed that the effect

would be the same: A determination

would be made to refer business based

on the dollar benefit of the referral,

rather than on considerations of what

would be most advantageous to the

consumer.

Similar views were expressed by a

New Jersey real estate broker who said

that he was ‘‘strongly in favor of any

changes in RESPA which would ban

payments for referrals from mortgage

lenders, title insurers, escrow agents

and other real estate settlement service

providers.’’ ‘‘[I]t would seem very

obvious,’’ the realtor wrote, ‘‘that

payment of referral fees would result in

the agent selecting the service

provider.’’

The Coalition to Retain Independent

Services in Settlements (CRISIS), an

organization of independent settlement

service providers, responded to the

proposed rule’s referral provisions

arguing for a total ban on referral fees

and referral-based compensation factors

to employees and managers. Consumer

Federation of America also called for a

total ban on referral-based

compensation involving affiliate

entities, as did the National Association

of Mortgage Brokers (NAMB).

b. The Final Rule’s Approach. The

rule revises the proposed rule’s

formulation and defines a ‘‘managerial

employee’’ as one of a limited class of

employees who do not routinely deal

with the public, but who function in a

management or executive capacity. It

makes permissible certain bonuses and

payments to these managerial

employees. Active real estate agents,

who are independent contractors,

cannot be managerial employees,

although a managerial employee can

hold a real estate brokerage or agency

license. HUD agrees with NAR counsel

that managers’ ‘‘mere status as licensed

brokers or salespersons should not

exclude them from being ‘managerial

employees’ if their principal functions’’

are the types of managerial functions

indicated in the definition, rather than

face-to-face dealings with consumers.

The rule provides that managerial

employees in controlled business

arrangements may be paid bonuses

based on performance criteria, including

profitability, capture rate or other

thresholds, but the bonus may not be

directly calculated as a multiple of the

number or value of settlement

transactions referred to a business entity

in an affiliate relationship. Thus, for

example, the final rule does not prohibit

a managerial employee from receiving

an annual bonus based on an affiliate

business entity capturing a percentage

of the business from the managerial

employee’s unit (e.g., a $1,000 bonus for

an affiliated lender’s 10% capture rate

of real estate brokerage customers and a

$2,500 bonus for a 20% capture rate).

Managerial employees may not,

however, receive a bonus or other

compensation calculated as a multiple

of the number or value of referrals of

settlement service business to a business

entity in an affiliate relationship. Thus,

a compensation system that awarded a

managerial employee $20 for every

referral continues to be prohibited, as

would a compensation system that

awarded a managerial employee $100

for every 5 referrals.

In the rule, the phrase ‘‘does not

routinely’’ is used to establish a ‘‘de

minimis’’ standard for consumer

contact. HUD intends the phrase ‘‘does

not routinely’’ to mean that managerial

employees who occasionally deal with

consumers, which is almost inevitable

in small offices, are not precluded from

receiving year-end bonuses because of

this minimal contact. Similarly, HUD

intends this phrase to allow a

managerial employee who performs and

is compensated for occasional

settlement services (not more than three

transactions a year) to be eligible for this

exemption. This standard will

effectively limit the class of managerial

employees who may receive these types

of bonuses to those ‘‘whose contacts

with consumers are only casual or

peripheral, at most, and who do not

occupy the special positions of trust,

arising from their relationship to

consumers as well as the arcane nature

of certain of the services required, that

are developed by real estate agents or

the comparable providers of other

services,’’ as suggested by NAR.

HUD has chosen to use its exemption

authority under Section 8(c)(5), having

consulted with other Federal agencies as

required by that provision, as well as

the authority under Section 19(a) of

RESPA to permit these payments which

would otherwise be prohibited by the

statute. As noted in the proposed rule

(59 FR at 37365), Congress has clearly

determined that RESPA does not

prohibit controlled business

arrangements, with certain conditions.

The final rule’s exemption permitting

managerial employees to receive

payments of a bonus based on criteria

relating to performance conforms with

Congress’s intent to permit controlled

business arrangements to operate.

This exemption is appropriate

because managers do not routinely deal

directly with consumers. Therefore, the

manager is not in a position of trust

with the consumer to directly influence

the consumer’s choice of settlement

service providers. By providing this

exemption, the regulation will not

require HUD to interfere unduly with

the internal operations of controlled

business arrangements. The exemption

reflects the Department’s

acknowledgement that it would be

difficult to enforce RESPA in

circumstances which would require

detailed scrutiny of complex

compensation arrangements for

management in affiliated settings.

The exemption draws a line, however,

for payments to managers that are

transaction based. This regulation does

not allow payments to managerial

employees which mimic referral fees.

Thus, where a payment of a bonus to a

managerial employee is calculated as a

multiple of the number or value of

referrals of settlement service business

to an entity in the controlled business

arrangement, it would appear to be a

payment in violation of the Act and

contrary to the intent of Section 8(a).

The foregoing provisions have been

amplified by a revised Illustration 12

that is being added to Appendix B.
29246 Federal Register / Vol. 61, No. 111 / Friday, June 7, 1996 / Rules and Regulations

5. Employees Who Do Not Perform

Settlement Services in Any Transaction

a. The Public Comments. Several

commenters advocated, either directly

or indirectly, that the rule allow

businesses to pay bonuses for referrals

to business entities in affiliate

relationships to those employees who

do not perform settlement services.

Many of these comments focused on the

way in which a host of Federal and

State regulations affect the way

particular industries do business and

are structured. These comments urged

HUD to allow compensation systems

which are sensitive to these structures.

ABA criticized HUD’s proposed rule

as insensitive to the structure of banks,

noting that, under the proposed rule, if

the loan were made by the bank itself,

employees could be compensated for

generating that business, but if the loan

were made by a subsidiary mortgage

company, such compensation would be

a prohibited referral fee.

Individuals seeking a residential mortgage

loan who enter a bank and inquire as to the

availability of such a loan do so voluntarily

with the goal of receiving information and

possibly applying for and obtaining such a

loan. Whether or not the bank is structured

* * * to process such loans within the bank,

the bank holding company or a subsidiary or

affiliate of each makes absolutely no

difference to the consumer and in no way

affects his or her decision * * * whether or

not to do business with the bank * * *.

Providing information in order to expedite

the customer’s objective is appropriate and

beneficial to all parties. The structure of the

mortgage lending operation within the bank,

its affiliate, or within the bank holding

company is inconsequential and shouldn’t

trigger any RESPA activity.

Other banker-commenters echoed the

ABA’s concern that the proposed rule’s

referral-related modification was a poor

fit for the varied structures of banks and

their integrated or affiliated real estate

service entities. A Minnesota bank

holding company was among several

banking organizations arguing that there

was a fundamental difference between a

referral by a bank employee to the

bank’s mortgage lending affiliate, and

the type of referral that might involve

another party to a real estate transaction,

e.g., from a real estate agent to a

mortgage lender:

If an individual contacts a bank to inquire

about a mortgage loan * * * it is because the

individual perceives the bank as a lender that

would offer that type of loan. The customer

is not going to the bank because he or she

is seeking an objective, unbiased referral to

another lender. The customer * * * expects

that whatever bank they talk to will promote

its own products. If that bank does offer

[mortgage loans] they would simply proceed

to give information to the potential customer

* * * If, however, a bank holding company

[has formed] a separate subsidiary to handle

* * * mortgage lending[,] the proposed rules

add additional burdens to that bank by

limiting its ability to design a compensation

system for managers that promotes the

affiliate relationship and by requiring an

additional layer of disclosure.

* * * [E]xcessive requirements place the

bank with a separate mortgage lending

subsidiary at a disadvantage compared to

banks that * * * offer such products within

the bank itself.

ABA also asked that HUD reconsider

this aspect of the rule in light of the

strong framework of existing bank

regulation, State and Federal:

Unless appropriately modified, this

proposed regulation penalizes banks, their

affiliates, bank holding companies * * *

solely because of their corporate structures.

These structures have been specifically

authorized by statute, implemented by state

or federal bank regulatory authorities and

constantly monitored and examined for

safety and soundness and compliance

purposes.

ABA asserted that the HUD regulation

effectively applies only to banks and

other banking institutions:

It is only these institutions which will be

examined on a periodic basis by bank

examiners for compliance with this

regulation. HUD does not maintain its own

compliance examiners for non-bank

settlement service providers. Other

settlement service providers do not and will

not face this intensive examination process.

ABA recommended that bank

examiners not be required to examine

for this aspect of RESPA compliance—

unless HUD intends to provide similar

supervision and enforcement for

settlement service providers other than

banks.

Finally, ABA’s comments indicated

that banks are encouraging employees to

focus attention on compliance with the

Community Reinvestment Act (which

encourages residential lending activity

in the banks’ immediate service areas

and neighborhoods). Many banks, ABA

claimed, find it advantageous to

structure lending programs to provide

financial incentives to their employees

to promote Community Reinvestment

Act objectives. The proposed rule would

eliminate these incentives arbitrarily,

ABA stated.

A comment from the Securities

Industry Association (SIA) similarly

objected to the proposed change in the

referral fee rule. Some SIA members, the

comment said, are part of diversified

services firms, with mortgage lending

affiliates. SIA believed that referrals

made by securities firms’

representatives should be distinguished

from those made by employees of

entities whose business is to perform

settlement services. The commenter

argued that the potential harm to

consumers that HUD is attempting to

deal with as ‘‘inherent’’ in referrals

made by persons performing settlement

services is not present when the

referring individual is a registered

securities representative. SIA requested

reconsideration, or an express

exemption from the rule applicable to

employees of securities firms.

Virtually all commenters who

objected strongly to the proposed

withdrawal of the existing employeremployee exemption, also approved of

the proposed rule’s retention of an

exemption, albeit in a modified form.

For example, RESPRO recommended

that the (old) employee compensation

exemption be retained, but modified to

exclude any real estate agent, sales

associate, or other person who assists

consumers with the listing or purchase

of a home, and who has regular and

meaningful contact with consumers.

This, RESPRO argued, would achieve

the HUD policy objective of

discouraging adverse steering by real

estate agents, without interfering with

the cost efficiencies of diversified

companies.

Several commenters also specifically

advocated that the rule allow businesses

to pay bonuses for referrals to business

entities in affiliate relationships, to

those employees who are financial

service representatives (FSRs), i.e.,

persons employed in affiliate businesses

to cross-market products. RESPRO

argued that HUD’s proposed rule would

place diversified companies at a

competitive disadvantage to their

independent competitors by preventing

them from compensating salespersons

who offer more than one of the

company’s products or services, in the

same manner as their independent

competitors. Whereas independent

mortgage, title, and homeowners

insurance companies follow the

traditional practice of encouraging a

salesperson’s productivity by paying

him or her on a commission basis,

HUD’s proposed rule would result in

diversified companies either having to

hire less productive salespersons

(persons who could not be compensated

based on commissions which encourage

productivity), or to pay three separate

employees (instead of one) to offer three

separate services (so they can properly

motivate the FSR). RESPRO urged that

HUD’s final rule allow a broad array of

compensation to management and

employees for developing and

implementing one-stop shopping,

including: (1) the hiring and

compensating of a financial services

manager, i.e., a branch manager who is
Federal Register / Vol. 61, No. 111 / Friday, June 7, 1996 / Rules and Regulations 29247

14 Section 3(3) of RESPA (12 U.S.C. 2602(3)) and

24 CFR § 3500.2 define the term ‘‘settlement

services’’. However, for purposes of this exemption,

the marketing of a settlement service or product of

an affiliated entity, including the collection and

conveyance of information or the taking of an

application or order for the services of an affiliated

entity, does not constitute the performance of a

settlement service. Under the exemption, marketing

of a settlement service or product also may include

incidental communications with the consumer after

the application or order, such as providing the

consumer with information about the status of an

application or order; marketing may not include

serving as the ongoing point of contact for

coordinating the delivery and provision of

settlement services.

responsible for supervising the

performance of the real estate agent, title

agent, mortgage loan officer, and other

persons performing settlement services;

and (2) the hiring and compensating on

a commission basis of a ‘‘customer

services representative’’ or ‘‘financial

services representative’’ who is not a

real estate agent, but ‘‘who markets

more than one settlement service (not

real estate brokerage)’’ either in or

outside of a real estate office.

NAR counsel urged that HUD place

no restrictions on the compensation of

employees whose function is to promote

sales of ‘‘secondary services’’ (i.e., other

settlement services) provided by

affiliates at the point of sale of ‘‘primary

services.’’ NAR counsel commented,

‘‘Notwithstanding that these individuals

have direct contact with consumers, we

do not believe that they are in positions

to develop the special relationships of

trust and expectation that are developed

by the ‘primary service’ providers.’’

b. The Final Rule’s Approach. In

response to these comments, the final

rule allows a limited exemption for an

employer’s payment to bona fide

employees who do not perform any

settlement services,14 so long as prior to

the referral, the consumer is provided

with a written disclosure in the format

of Appendix D. This exemption will

cover at least two situations frequently

mentioned in the comments. First, this

exemption will allow employers to pay

their own bona fide employees who are

not involved in the provision of

settlement services, such as securities

sales persons or bank tellers, for

referrals of settlement service business

to business entities in affiliate

relationships. This approach achieves

substantially the same result

recommended by counsel to the NAR.

Second, this exemption will allow

employers to pay their own bona fide

employees, whose primary function is

to market the services of the affiliates of

the employer. Employees who perform

settlement services remain subject to

Section 8’s prohibitions. However, as

with a managerial employee who holds

a real estate license, a securities sales

person or bank teller who holds a

mortgage broker license would not be

precluded from qualifying for the

exemption, if the securities sales person

or bank teller is not actually involved in

the provision of settlement services.

The exemption created here

establishes a test: if an employer’s

payment is to an employee who does

not perform settlement services in any

transaction, the exemption applies and

payments are not subject to Section 8

scrutiny so long as the disclosure is

made.

A primary purpose of RESPA is to

prevent consumers from being

unwittingly steered (in exchange for

referral payments) by one settlement

service provider to other particular

settlement service providers. Although

the statute, on its face, covers all

referrals of settlement service business,

regardless of who makes the referral,

Congress did not express as high a level

of concern about the referral activities of

those who do not perform settlement

services. The Department believes that

the structure of affiliated businesses,

particularly in the financial services

industry, wherein services are often

divided among different affiliates, is

frequently a response to State and

Federal laws, such as the Bank Holding

Company Act, rather than an attempt to

circumvent RESPA. The Department

believes that the industry should not be

unnecessarily disadvantaged in

competition by its mandated or chosen

business structure. Thus, HUD has

chosen to use its exemption authority

under Section 8(c)(5) and Section 19(a)

of RESPA to permit these payments

otherwise prohibited by the statute.

This exemption only covers payments

made by the employer, not by the party

to whom the settlement service business

is referred. It also only applies to

payments for referrals to affiliate

business entities. Further consideration

should be given to a broader exemption

for payments to those who do not

perform settlement services received

directly from either: (1) An affiliated

party receiving the referral; or (2) an

unaffiliated party receiving the referral.

However, these issues were not raised

by this rulemaking and the record is

insufficient to determine the impact of

such changes.

A similar proposal is included in

legislation currently under

consideration in the United States

Senate. This legislation would allow

anyone who does not receive another

fee in the particular transaction to

receive a referral fee from any source.

The stated purpose of the proposal is to

exempt from RESPA coverage ‘‘cobranding’’ and ‘‘affinity marketing,’’ as

such payments are known in the

industry. The Department believes that

this proposal also could be

accomplished by regulation, using

HUD’s exemption authority under

Section 8(c)(5) and Section 19(a) of

RESPA. However, both approaches—an

exemption for all payments to those not

performing settlement services or an

exemption for all payments for those not

receiving another fee in the

transaction—require further scrutiny.

While it is desirable to facilitate

business generation where there is little

danger of the adverse steering that

RESPA was designed to prevent, it is

important to ensure that loopholes are

not created through which such adverse

steering can slip. HUD intends to

undertake further rulemaking on this

subject and to seek public comments.

The Department also recognizes the

market trend, described particularly in

RESPRO’s comments, that many

companies are choosing to hire one or

more individuals whose primary

function is to generate business for his

or her employer and affiliated

companies. Such individuals are

sometimes referred to as marketers or

customer or financial service

representatives.

In response to these realities, the

Department has created an exemption

sufficiently broad to allow an

employer’s payments to its bona fide

employees whose primary function is to

generate business for entities within an

affiliated relationship with that

employer. The Department has

restricted this exemption to payments to

those who do not perform settlement

services in any transaction including,

for example, those settlement services of

a real estate agent, loan processor,

settlement agent, attorney, or mortgage

broker. For purposes of this exemption,

the marketing of a settlement service or

product, including the collection and

conveyance of information or the taking

of an application or order for the

services of an affiliate does not

constitute the performance of a

settlement service. Under the

exemption, marketing of a settlement

service or product also may include

incidental communications with the

consumer after the application or order,

such as providing the consumer with

information about the status of an

application or order; marketing may not

include serving as the ongoing point of

contact for coordinating the delivery

and provision of settlement services.

As discussed above, the Department’s

review of the legislative history revealed

that steering of unsophisticated

consumers from one settlement service
29248 Federal Register / Vol. 61, No. 111 / Friday, June 7, 1996 / Rules and Regulations

15See further discussion later in this Issue 2

section, under heading (g), ‘‘Other CLO Issues

Raised by Commenters’’.

provider to other settlement service

providers was a substantial

congressional concern. A settlement

service provider frequently is trusted by

the consumer and appears to the

consumer to be an expert in the

settlement process and to have the

consumer’s interests in mind. If a

person performing settlement services is

also receiving compensation for

referring business to another settlement

service provider, there is a potential

conflict of interest. The consumer’s trust

in the person performing settlement

services may cause the consumer to lose

any natural wariness he or she might

otherwise have of following the advice

of a salesperson who derives income

from sales performance. The consumer

might ignore the conflict of interest

because of trust that has accrued from

the provision of another settlement

service. A person who is not performing

a settlement service, but is merely

marketing the affiliated companies, is

less likely to attain trusted-advisor

status concerning the transaction. The

consumer is more likely to be aware of

and weigh carefully the incentives of a

person who is not performing a

settlement service but is generating

business for that person’s own employer

and its affiliates. The application of the

rule’s prohibition to all settlement

service providers, whether involved in

the specific settlement or not, prevents

two providers from swapping referrals.

The Department is also requiring that

disclosure of the affiliate relationship be

provided to the consumer when the

referral is made, so that the consumer

will be alerted to the affiliate

relationship, be informed of the

potential business interest of the

employee making the referral, and be

able to make an educated decision about

whether to use the recommended

provider or another. Finally, the

Department is requiring that, for the

exemption to apply, the referral of

settlement service business be to a

settlement service provider that has an

affiliate relationship with the employer

or in which the employer has a direct

or beneficial ownership interest of more

than one percent. This requirement is

consistent with congressional intent to

allow controlled business arrangements

and is responsive to comments

indicating that the circumstances

described in the exemption are those in

which an exemption would be most

beneficial. Where these requirements

are met, the Department believes the

consumer is adequately protected. The

Department, therefore, has used its

exemption authority under Section

8(c)(5) and Section 19(a) of RESPA to

permit these payments otherwise

prohibited by the statute.

The foregoing provisions have been

amplified by revised Illustrations 11 and

12 which are being added by this rule

to Appendix B.

C. Issue 2: Computer Loan Origination

Systems (CLOS)

1. Background

The 1992 final rule specifically

exempted from RESPA’s coverage any

borrower payment for computer loan

origination systems or CLOs. The

exemption was intended to prevent

RESPA’s restrictions against unearned

fees from unduly inhibiting the

development of technology which could

permit consumers to shop, apply for or

obtain mortgage loans electronically. A

CLO system was not defined in the 1992

rule.

2. The Proposed Rule, CLO

Demonstration and CLO Working

Groups

In response to the earlier comments,

the proposed rule undertook to establish

minimum standards for a system falling

within the exemption. HUD proposed to

designate such CLO systems as

‘‘qualified CLOs.’’ Payments by

consumers to such systems would not

then be ‘‘scrutinized under RESPA.’’ A

‘‘qualified’’ system would:

(a.) Provide openings for 20 or more

lenders offering various loan products;

(b.) Utilize selection factors for

lenders that are fair and impartial and

are designed to contribute to the

efficiency and quality of the system;

(c.) Provide borrowers information in

a lender-neutral manner;

(d.) Provide borrowers a CLO

disclosure form before CLO services are

performed;

(e.) Charge all borrowers using the

system the same CLO access fee(s) for

the same service or the same

components of service; and

(f.) Be allowed to charge lenders for

access only if charges are set forth in a

written schedule of charges, charges for

the same services and components of

services are the same for all lenders on

the system, and charges for the same

services are reasonably related to the

costs of maintenance and operation of

the qualified CLO system.

The proposed rule asked for advice on

whether to create a similar exemption

for payments by lenders to ‘‘qualified

lender’’ CLOs, or whether to leave such

systems to be governed by the general

rules of RESPA regarding kickbacks,

unearned fees and referral fees.

As an additional vehicle for obtaining

public input, on September 30, 1994, as

part of the rulemaking process, the

Department conducted an open house

for operators of CLO systems to

demonstrate their systems to HUD and

to the public. Twenty-one CLO

operators accepted the invitation and

participated in this all-day

demonstration in Washington, D.C. At

the demonstration, the capabilities of

the systems, the number of lenders

displayed, the arrangements for

payment, among other characteristics,

differed widely.

3. The Public Comments

The public comments received on the

proposed rule reflected a wide array of

criticisms that suggested continuing

problems with the rule’s approach, or

that indicated that the CLO definition

HUD had arrived at would not work

under particular circumstances.

Additionally, a few commenters

(including RESPRO, NAR, and separate

comments by NAR counsel) not only

questioned the particulars of HUD’s

CLO proposal, but also suggested that

the Department lacked adequate

authority under Section 8(b) of RESPA

to establish ‘‘qualified’’ or ‘‘nonqualified’’ CLO systems by regulation,

as proposed.

NAR and several individual

commenters advocated that the rule

should distinguish computer systems

that merely provided basic information

about prospective lenders (e.g., a

comparison of current interest rate

quotations for particular mortgages) and

those systems that actually may be said

to ‘‘originate’’ loans by means of

qualification (or at least, prequalification) of borrowers.15

Many commenters objected to the

proposed rule’s requirement that a

borrower’s payment for CLO services be

made ‘‘outside of and before closing,’’

arguing that this requirement would

dampen or completely destroy the

market for CLO services, and that

determining the appropriate timing of

the borrower’s payment would create

ambiguities and resulting compliance

difficulties. The combined comments of

the State attorneys general objected to

the proposed rule’s concept of

‘‘qualified’’ and ‘‘non-qualified’’ CLOs

and suggested, instead, that HUD permit

only qualified CLOs to operate at all.

The several most-frequently raised

CLO issues are summarized below.

a. The Legal Issue. RESPRO, NAR,

and others raised the issue of HUD’s

authority to establish minimum

standards (i.e., a ‘‘safe harbor’’
Federal Register / Vol. 61, No. 111 / Friday, June 7, 1996 / Rules and Regulations 29249

16See discussion of CBA disclosure statement

format under the heading ‘‘Issue 4’’ elsewhere in

this preamble.

exemption) and to subject nonqualifying CLO systems to scrutiny.

Noting that the proposed rule cited

Section 8(b) of RESPA as a basis of

HUD’s authority to regulate in this area

and to prohibit a CLO operator from

accepting a payment from a borrower for

a sham or duplicative charge, these

commenters argued that Section 8(b) of

RESPA was inoperative as authority for

regulating CLO payments unless the

CLO operator shared fees with a third

party.

According to the commenters, Section

8(b) governs only a ‘‘portion, split, or

percentage’’ of any charge made or

received. If the CLO operator is the only

party charging or receiving a fee for

CLO-related services, the commenters

argued, then Section 8(b) cannot be the

authority for the proposed borrower

payment exemption ‘‘safe harbor’’ or for

regulating non-qualifying CLOs. The

commenters cited as authority for this

position certain judicial precedents.

HUD is aware of these cases, which

never involved HUD as a party, but

finds their reasoning not to be

persuasive or their holdings not to be

determinative of the issue. HUD

believes that Section 8(b) of the statute

and the legislative history make it clear

that no person is allowed to receive

‘‘any portion’’ of charges for settlement

services, except for services actually

performed. The provisions of Section

8(b) could apply in a number of

situations: (1) where one settlement

service provider receives an unearned

fee from another provider; (2) where one

settlement service provider charges the

consumer for third-party services and

retains an unearned fee from the

payment received; or (3) where one

settlement service provider accepts a

portion of a charge (including 100% of

the charge) for other than services

actually performed.

The interpretation urged, that a single

settlement service provider can charge

unearned or excessive fees so long as

the fees are not shared with another, is

an unnecessarily restrictive

interpretation of a statute designed to

reduce unnecessary costs to consumers.

The Secretary, charged by statute with

interpreting RESPA, interprets Section

8(b) to mean that two persons are not

required for the provision to be violated.

HUD, therefore, had adequate authority

to promulgate the rule it proposed,

although it has chosen not to do so.

b. Impact on Mortgage Brokers. On

the merits of the CLO proposal, the

Mortgage Bankers Association and many

other commenters were alarmed about

possibly unintended effects of the CLO

provisions on mortgage brokers. First,

MBA feared that merely by using a

computer in its activities, a mortgage

broker could be deemed a CLO operator,

since mortgage brokers typically

perform many or all of the functions set

out in the ‘‘CLO system’’ definition

contained in § 3500.2 of the proposed

rule. MBA anticipated that mortgage

brokers might therefore find themselves

faced with a new disclosure

requirement (relating to CLO systems)

that HUD probably did not intend.

Revision of the definition was urged to

clarify this point.

c. Time of Payment for CLO Services.

RESPRO, NAR, and many other

commenters strenuously objected to the

requirement in the proposed rule that

for a system to qualify, payment for CLO

services be ‘‘outside of and before’’ loan

closing.

d. Twenty-Lender Requirement.

RESPRO and a large number of

individual commenters objected to the

proposed rule’s requirement that CLO

systems provide access to at least 20

lenders. RESPRO asserted that its

members, as well as CLO operators,

uniformly believed that 20 lenders

would constitute ‘‘information

overload’’ and would discriminate

against small and local CLO operators.

Other commenters reflected that 20

lenders, each offering, perhaps, multiple

variations of mortgage loan packages,

would overtax a CLO system and

increase its operating costs, to no useful

purpose. Consumer Federation of

America was among the very few

commenters who suggested that access

by 20 lenders would be inadequate.

e. Lender-Pay Systems. The Attorneys’

General comment objected to the fact

that the rule did not prohibit lenders

from paying for CLO services, viewing

lender-paid services as ‘‘harboring the

same potential for consumer abuse as

direct kickbacks.’’ MBA also opposed

permitting lender-paid fees, arguing that

they constitute hidden costs to the

consumer. Consumer Federation of

America strongly objected to lender

payments, saying that they would place

consumers at ‘‘great risk of being steered

into noncompetitive products.’’

Conversely, comments from the

National Association of Federal Credit

Unions (NAFCU) urged HUD not only to

create a parallel exemption for

payments by lenders for qualified CLO

systems, but suggested that HUD not

intervene in setting lender-CLO operator

fee schedules. NAFCU believed that

negotiated fees for CLO services to

lenders would promote competition.

f. ‘‘Information’’ vs. ‘‘Origination’’.

NAR and numerous other commenters

urged that a sharp distinction be made

in the rule between computer loan

information systems (dubbed by NAR

and others as ‘‘CLIs’’) and computer

loan origination systems (‘‘true’’ CLOs),

with which a computer link-up can be

made with lenders and a genuine loanapplication-approval process originated.

Another commenter similarly explained

that vast differences existed in the

functions and sophistication of ‘‘loan

origination technology,’’ ranging from

relatively simple information

transmittal systems to ‘‘electronic

decision makers’’ that utilize artificial

intelligence. These latter systems, the

commenter claimed, were essentially

computer underwriting systems. The

commenter went on to recommend that

HUD narrow its CLO definition to

require that qualified systems not only

collect data, but evaluate it.

g. Other CLO Issues Raised by

Commenters. A nationwide finance

organization believed that the CLO

system definition should not require the

transmission of information concerning

a prospective property. CLO systems

offer the same benefits to consumers in

the pre-qualification stage, the

commenter asserted.

Comments on the issue of CLO-related

disclosures varied greatly. Commenters

sympathetic to the regulatory scheme

proposed for CLOs were also supportive

of the form of disclosure, although some

additional disclosures were occasionally

suggested. Commenters otherwise

critical of HUD’s definition, the

proposed CLO regulatory scheme, or

other aspects of the proposal tended to

object as well to the form of disclosure

proposed. Generally, objections to the

CLO disclosure format were mild,

except the American Bankers

Association and a few other commenters

specifically objected to the

‘‘acknowledgement box’’ requirement

for the same reasons that consumeracknowledgement procedures were

objected to in connection with the

controlled business arrangement

disclosure statement.16

4. Working Group Meetings

After review of all of the comments

and the information gleaned from the

technology demonstration, HUD

believed that it did not have sufficient

information on CLOs and how they

were actually functioning in the

provision of services to consumers.

Accordingly, HUD convened the first of

two CLO working group meetings on

August 11, 1995, in Washington, D.C.

Participants included CLO vendors,

related industry associations, State

regulators, consumer groups, and
29250 Federal Register / Vol. 61, No. 111 / Friday, June 7, 1996 / Rules and Regulations

17Prior to HUD’s regulatory streamlining, this

provision was codified at 24 CFR

§ 3500.14(g)(2)(iii).

individual advocates. The purpose was

to get their individual input on CLO

issues.

The working group examined a

number of CLO trends and CLO systems

and identified the types and

characteristics of CLOs currently

operating. Presentations were made

regarding several operating systems, as

well as the Federal National Mortgage

Association’s (Fannie Mae’s) Desktop

Underwriter and the Federal Home Loan

Mortgage Corporation’s (Freddie Mac’s)

Loan Prospector. Views expressed by

one or more members of the group

included:

• CLOs are merely a technology for

automating the loan process and not

necessarily an independent settlement

service.

• There should not be a special

exemption for CLO services.

• A separate set of disclosures for

CLOs and CLIs should not be created,

but consumers should be given

understandable and meaningful

disclosures.

• HUD should not attempt to set

rates.

• HUD should define the level of

service that must be performed in the

origination process in order to receive

compensation.

Many participants argued that HUD

should not attempt to regulate, define,

or set standards for an evolving

technology. Many argued that greater

clarity about how the RESPA

regulations applied to loan originations

would be preferable to a separate

exemption or ‘‘safe harbor,’’ for which

HUD set required characteristics by

regulation. At the conclusion of the first

meeting, the group agreed to meet again

and discuss further the development of

CLO technology.

HUD held a second working group

meeting on September 26, 1995. At this

meeting, many also argued again that

the RESPA regulations should apply

equally to all participants in the market,

regardless of their use of technology,

and that the applicable test should be

whether the fees paid were for services

actually performed. Many in the group

believed that HUD should provide

additional guidance about how this

basic RESPA test applies in the CLO

context. Some participants criticized a

distinction between services paid for by

lenders and services paid for by

borrowers, arguing that the borrower

was the final source of funds for all

services. State regulators also discussed

the licensing and other requirements

applicable to CLOs in many

jurisdictions.

5. The Final Rule’s Approach

After further internal review and

discussion, the Department determined

to abandon the approach taken in the

proposed rule, withdraw the CLO

exemption that had been contained in

24 CFR 3500.14(g)(1)(viii),17 and replace

it with guidance analyzing the

application of RESPA and the RESPA

regulations to common CLO issues. The

final rule also withdraws Appendix E,

the CLO disclosure.

Simultaneously with the publication

of this final rule, the Department is

issuing a Statement of Policy. That

Statement of Policy, issued under

§ 3500.4(a)(1)(ii), is being published in

today’s Federal Register and constitutes

a ‘‘rule, regulation, or interpretation’’

within the meaning of Section 8.

D. Issue 4: CBA Disclosure Form

1. The Public Comments

Proposed changes in the controlled

business disclosure form also attracted

significant attention from commenters.

Eleven Attorneys General commended

the Department for accepting most of

the suggestions made by State Attorneys

General in the earlier round of public

comment on RESPA regulations.

However, the Attorneys General

questioned whether the addition of a

borrower acknowledgement box on the

form is helpful and suggested it may

actually prove harmful:

* * * While it may appear that such a box

induces the consumer to read the disclosures,

in fact, it may be just one more document in

a blizzard of such forms which the consumer

signs. It is likely that lenders will find this

acknowledgement more useful than

consumers and will attempt to use the

acknowledgement in defending any suits by

consumers who feel they have been misled.

A few commenters affirmatively

supported the revised disclosure

statement requirement as appropriate

and useful.

Other commenters, however, were

more critical of the content of the

revised disclosure statement. Especially

singled out for criticism was the

required statement ‘‘YOU MAY BE

ABLE TO GET THESE SERVICES AT A

LOWER RATE BY SHOPPING WITH

OTHER SETTLEMENT SERVICE

PROVIDERS, AND THIS IS

SOMETHING YOU SHOULD

CONSIDER DOING.’’

A multi-service company in

Massachusetts called the quoted

sentence a ‘‘negative statement’’ that

would discourage consumers from using

an affiliated service. ‘‘If HUD is serious

about allowing diversified service

providers to compete, this statement

should be eliminated.’’ (Emphasis in

original.) Another commenter, a

Missouri attorney, objected in particular

to the last phrase, ‘‘* * * and this is

something you should consider doing.’’

* * * This phrase clearly denotes that

there are better services available, and that

the service which will be provided by the

referred settlement service would be

inadequate * * *. To suggest * * * that

buyers would be better off looking elsewhere,

is far beyond protection of the consumer and

actually is hinting to the consumer that there

is something inherently wrong with the

controlled business arrangement * * *.

(Emphasis in original.)

An Iowa realty company urged that

the statement be made more ‘‘provider

neutral,’’ and that all mortgage service

providers be called upon to provide

similarly worded disclosures regarding

the value of comparison shopping.

A Kansas lender complained that ‘‘No

other industry in this country is

required to urge its customers to seek

services elsewhere* * *.’’

A Chicago title guaranty company

expressed sympathy for the objectives of

the disclosure statement, but agreed that

the proposed rule’s version implied that

substandard service was being provided.

The following alternative statement was

offered:

There are many providers of settlement

services providing quality products at

competitive rates. You are encouraged to

shop around to ensure that you are receiving

the best quality product at the best rate

available for the same or similar services.

NAR’s comments echoed the concerns

of the above-quoted individual

commenters by asking for a ‘‘provider

neutral’’ statement and that all mortgage

settlement service providers be called

upon to provide similarly worded

statements, ‘‘thus preventing multiple

service * * * firms from being placed at

a relative disadvantage vis-a-vis other

mortgage service providers.’’

Several banker-commenters again

pressed the point that the required

disclosure statement was inappropriate

for the circumstances of banks and bank

holding companies. Because these

organizations commonly conduct their

residential mortgage lending activities

through mortgage company affiliates,

‘‘* * * the consumer that contacts the

bank * * * expects to be referred to the

bank’s mortgage lending operations,

whether that consists of a department of

the bank or an affiliate.’’

The American Bankers Association

objected to the elaborate disclosure

statement in the context of the kind of

incidental and uncompensated referrals
Federal Register / Vol. 61, No. 111 / Friday, June 7, 1996 / Rules and Regulations 29251

involved in the bank/affiliate mortgage

company operation. ‘‘It is sufficient

consumer protection,’’ ABA argued, ‘‘for

banks to indicate that there might be

services provided at a lower rate and not

to add a statement that such shopping

is recommended.’’

ABA and a few individual

commenters also protested the

requirement that the disclosure be

acknowledged in writing. A title

guaranty firm made the point that

documents are frequently mailed to

consumers to be signed and returned,

and that it is difficult to secure the

return of such documents, possibly

raising unnecessary doubts concerning

the validity of the disclosure actually

given. ABA raised several questions:

* * * [W]hat is the status of a bank’s

compliance with the acknowledgment and

signature requirement if only the applicant

and not the co-applicant signs the

acknowledgment?

What efforts does the bank have to expend

in order to obtain the co-applicant’s

signature?

Should not the applicant’s

acknowledgement be sufficient for

compliance purposes?

The process of obtaining these

signatures, ABA concluded, ‘‘creates

compliance burdens for banks while

providing negligible benefits to

consumers.’’

2. The Final Rule’s Approach

After review of all comments, the

Department retains the requirement of

the applicants’ acknowledgement. In

addition to focusing the attention of the

applicant on the document, the

acknowledgement also protects the

lender from charges that it had failed to

inform the prospective borrower of the

controlled business arrangement. In

response to comments, only one

signature is now required.

The Department has not adopted the

NAR’s suggestion that HUD require all

settlement service providers to provide

a statement encouraging consumers to

shop around. The statute requires such

a statement in the context of controlled

businesses, but has no such requirement

for any other situation. This rule only

requires the disclosure in the context of

controlled business arrangements.

Also, the Department reformulates the

discussion of the desirability of

borrowers shopping for settlement

services. In response to criticism that

the proposed language intimated that

the services offered by the disclosing

servicer might be substandard or

overpriced, the Department adopts more

neutral wording that continues to

inform consumers of their freedom to

seek the most advantageous rates or

services in a competitive market. The

Department remains committed to the

policy that ample disclosure, a

preeminent principle of the RESPA

statute, is a valuable means of informing

consumers and promoting competition

in the settlement services industry.

The new formulation for the CBA

disclosure is set forth in Appendix D. It

now reads:

You are NOT required to use [provider] as

a condition for [settlement of your loan on]

[or] [purchase, sale, or refinance of] the

subject property. THERE ARE FREQUENTLY

OTHER SETTLEMENT SERVICE

PROVIDERS AVAILABLE WITH SIMILAR

SERVICES. YOU ARE FREE TO SHOP

AROUND TO DETERMINE THAT YOU ARE

RECEIVING THE BEST SERVICES AND THE

BEST RATE FOR THESE SERVICES.

E. Other Matters Raised by Commenters

1. The Public Comments

In addition to the specific comments

received in response to the

Department’s request, some commenters

raised concerns that some employers

were engaging in practices of retaliation

or discrimination against employees and

agents for not referring business to

affiliate entities. Other commenters

complained that settlement service

providers were being excluded from, or

locked-out of, places of business where

they might find potential customers.

They also alleged that high-priced real

estate office space arrangements with

particular lenders, frequently coupled

with lock-out arrangements, raised

RESPA concerns.

2. The Final Rule’s Approach

The Department determined that

these issues were distinct from those

raised by the proposed rule. Moreover,

they do not require rulemaking, but

rather an interpretation, applied to

specific circumstances, of the statute

and the implementing regulations.

Therefore, HUD is issuing a separate

Statement of Policy on the issues of

retaliation, lock-outs, and appropriate

office rents to provide the guidance

sought by so many commenters. That

Statement of Policy is being published

in today’s Federal Register,

simultaneously with the publication of

this final rule.

Other Matters

Environmental Impact

A finding of no significant impact

with respect to the environment has

been made in accordance with HUD

regulations in 24 CFR part 50 that

implement section 102(2)(C) of the

National Environmental Policy Act of

1969 (42 U.S.C. 4332). The finding is

available for public inspection during

regular business hours in the Office of

General Counsel, the Rules Docket

Clerk, room 10276, 451 Seventh Street,

SW, Washington, DC 20410.

Executive Order 12866

This final rule was reviewed by the

Office of Management and Budget under

Executive Order 12866, Regulatory

Planning and Review. Any changes

made to the rule as a result of that

review are clearly identified in the

docket file, which is available for public

inspection at the Office of the Rules

Docket Clerk, Office of General Counsel,

Room 10276, Department of Housing

and Urban Development, 451 Seventh

Street, SW, Washington, D.C. 20410–

0500. An Economic Analysis (EA)

performed on this proposed rule is also

available for review at the same address.

Regulatory Flexibility Act

The Secretary, in accordance with the

Regulatory Flexibility Act (5 U.S.C.

605(b)), has reviewed this rule before

publication and by approving it certifies

that this rule does not have a significant

economic impact on a substantial

number of small entities, other than

those impacts specifically required to be

applied universally by the RESPA

statute. An Economic Analysis prepared

in connection with this rule considers

the impact on small entities.

Executive Order 12612, Federalism

The General Counsel, as the

Designated Official under section 6(a) of

Executive Order 12612, Federalism, has

determined that the policies contained

in this final rule will not have

substantial direct effects on States or

their political subdivisions, or the

relationship between the Federal

government and the States, or on the

distribution of power and

responsibilities among the various

levels of government. As a result, the

rule is not subject to review under the

Order. Promulgation of this rule

expands coverage of the applicable

regulatory requirements pursuant to

statutory direction.

Executive Order 12606, the Family

The General Counsel, as the

Designated Official under Executive

Order 12606, The Family, has

determined that this final rule does not

have potential for significant impact on

family formation, maintenance, and

general well-being, and, thus, is not

subject to review under the order. No

significant change in existing HUD

policies or programs will result from

promulgation of this rule, as those

policies and programs relate to family

concerns.
29252 Federal Register / Vol. 61, No. 111 / Friday, June 7, 1996 / Rules and Regulations

List of Subjects in 24 CFR Part 3500

Consumer protection, Condominiums,

Housing, Mortgages, Mortgage servicing,

Reporting and recordkeeping

requirements.

Accordingly, for the reasons set out in

the preamble, part 3500 of title 24 of the

Code of Federal Regulations is amended

as follows.

PART 3500—REAL ESTATE

SETTLEMENT PROCEDURES ACT

1. The authority citation for shall

continue to read as follows:

Authority: 12 U.S.C. 2601 et seq.

2. Section 3500.2(b) is amended by

adding, in alphabetical order, a

definition of ‘‘managerial employee’’, to

read as follows:

§ 3500.2 Definitions.

* * * * *

(b) * * *

Managerial employee means an

employee of a settlement service

provider who does not routinely deal

directly with consumers, and who either

hires, directs, assigns, promotes, or

rewards other employees or

independent contractors, or is in a

position to formulate, determine, or

influence the policies of the employer.

Neither the term ‘‘managerial

employee’’ nor the term ‘‘employee’’

includes independent contractors, but a

managerial employee may hold a real

estate brokerage or agency license.

* * * * *

3. Section 3500.8(c)(2) is amended in

the fourth sentence by removing the

reference ‘‘Appendix F’’ and adding in

its place the reference ‘‘Appendix E’’.

4. Section 3500.14 is amended by

revising the last sentence of paragraph

(b), the heading of paragraph (g), and

paragraph (g)(1), to read as follows:

§ 3500.14 Prohibition against kickbacks

and unearned fees.

* * * * *

(b) * * * A business entity (whether

or not in an affiliate relationship) may

not pay any other business entity or the

employees of any other business entity

for the referral of settlement service

business.

* * * * *

(g) Exemptions for fees, salaries,

compensation, or other payments.

(1) The following are permissible:

(i) A payment to an attorney at law for

services actually rendered;

(ii) A payment by a title company to

its duly appointed agent for services

actually performed in the issuance of a

policy of title insurance;

(iii) A payment by a lender to its duly

appointed agent or contractor for

services actually performed in the

origination, processing, or funding of a

loan;

(iv) 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;

(v) A payment pursuant to

cooperative brokerage and referral

arrangements or agreements between

real estate agents and real estate brokers.

(The statutory exemption restated in

this paragraph refers only to fee

divisions within real estate brokerage

arrangements when all parties are acting

in a real estate brokerage capacity, and

has no applicability to any fee

arrangements between real estate

brokers and mortgage brokers or

between mortgage brokers.)

(vi) Normal promotional and

educational activities that are not

conditioned on the referral of business

and do not involve the defraying of

expenses that otherwise would be

incurred by persons in a position to

refer settlement services or business

incident thereto;

(vii) A payment by an employer to its

own bona fide employee for generating

business for that employer;

(viii) In a controlled business

arrangement, a payment by an employer

of a bonus to a managerial employee

based on criteria relating to performance

(such as profitability, capture rate, or

other thresholds) of a business entity in

the controlled business arrangement.

However, the amount of such bonus

may not be calculated as a multiple of

the number or value of referrals of

settlement service business to a business

entity in a controlled business

arrangement; and

(ix)(A) A payment by an employer to

its bona fide employee for the referral of

settlement service business to a

settlement service provider that has an

affiliate relationship with the employer

or in which the employer has a direct

or beneficial ownership interest of more

than 1 percent, if the following

conditions are met:

(1) The employee does not perform

settlement services in any transaction;

and

(2) Before the referral, the employee

provides to the person being referred a

written disclosure in the format of the

Controlled Business Arrangement

Disclosure Statement, set forth in

Appendix D to this part.

(B) For purposes of this paragraph

(g)(1)(ix), the marketing of a settlement

service or product of an affiliated entity,

including the collection and conveyance

of information or the taking of an

application or order for an affiliated

entity, does not constitute the

performance of a settlement service.

Under this paragraph (g)(1)(ix),

marketing of a settlement service or

product may include incidental

communications with the consumer

after the application or order, such as

providing the consumer with

information about the status of an

application or order; marketing shall not

include serving as the ongoing point of

contact for coordinating the delivery

and provision of settlement services.

* * * * *

5. Section 3500.15 is amended by

revising the introductory text of

paragraph (b)(1), to read as follows:

§ 3500.15 Controlled business

arrangements.

* * * * *

(b) * * *

(1) Prior to the referral, the person

making a referral has provided to each

person whose business is referred a

written disclosure, in the format of the

Controlled Business Arrangement

Disclosure Statement set forth in

Appendix D of this part. This disclosure

shall specify the nature of the

relationship (explaining the ownership

and financial interest) between the

person performing settlement services

(or business incident thereto) and the

person making the referral, and shall

describe the estimated charge or range

of charges (using the same terminology,

as far as practical, as Section L of the

HUD–1 or HUD–1A settlement

statement) generally made by the

provider of settlement services. The

disclosure must be provided on a

separate piece of paper no later than the

time of each referral or, if the lender

requires the use of a particular provider,

the time of loan application, except that:

* * * * *

§ 350017 [Amended]

6. Section 3500.17 is amended as

follows:

a. In paragraph (b), in the definitions

of ‘‘Aggregate (or) composite analysis’’

and ‘‘Single-item analysis’’, by removing

the reference ‘‘Appendix F’’ in the last

sentence of each definition and adding

in its place the reference ‘‘Appendix E’’.

b. In paragraph (c)(1)(i), in the second

sentence, by removing the reference

‘‘Appendix F’’ and adding in its place

the reference ‘‘Appendix E’’.

c. In paragraph (d)(1)(ii), in the last

sentence, by removing the reference

‘‘Appendix F’’ and adding in its place

the reference ‘‘Appendix E’’.

7. Appendix B is amended by revising

Illustration 11, redesignating

Illustrations 12 and 13 as Illustrations
Federal Register / Vol. 61, No. 111 / Friday, June 7, 1996 / Rules and Regulations 29253

13 and 14 respectively, and adding a

new Illustration 12, to read as follows:

Appendix B to Part 3500—Illustrations

of Requirements of RESPA

* * * * *

11. Facts: A, a mortgage lender, is affiliated

with B, a title company, and C, an escrow

company, and offers consumers a package of

mortgage, title, and escrow services at a

discount from the prices at which such

services would be sold if purchased

separately. A, B, and C are subsidiaries of H,

a holding company, which also controls a

retail stock brokerage firm, D. None of A, B,

or C requires consumers to purchase the

services of its sister companies, and each

company sells such services separately and

as part of the package. A also pays an

employee T, a full-time bank teller who does

not perform settlement services, a bonus for

each loan, title insurance binder, or closing

that T generates for A, B, or C. A pays T these

bonuses out of A’s own funds and receives

no reimbursements for these bonuses from B,

C, or H. At the time that T refers customers

to B and C, T provides the customers with

a disclosure using the controlled business

arrangement disclosure format. Also, Z, a

stockbroker employee of D, occasionally

refers her customers to A, B, or C; gives a

statement in the controlled business

disclosure format; and receives a payment

from D for each referral.

Comments: Selling a package of settlement

services at a discount is not prohibited by

RESPA, consistent with the definition of

‘‘required use’’ in 24 CFR 3500.2. Also, A is

always allowed to compensate its own

employees for business generated for A’s

company. Here, A may also compensate T, an

employee who does not perform settlement

services in this or any transaction, for

referring business to a business entity in an

affiliate relationship with A. Z, who does not

perform settlement services in this or any

transaction, can also be compensated by D,

but not by anyone else. Employees who

perform settlement services cannot be

compensated for referrals to other settlement

service providers. None of the entities in an

affiliated relationship with each other may

pay for referrals received from an affiliate’s

employees. Sections 3500.15(b)(3)(i)(A) and

(B) set forth the permissible exchanges of

funds between controlled business entities.

In all circumstances described a statement in

the controlled business disclosure format

must be provided to a potential consumer at

or before the time that the referral is made.

12. Facts: A, a real estate broker, is

affiliated with B, a mortgage lender, and C,

a title agency. A employs F to advise and

assist any customers of A who have executed

sales contracts regarding mortgage loans and

title insurance. F collects and transmits (by

computer, fax, mail, or other means) loan

applications or other information to B and C

for processing. A pays F a small salary and

a bonus for every loan closed with B or title

insurance issued with C. F furnishes the

controlled business disclosure to consumers

at the time of each referral. F receives no

other compensation from the real estate or

mortgage transaction and performs no

settlement services in any transaction. At the

end of each of A’s fiscal years, M, a

managerial employee of A, receives a $1,000

bonus if 20% of the consumers who purchase

a home through A close a loan on the home

with B and have the title issued by C. During

the year, M acted as a real estate agent for his

neighbor and received a real estate sales

commission for selling his neighbor’s home.

Comments: Under § 3500.14(g)(1),

employers may pay their own bona fide

employees for generating business for their

employer (§ 3500.14(g)(1)(vii)). Employers

may also pay their own bona fide employees

for generating business for their affiliate

business entities (§ 3500.14(g)(1)(ix)), as long

as the employees do not perform settlement

services in any transaction and disclosure is

made. This permits a company to employ a

person whose primary function is to market

the employer’s or its affiliate’s settlement

services (frequently referred to as a Financial

Services Representative, or ‘‘FSR’’). An FSR

may not perform any settlement services

including, for example, those services of a

real estate agent, loan processor, settlement

agent, attorney, or mortgage broker. In

accordance with the terms of the exemption

at § 3500.14(g)(1)(ix), the marketing of a

settlement service or product of an affiliated

entity, including the collection and

conveyance of information or the taking of an

application or order for the services of an

affiliated entity, does not constitute the

performance of a settlement service. Under

the exemption, marketing of a settlement

service or product also may include

incidental communications with the

consumer after the application or order, such

as providing the consumer with information

about the status of an application or order;

marketing may not include serving as the

ongoing point of contact for coordinating the

delivery and provision of settlement services.

Thus, in the circumstances described, F

and M may receive the additional

compensation without violating RESPA.

Also, employers may pay managerial

employees compensation in the form of

bonuses based on a percentage of

transactions completed by an affiliated

company (frequently called a ‘‘capture rate’’),

as long as the payment is not directly

calculated as a multiple of the number or

value of the referrals. 24 CFR

3500.14(g)(1)(viii). A managerial employee

who receives compensation for performing

settlement services in three or fewer

transactions in any calendar year ‘‘does not

routinely’’ deal directly with the consumer

and is not precluded from receiving

managerial compensation.

* * * * *

8. Appendix D is revised to read as

follows:

BILLING CODE 4210–27–P
29254 Federal Register / Vol. 61, No. 111 / Friday, June 7, 1996 / Rules and Regulations

BILLING CODE 4210–27–C
Federal Register / Vol. 61, No. 111 / Friday, June 7, 1996 / Rules and Regulations 29255

9. Appendix E is removed and

Appendix F is redesignated as

Appendix E.

Dated: May 31, 1996.

Nicolas P. Retsinas,

Assistant Secretary for Housing-Federal

Housing Commissioner.

[FR Doc. 96–14329 Filed 6–6–96; 8:45 am]

BILLING CODE 4210–27–P

24 CFR Part 3500

[Docket No. FR–3638–N–03]

Office of the Assistant Secretary for

Housing-Federal Housing

Commissioner; Real Estate Settlement

Procedures Act (RESPA); Statement of

Policy 1996–1, Regarding Computer

Loan Origination Systems (CLOs)

AGENCY: Office of the Assistant

Secretary for Housing-Federal Housing

Commissioner, HUD.

ACTION: Statement of Policy 1996–1:

Computer Loan Origination Systems

(CLOs).

SUMMARY: This Statement of Policy sets

forth the Department’s interpretation of

Section 8 of the Real Estate Settlement

Procedures Act (RESPA) and its

implementing regulations with regard to

the applicability of RESPA to payments

for services from certain computer

systems, frequently called CLOs, used

by settlement service providers in

connection with the origination of

mortgage loans or the provision of other

settlement services covered by RESPA.

This statement explains the statutory

and regulatory framework for HUD’s

treatment of payments to CLOs.

In reading this policy statement, the

reader should be aware that HUD’s

RESPA rule was recently streamlined

through a separate rulemaking. 61 FR

13232 (Mar. 26, 1996). This streamlining

caused several provisions of the RESPA

rule to be renumbered. Except as is

otherwise indicated in the context of the

policy statement, this policy statement

refers to provisions by their current

section number, incorporating all

revisions to date as a result of the

streamlining and today’s rulemaking,

published elsewhere in the Federal

Register.

FOR FURTHER INFORMATION CONTACT:

David Williamson, Director, Office of

Consumer and Regulatory Affairs, Room

5241, telephone (202) 708–4560; or, for

legal questions, Kenneth Markison,

Assistant General Counsel for GSE/

RESPA, or Grant E. Mitchell, Senior

Attorney for RESPA, Room 9262,

telephone (202) 708–1550. (The

telephone numbers are not toll-free.) For

hearing- and speech-impaired persons,

this number may be accessed via TTY

(text telephone) by calling the Federal

Information Relay Service at 1–800–

877–8339. The address for the abovelisted persons is: Department of Housing

and Urban Development, 451 Seventh

Street, SW, Washington, DC 20410.

SUPPLEMENTARY INFORMATION:

Individuals and firms have developed

and are developing various systems that

employ computer technology to assist

consumers in finding a lender, selecting

a mortgage product, originating a

mortgage, or choosing among other

settlement service providers and

products. These systems are sometimes

called computer loan origination

systems (hereafter ‘‘CLOs’’), although

other terminology may be used, such as

computer loan information systems.

These systems differ in the way they

interact with consumers, in the way

they collect and display information on

mortgage options, in the range of

choices of products and services they

provide to consumers, and in the extent

to which they share work with other

providers in the settlement service

process. HUD expects product diversity

to increase as technology evolves and

new telecommunication options become

available.

The following exemption was set

forth in the November 2, 1992 final rule,

effective December 2, 1992: Section 8 of

RESPA does not prohibit * * * any

payment by a borrower for computer

loan origination services, so long as the

disclosure set forth in Appendix E of

this part is provided to the borrower. 24

CFR 3500.14(g)(2)(iii).

This exemption from Section 8 was

for ‘‘any payment by a borrower for

computer loan origination services,’’ as

long as certain disclosures were

provided. This rule did not address

payments made by lenders, thus leaving

such payments subject to Section 8

scrutiny. Although the term ‘‘CLO

exemption’’ is frequently used,

including in the preamble of the 1992

final rule, the exemption was not for the

CLO itself, but only for payments made

for CLO services by borrowers. The 1992

final rule did not speak to other issues;

notably it did not define a CLO or

explain how RESPA applies to

payments by lenders to CLOs for CLO

services. The November 2, 1992 rule

also withdrew all previous informal

legal opinions, including those stating

the Department’s views on various CLO

issues.

In response to numerous expressions

of concern about the new exemption

and other aspects of the revised

regulations, HUD requested public

comments in a Federal Register Notice

on July 6, 1993, and held public

hearings on August 6, 1993.

On July 21, 1994, HUD issued

proposed regulations that would repeal

the general CLO exemption for borrower

payments and, in its place, establish an

exemption for borrower payments to

certain ‘‘qualified CLOs’’, that is, CLOs

having characteristics that HUD

considered beneficial to consumers. The

proposed exemption would apply only

to payments by borrowers, but HUD did

solicit public comments on whether to

provide a similar exemption for

payments by lenders to qualified CLOs.

Under the proposed rule, payments by

borrowers to CLO systems that did not

qualify for the exemption were subject

to scrutiny under section 8 of RESPA.

HUD also invited those with active

CLOs or those developing CLOs to

demonstrate their systems at a

Technology Demonstration Fair on

September 30, 1994. Twenty-one CLO

operators accepted the invitation and

participated in this all-day

demonstration in Washington, D.C.

The public comments in response to

the proposed rule raised a number of

specific questions about the proposed

exemption for payments to qualified

CLOs, and generally displayed

skepticism or uncertainty about the

usefulness of the proposal. Concerned

that the comments did not adequately

address all the issues, HUD held two

informal meetings with industry and

consumer groups to seek additional

individual input on the likely future

development of CLOs. These meetings

were held on August 11, 1995, and

September 21, 1995. While HUD learned

many things from the public comments

and the meetings with industry and

consumer groups, one message seemed

to predominate. All parties wanted

clearer guidance from HUD on how

RESPA’s disclosure and anti-kickback

provisions apply to borrower and lender

payments for CLO services.

Both the 1992 and the proposed 1994

exemptions for borrower payments to

CLOs were offered because of concern

that uncertainty about how RESPA

applied to payments to CLOs might be

impeding the development or use of

potentially beneficial technology.

However, by limiting the exemptions to

borrower payments, in both cases, HUD

did not address the primary issue of

how RESPA’s anti-kickback provisions

applied to lender payments to CLOs.

Many participants in the informal

meetings urged that it was impossible to