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
29256 Federal Register / Vol. 61, No. 111 / Friday, June 7, 1996 / Rules and Regulations

create a useful safe harbor or exemption

for ‘‘qualified CLOs’’, because changes

in technology and in its use in the

market would repeatedly make that safe

harbor obsolete. CLO service providers

would take their chances of running

afoul of RESPA, rather than develop

systems to meet the ‘‘qualified CLO’’

criteria. More helpful, many

participants argued, would be if HUD

explained clearly how RESPA’s antikickback prohibitions and disclosure

requirements applied to various sorts of

CLO payments.

After considering the public

comments and informal meetings, HUD

has decided: (1) To eliminate the

exemption for borrower payments to

CLOs and the associated disclosure; (2)

to abandon the idea of establishing a

similar or broader exemption for

qualified CLOs; and (3) to issue this

policy statement to help those

developing and using CLOs to

understand better how RESPA applies

to their activities.

HUD does not think it is useful to

continue a modest exemption or to

develop a separate and elaborate

regulatory structure for a still emerging

industry. However, clarification of

certain matters in the form of a policy

statement would be useful to the

industry and consumers. The effect of

this action is to subject payments to

CLOs to the same RESPA provisions as

payments for any other service;

however, HUD is providing specific

guidance on how HUD will apply these

provisions in the CLO context.

Today HUD is simultaneously issuing

a revision to the 1992 rule. The

preamble to this new final rule contains

a fuller discussion of the decisionmaking process leading from the

November 2, 1992 rule to the

withdrawal of the exemption and the

issuance of this guidance.

To the extent this guidance interprets

rules that become effective 120 days

from the date of this publication, then

this guidance will be applicable as of

the effective date of such rules.

Statement of Policy—1996–1

To give guidance to interested

members of the public on the

application of RESPA and its

implementing regulations to these

issues, the Secretary, pursuant to

Section 19(a) of RESPA (12 U.S.C.

2617(a)) and 24 CFR 3500.4(a)(1)(ii),

hereby issues the following statement of

policy.

For purposes of this statement of

policy, a CLO is a computer system that

is used by or on behalf of a consumer

to facilitate a consumer’s choice among

alternative products or settlement

service providers in connection with a

particular RESPA-covered real estate

transaction. Such a computer system: (1)

may provide information concerning

products or services; (2) may pre-qualify

a prospective borrower; (3) may provide

consumers with an opportunity to select

ancillary settlement services; (4) may

provide prospective borrowers with

information regarding the rates and

terms of loan products for a particular

property in order for the borrower to

choose a loan product; (5) may collect

and transmit information concerning the

borrower, the property, and other

information on a mortgage loan

application for evaluation by a lender or

lenders; (6) may provide loan

origination, processing, and

underwriting services, including but not

limited to, the taking of loan

applications, obtaining verifications and

appraisals, and communicating with the

borrower and lender; and (7) may make

a funding decision.

This definition is not meant to be

restrictive or exhaustive; it merely

attempts to describe existing practices of

service providers. With the use of

technology evolving so rapidly,

however, it is difficult for the

Department to provide guidance on

future unspecified practices in the

abstract.

This statement of policy provides

guidance on how RESPA applies to

service providers and interprets existing

law. It does not add any new restrictions

on business practices.

Section 3 of RESPA defines

‘‘settlement services’’ to include:

[A]ny service provided in connection with

a real estate settlement including, but not

limited to * * * the origination of a federally

related mortgage loan (including, but not

limited to, the taking of loan applications,

loan processing, and the underwriting and

funding of loans), and the handling of the

processing, and closing or settlement. 12

U.S.C. 2602(3).

The regulations define a ‘‘settlement

service’’ to mean ‘‘any service provided

in connection with a prospective or

actual settlement.’’ 24 CFR 3500.2. This

definition specifically includes the

providing of any services related to the

origination, processing, or funding of a

federally-related mortgage loan. 24 CFR

3500.2. To the extent that a CLO

performs ‘‘settlement services’’, it is a

settlement service provider. Conversely,

if a CLO does not perform settlement

services, it is not a settlement service

provider.

NOTHING IN THIS POLICY

STATEMENT SHOULD BE READ AS A

HUD ENDORSEMENT OF ANY

CHARGE TO CONSUMERS OR AS A

REQUIREMENT FOR ANY CHARGE TO

CONSUMERS.

1. Payments by Consumers to CLOs

CLOs that provide services to

consumers may charge consumers for

services performed. 12 U.S.C.

2607(c)(2). RESPA requires that all

charges for settlement services be

reported on the Good Faith Estimate and

the HUD–1 or HUD–1A; however, the

regulations do not address the exact

timing of the payment. 12 U.S.C. 2603(a)

and 2604(c). Similarly, any payment for

CLO services that is paid outside of

closing must be so identified on the

HUD–1 or HUD–1A settlement

statement. 24 CFR 3500, App. A,

General Instructions. In addition,

settlement service providers whose

products are made available on CLOs

may reimburse consumers for any fee

charged them by the CLO.

2. Payments by Settlement Service

Providers to CLOs

Section 8(a) of RESPA prohibits

payments for the referral of a consumer

to a settlement service provider;

however, Section 8(c)(2) permits

payments for goods or facilities actually

furnished or for services actually

performed. 12 U.S.C. 2607(c)(2).

The definition used in this policy

statement encompasses various types of

CLOs. Regardless of the type of CLO,

compensable goods, facilities, or

services must be provided by the CLO

in return for payments by settlement

service providers. Any such payment

must bear a reasonable relationship to

the value of the goods, facilities, or

services provided. 24 CFR 3500.14(g)(2).

A charge for which no or nominal

services are performed or for which

duplicative fees are charged is an

unearned fee. 24 CFR 3500.14(c). For

example, if a CLO lists only one

settlement service provider and only

presents basic information to the

consumer on the provider’s products,

then there would appear to be no or

nominal compensable services provided

by the CLO to either the settlement

service provider or the consumer, only

a referral; and any payment by the

settlement service provider for the CLO

listing could be considered a referral fee

in violation of section 8 of RESPA. Note,

however, that a new provision of HUD’s

RESPA rules at 24 CFR 3500.14(g)(1)(ix),

discussed at Section 4 below, allows

employees who do not perform

settlement services to market settlement

services or products of an affiliated

entity and to receive employer

payments for these referrals. A company

may not pay any other company for the
Federal Register / Vol. 61, No. 111 / Friday, June 7, 1996 / Rules and Regulations 29257

1 Depending upon the circumstances of the

referrals and the design of the CLO system, this

steering of consumers may violate the Fair Housing

Act, as may selective marketing of CLO systems.

referral of settlement service business.

24 CFR 3500.14(b).

RESPA places no restrictions on the

pricing structure of CLOs as long as the

payments are not referral fees and are

reasonably related to the value of the

services provided. However, the value

of a referral is not to be taken into

account in determining whether the

payment exceeds the reasonable value

of the goods, facilities, or services. 24

CFR 3500.14(g)(2). If these requirements

are met, CLOs may charge settlement

service providers a fixed or periodic fee

or a fee for each closed transaction

arising from the use of the CLO.

However, if a CLO charges different fees

to different settlement service providers

in similar situations, an incentive may

exist for the CLO to steer the consumer

to the settlement service provider

paying the highest fees. HUD may

scrutinize these circumstances to

determine if the differentials constitute

referral fees.1

Settlement service providers may pay

CLOs a reasonable fee for services

provided by the CLO to the settlement

service provider, such as, having

information about the provider’s

products made available to consumers

for comparison with the products of

other settlement service providers. If a

CLO elects to act as a mortgage broker,

as that term is defined in 24 CFR 3500.2,

then all RESPA rules related to

compensation of mortgage brokerage

services apply to the CLO. On December

13, 1995, HUD convened a negotiated

rulemaking that could result in changes

to these RESPA rules. CLOs should

review carefully any changes in the

regulations applicable to mortgage

brokers and others that result from this

rulemaking.

3. CLOs in a Controlled Business

Context

When a CLO is used in a controlled

business arrangement, the RESPA

regulations relating to controlled

business arrangements apply. Section

3(7) of RESPA (12 U.S.C. 2602(7))

defines a controlled business

arrangement in terms of an affiliate

relationship or a direct or beneficial

ownership. The regulations provide

definitions of affiliate relationship,

beneficial ownership, and direct

ownership. 24 CFR 3500.15(c). Separate

entities are a necessary component of

the controlled business arrangement

definitions. For example, if a real estate

brokerage firm uses a CLO within its

own business structure and there is no

separate affiliated business entity

involved, then the CLO is not being

used in a controlled business

arrangement with the real estate

brokerage firm.

A controlled business arrangement

does not violate RESPA if three

conditions are met. 12 U.S.C.

2607(c)(4)(A)–(C). Section 3500.15(b) of

the regulations elaborates on the three

requirements. First, when consumers

are referred from one business entity to

an affiliated business entity, a written

disclosure of the affiliate relationship

must be provided. For example, if a real

estate firm has an affiliate relationship

with a company providing CLO services

and an agent of the real estate firm refers

a customer to the CLO company, then

the real estate agent must provide the

required disclosure to the customer at

the time of the referral. Similarly, if the

CLO company has an affiliate

relationship with one of the settlement

service providers listed on the CLO,

then the CLO operator must provide the

customer with the required disclosure

before the consumer uses the CLO.

Second there can be no required use,

i.e., the referring entity cannot require

the consumer to use the CLO and the

CLO cannot require the consumer to use

an affiliated company listed on the CLO.

Thirdly, the only thing of value that is

received by one business entity from

other business entities in the controlled

business arrangement, other than

payments permitted under 24 CFR

3500.14(g) for services actually

performed, is a return on an ownership

interest or franchise relationship.

4. Payments of Commissions or Bonuses

to Employees

CLOs are subject to the same RESPA

provisions regarding employee

compensation as any service provider.

For example, a settlement service

provider listed on the CLO may not pay

a CLO employee a referral fee or

commission if the consumer selects that

settlement service provider. 24 CFR

3500.14(b). Employees of a CLO may

receive a bona fide salary or

compensation from the CLO—their

employer. 24 CFR 3500.14(g)(1)(iv).

Compensation from CLOs to their

employees may include commissions

for transactions closed on the system. 24

CFR 3500.14(g)(1)(vii). However, if a

CLO pays commissions for transactions

closed with some settlement service

providers but not for transactions closed

with other settlement service providers,

HUD may scrutinize these payments to

determine if the commissions constitute

referral fees or are exempt under other

provisions (see below).

HUD established two new exemptions

related to compensation of employees in

a final rule published today and

effective 120 days from their

publication. The first exemption (24

CFR 3500.14(g)(1)(viii)) allows an

employer to pay managerial employees

who do not routinely deal with the

public bonuses related to the referral of

settlement service business to a business

entity in a controlled business

arrangement. The CLO employee who

routinely deals with customers is not

considered a managerial employee

within the meaning of 24 CFR 3500.2.

A CLO may have managerial employees

within the meaning of 24 CFR 3500.2,

such as a district manager who oversees

several CLO operators who work in

different locations. Such a managerial

employee may receive bonuses based on

criteria related to the performance of a

business entity in an affiliate

relationship, such as profitability,

capture rate, or other thresholds.

However, the amount of such bonus

may not be calculated as a multiple of

the number or value of referrals of

settlement services business to a

business entity in a controlled business

arrangement. 24 CFR 3500.14(g)(1)(viii).

The second exemption (24 CFR

3500.14(g)(1)(ix)) allows employer

payments to their own bona fide

employees for referrals of business to

affiliated entities if the employee does

not perform settlement services in any

transaction and provides the consumer

with a written disclosure in the format

of the Controlled Business Arrangement

Disclosure Statement. Employer

payments to a CLO employee who does

not perform settlement services may

qualify for this exemption. This

exemption permits employer payments

to employees who do not perform

settlement services for referrals to

affiliates. Under this exemption, the

employee may market a settlement

service or product of an affiliated entity,

including collecting and conveying

information and taking an application or

order for the services of an affiliated

entity. Marketing 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.

Under the exemption, a CLO employee

who takes an application and collects

information for an affiliate but performs

no other settlement services, may

receive a payment from his or her
29258 Federal Register / Vol. 61, No. 111 / Friday, June 7, 1996 / Rules and Regulations

1All citations in this Statement of Policy refer to

recently streamlined regulations published on

March 26, 1996 (61 FR 13232), in the Federal

Register (to be codified at 24 CFR part 3500).

employer for a referral to an affiliated

entity.

5. Neutral Display of Information on

Settlement Service Providers and Their

Products

Section 8(a) of RESPA prohibits

compensated referrals. HUD may

scrutinize non-neutral displays of

information on settlement service

providers and their products because

favoring one settlement service provider

over others may be affirmatively

influencing the selection of a settlement

service provider which could constitute

a referral under RESPA. 24 CFR

3500.14(f). An agreement or

understanding for the referral of

business incident to or part of a

settlement service may be established by

a practice, pattern, or course of conduct.

24 CFR 3500.14(e). For example, if one

lender always appears at the top of any

listing of mortgage products and there is

no real difference in interest rates and

charges between the products of that

lender and other lenders on a particular

listing, then this may be a non-neutral

presentation of information which

affirmatively influences the selection of

a settlement service provider.

Furthermore, if there is an affiliate

relationship between the CLO and a

favored settlement service provider, the

non-neutral presentation of information

under certain circumstances could

constitute a required use in violation of

3500.15(b)(2). This guidance on neutral

displays should not be read to

discourage CLOs from assisting

consumers in determining which

products are most advantageous to

them. For example, if a CLO

consistently ranks lenders and their

mortgage products on the basis of some

factor relevant to the borrower’s choice

of product, such as APR calculated to

include all charges and to account for

the expected tenure of the buyer, HUD

would consider this practice as a neutral

display of information.

Authority: 12 U.S.C. 2617; 42 U.S.C.

3535(d).

Dated: May 31, 1996.

Nicolas P. Retsinas,

Assistant Secretary for Housing-Federal

Housing Commissioner.

[FR Doc. 96–14330 Filed 6–6–96; 8:45 am]

BILLING CODE 4210–27–P

24 CFR Part 3500

[Docket No. FR–3638–N–04]

Office of the Assistant Secretary for

Housing-Federal Housing

Commissioner; Real Estate Settlement

Procedures Act (RESPA); Statement of

Policy 1996–2 Regarding Sham

Controlled Business Arrangements

AGENCY: Office of the Assistant

Secretary for Housing-Federal Housing

Commissioner, HUD.

ACTION: Statement of policy 1996–2,

sham controlled business arrangements.

SUMMARY: This statement sets forth the

factors that the Department uses to

determine whether a controlled

business arrangement is a sham under

the Real Estate Settlement Procedures

Act (RESPA) or whether it constitutes a

bona fide provider of settlement

services. It provides an interpretation of

the legislative and regulatory framework

for HUD’s enforcement practices

involving sham arrangements that do

not come within the definition of and

exception for controlled business

arrangements under Sections 3(7) and

8(c)(4) of the Real Estate Settlement

Procedures Act (RESPA). It is published

to give guidance and to inform

interested members of the public of the

Department’s interpretation of this

section of the law.

FOR FURTHER INFORMATION CONTACT:

David Williamson, Director, Office of

Consumer and Regulatory Affairs, Room

5241, telephone (202) 708–4560. For

legal enforcement questions, Rebecca J.

Holtz, Attorney, Room 9253, telephone:

(202) 708–4184. (The telephone

numbers are not toll-free.) For hearingand 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:

General Background

Section 8 (a) of the Real Estate

Settlement Procedures Act (RESPA)

prohibits any person from giving or

accepting any fee, kickback, or thing of

value for the referral of settlement

service business involving a federally

related mortgage loan. 12 U.S.C.

§ 2607(a). Congress specifically stated it

intended to eliminate kickbacks and

referral fees that tend to increase

unnecessarily the costs of settlement

services. 12 U.S.C. § 2601(b)(2).

After RESPA’s passage, the

Department received many questions

asking if referrals between affiliated

settlement service providers violated

RESPA. Congress held hearings in 1981.

In 1983, Congress amended RESPA to

permit controlled business

arrangements (CBAs) under certain

conditions, while retaining the general

prohibitions against the giving and

taking of referral fees. Congress defined

the term ‘‘controlled business

arrangement’’ to mean an arrangement:

[I]n which (A) a person who is in a

position to refer business incident to or a part

of a real estate settlement service involving

a federally related mortgage loan, or an

associate of such person, has either an

affiliate relationship with or a direct or

beneficial ownership interest of more than 1

percent in a provider of settlement services;

and (B) either of such persons directly or

indirectly refers such business to that

provider or affirmatively influences the

selection of that provider.

12 U.S.C. 2602(7) (emphasis added).

In November 1992, HUD issued its

first regulation covering controlled

business arrangements, 57 FR 49599

(Nov. 2, 1992), codified at 24 CFR

3500.15. 1 That rule provided that a

controlled business arrangement was

not a violation of Section 8 and allowed

referrals of business to an affiliated

settlement service provider so long as:

(1) The consumer receives a written

disclosure of the nature of the

relationship and an estimate of the

affiliate’s charges; (2) the consumer is

not required to use the controlled entity;

and (3) the only thing of value received

from the arrangement, other than

payments for services rendered, is a

return on ownership interest.

Section 3500.15(b) sets out the three

conditions of the controlled business

arrangement exception. The first

condition concerns the disclosure of the

relationship. The rule provides that the

person making the referral must provide

the consumer with a written statement,

in the format set out in appendix D to

part 3500. This statement must be

provided on a separate piece of paper.

The referring party must give the

statement to the consumer no later than

the time of the referral. 24 CFR

3500.15(b)(1).

The second condition involves the

non-required use of the referred entity.

Section 3500.15(b)(2) provides that the

person making the referral may not

require the consumer to use any

particular settlement service provider,

except in limited circumstances. A