[Federal Register Volume 61, Number 111 (Friday, June 7, 1996)]
[Rules and Regulations]
[Pages 29264-29266]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-14332]



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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 3500

[Docket No. FR-3638-N-05]


Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner; Real Estate Settlement Procedures Act (RESPA); Statement 
of Policy 1996-3, Rental of Office Space, Lock-outs, and Retaliation

AGENCY: Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner, HUD.

ACTION: Statement of Policy 1996-3, Rental of Office Space, Lock-outs, 
and Retaliation.

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SUMMARY: This statement 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 rental of office space, 
lock-outs and retaliation. It is published to give guidance and to 
inform interested members of the public of the Department's position on 
enforcement of this section of the law.

FOR FURTHER INFORMATION CONTACT: David R. Williamson, Director of the 
Office of Consumer and Regulatory Affairs, Room 5241, telephone: (202) 
708-4560. For legal enforcement questions, Peter Race, Assistant 
General Counsel for Program Compliance, or Rebecca J. Holtz, Attorney, 
Room 9253, telephone: (202) 708-4184. (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 above-listed 
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).
    Since July 1993, the Department has been seeking comments and 
advice concerning the final rule of November 2, 1992, implementing 
Section 8 of RESPA. On July 21, 1994, the Department published a new 
proposed rule on certain Section 8 issues. Simultaneously with the 
issuance of this Statement of Policy, HUD is publishing a final rule in 
that rulemaking. As part of that rulemaking process, the Department 
received comments concerning the application of Section 8 of RESPA to 
the rental of office space, lock-outs and retaliation in connection 
with real estate brokerage office practices. In addition, the 
Department's enforcement officials have received numerous complaints 
dealing with these same issues.

Rental of Office Space

    In the last few years, the Department has received numerous 
complaints alleging that certain settlement service providers, 
particularly lenders, are leasing desks or office space in real estate 
brokerage offices at higher than market rate in exchange for referrals 
of business. In HUD's rulemaking docket, number R-94-1725 (FR-3638), 
many commenters argued that HUD should scrutinize this rental practice. 
The concern expressed is that real estate brokers charge, and 
settlement service providers pay, high rent payments for the desk or 
office space to disguise kickbacks to the real estate broker for the 
referral of business to the settlement service provider. In this 
Statement of Policy, the Department sets forth how it distinguishes 
legitimate payments for rentals from payments that are for the referral 
of business in violation of Section 8.

Lock-outs

    The Department also received comments and complaints alleging that 
settlement service providers were being excluded from, or locked-out 
of, places of business where they might find

[[Page 29265]]

potential customers. The most common occurrence cited was where a real 
estate brokerage company had leased space to a particular provider of 
services, and had prevented any other provider from entering its office 
space.
    As part of the July 21, 1994, rulemaking, a Nebraska lender 
commented:

    We are experiencing a rapid growth of lender lock-out 
relationships wherein real estate companies lease office space 
within their sales offices to a particular mortgage company. A part 
of the agreement is that other lenders are not allowed in the sales 
offices to solicit business. This clearly prevents free competition 
in financing to the home buyer.
* * * * *
    * * * [I]t is very clear that the [real estate] office managers 
are exerting a lot of control to keep all other lenders out. This 
would not be done without proper incentive ($$$) * * *.

    Several other commenters alleged that real estate office space 
arrangements with particular lenders, coupled with limiting or denying 
rival lenders access to customers, were being used in their communities 
to eliminate competition. These commenters called for special RESPA 
rules to ban these practices.

Retaliation

    The Department also has received complaints concerning retaliation 
practices used to influence consumer referrals. In one complaint, 
financial service representatives in a real estate broker's office were 
given specific quotas of referrals of home buyers to an affiliated 
lender and were threatened with the loss of their jobs if they did not 
meet the quotas.
    Commenters on the proposed rules also alleged that some employers 
were engaging in practices of retaliation or discrimination against 
employees and agents who did not refer business to affiliated entities. 
Reprisals could range from loss of benefits, such as fewer sales leads, 
higher desk fees, less desirable work space, and ultimately, loss of 
job. Some commenters requested that the Department issue guidelines or 
other regulatory provisions to restrict such retaliatory activities.
    The Coalition to Retain Independent Services in Settlement (CRISIS) 
called for a rule prohibiting retaliation against employees and agents 
who refer business to non-affiliated entities as most consistent with 
the language of the RESPA statute. CRISIS suggested strong language to 
prohibit negative actions against employees and agents who refer 
business to non-affiliated entities, including prohibitions against 
more subtle actions, such as loss of work space or increases in desk 
fees.

Statement of Policy--1996-3

    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 and 24 CFR 
3500.4(a)(1)(ii),<SUP>1 hereby issues the following Statement of 
Policy.
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    \1\ All 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).
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Rental of Office Space

    Section 8 of RESPA prohibits a person from giving or from accepting 
any fee, kickback or thing of value pursuant to an agreement that 
business incident to a settlement service involving a federally related 
mortgage loan shall be referred to any person. 12 U.S.C. Sec. 2607(a). 
An example of a thing of value is a rental payment that is higher than 
that ordinarily paid for the facilities. The statute, however, permits 
payments for goods or facilities actually furnished or for services 
actually performed. 12 U.S.C. Sec. 2607(c)(2). Thus, when faced with a 
complaint that a settlement service provider is paying a high rent for 
referrals of settlement service business, HUD analyzes whether the 
rental payment is bona fide or is really a disguised referral fee.
    HUD's regulations implement the statutory provisions at 24 CFR 
3500.14 and give greater guidance to this analysis. Section 
3500.14(g)(2) of the regulations provides that the Department may 
investigate high prices to see if they are the result of a referral fee 
or a split of a fee. It states: ``If the payment bears no reasonable 
relationship to the market value of the goods or services provided, 
then the excess is not for services or goods actually performed or 
provided * * *. The value of a referral (i.e., the value of any 
additional business obtained thereby) is not to be taken into account 
in determining whether the payment exceeds the reasonable value of such 
goods, facilities or services.'' Id.
    Thus, under existing regulations, when faced with a complaint that 
a person is renting space from a person who is referring business to 
that person, HUD examines the facts to determine whether the rental 
payment bears a reasonable relationship to the market value of the 
rental space provided or is a disguised referral fee. The market value 
of the rental space may include an appropriate proportion of the cost 
for office services actually provided to the tenant, such as 
secretarial services, utilities, telephone and other office equipment. 
In some situations, a market price rental payment from the highest 
bidding settlement service provider could reflect payments for 
referrals of business to that settlement service provider from the 
person whose space is being rented. Thus, to distinguish between rental 
payments that may include a payment for referrals of settlement service 
business and a payment for the facility actually provided, HUD 
interprets the existing regulations to require a ``general market 
value'' standard as the basis for the analysis, rather than a market 
rate among settlement service providers.
    In a rental situation, the general market value is the rent that a 
non-settlement service provider would pay for the same amount of space 
and services in the same or a comparable building. A general market 
value standard allows payments for facilities and services actually 
furnished, but does not take into account any value for the referrals 
that might be reflected in the rental payment. A general market 
standard is not only consistent with the existing regulations, it 
furthers the statute's purpose. Congress specifically stated that it 
intended to protect consumers from unnecessarily high settlement 
charges caused by abusive practices. 12 U.S.C. Sec. 2601. Some 
settlement service providers might be willing to pay a higher rent than 
the general market value to reflect the value of referrals of 
settlement service business. The cost of an above-general-market-rate 
rental payment could likely be passed on to the consumer in higher 
settlement costs. If referrals of settlement service business are 
taking place in a given rental situation, and the rental payment is 
above the general market value, then it becomes difficult to 
distinguish any increase in rental payment over the general market from 
a referral fee payment.
    HUD, therefore, interprets Section 8 of RESPA and its implementing 
regulations to allow payments for the rental of desk space or office 
space. However, if a settlement service provider rents space from a 
person who is referring settlement service business to the provider, 
then HUD will examine whether the rental payments are reasonably 
related to the general market value of the facilities and services 
actually furnished. If the rental payments exceed the general market 
value of the space provided, then HUD will consider the excess amount 
to be for the referral of business in violation of Section 8(a).

[[Page 29266]]

    As an additional consideration, HUD will examine whether the rent 
is calculated, in whole or in part, on a multiple of the number or 
value of the referrals made. If the rental payment is conditioned on 
the number or value of the referrals made, then HUD will consider the 
rental payment to be for the referral of business in violation of 
Section 8(a).
    In its RESPA enforcement work, HUD has also encountered ``bogus'' 
rental arrangements that are really agreements for the payment of 
referral fees. For example, one case involved a title insurance company 
that paid a ``rental fee'' to a real estate broker for the ``per use 
rental'' of a conference room for closings. The title insurance company 
paid a $100 fee for each transaction. This ``rental fee'' was greater 
than the general market value for the use of the space. In addition, 
the facts revealed that the room was rarely actually used for closings. 
In this case, HUD examined whether a ``facility'' was actually 
furnished at a general market rate. HUD concluded that this was a sham 
rental arrangement; the ``rent'' was really a disguised referral fee in 
violation of Section 8(a).

Lock-outs

    A lock-out situation arises where a settlement service provider 
prevents other providers from marketing their services within a setting 
under that provider's control. A situation involving a rental of desk 
or office space to a particular settlement service provider could lead 
to other, competing, settlement service providers being ``locked-out'' 
from access to the referrers of business or from reaching the consumer. 
The existence of a lock-out situation could, therefore, give rise to a 
question of whether a rental payment is bona fide. A lock out situation 
without other factors, however, does not give rise to a RESPA 
violation.
    The RESPA statute does not provide HUD with authority to regulate 
access to the offices of settlement service providers or to require a 
company to assist another company in its marketing activity. This 
interpretation of RESPA does not bear on whether State consumer, 
antitrust or other laws apply to lock-out situations. Of course, 
Section 8 still applies to any payments made to a referrer of business 
by a settlement service provider who is not ``locked out'' of the 
referrer's office and receives referrals of settlement service business 
from that office.

Retaliation

    Section 8 of RESPA expressly prohibits giving positive incentives, 
``things of value,'' for the referral of settlement service business. 
12 U.S.C. 2607(a). The Act is silent as to disincentives. If HUD were 
to find that Section 8 also prohibited disincentives for failure to 
make referrals, HUD would find itself being called upon to resolve 
numerous employment disputes under RESPA. HUD does not believe that 
Congress intended that RESPA reach these matters. Retaliatory actions 
against employees are more appropriately governed by State labor, 
contract, and other laws. However, the Department will continue to 
examine for possible violations of Section 8 whether payments or other 
positive incentives are given employees or agents to make referrals to 
other settlement service providers.
    New RESPA regulations are being issued simultaneously with this 
Statement of Policy. With regard to this area, the public should note 
the new exemptions for payments to employees in 24 CFR 3500.14.

    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. 96-14332 Filed 6-6-96; 8:45 am]
BILLING CODE 4210-27-P