29264 Federal Register / Vol. 61, No. 111 / Friday, June 7, 1996 / Rules and Regulations

ownership interest and unrelated to referrals

of business.

HUD Analysis. A review of the factors

reflects an arrangement involving a

bona fide provider of settlement

services. In this example, the real estate

brokerage company is not the sole

source of referrals to the title agency.

However, the title agency continues its

exclusive agency arrangement with the

title insurance company owner. While

this last factor initially may raise a

question as to why other title insurance

companies are not used for title

insurance policies, upon review there

appears to be nothing impermissible

about these referrals of title business

from the title agency to the title

insurance company.

This example involves the purchase

of stock in an existing full service

provider. In such a situation, HUD

would carefully examine the investment

made by the real estate brokerage

company. In this example, the real

estate brokerage company pays a fair

value contribution for its ownership

share and receives a return on its

investment that is not based on referrals

of business. Since the real estate

brokerage provides the CBA disclosure,

does not require the use of the title

agency and the only return to the

brokerage is based on the profits of the

agency and not reflective of referrals

made, the arrangement meets the CBA

exemption requirements. HUD would

consider this a bona fide controlled

business arrangement.

5. A mortgage banker sets up a limited

liability mortgage brokerage company. The

mortgage banker sells shares in divisions of

the limited liability company to real estate

brokers and real estate agents. For $500 each,

the real estate brokers and agents may

purchase separate ‘‘divisions’’ within the

limited liability mortgage brokerage company

to which they refer customers for loans. In

later years ownership may vary by the

amount of referrals made by a real estate

broker or agent in the previous year. Under

this structure, the ownership distributions

are based on the business each real estate

broker or real estate agent refers to his/her

division and not on the basis of their capital

contribution to the entity as a whole. The

limited liability mortgage brokerage company

provides all the substantial services of a

mortgage broker. It does not contract out any

processing to its mortgage banker owner. It

sends loan packages to its mortgage banker

owner as well as other lenders.

HUD analysis. Although HUD would

consider the mortgage brokerage

company to be a bona fide provider of

mortgage brokerage services, this

example illustrates an arrangement that

fails to meet the third condition of the

CBA exception. 12 U.S.C. 2607(c)(4)(C).

Here, the capitalization, ownership and

payment structure with ownership in

separate ‘‘divisions’’ is a method in

which ownership returns or ownership

shares vary based on referrals made and

not on the amount contributed to the

capitalization of the company. In cases

where the percent of ownership interest

or the amount of payment varies by the

amount of business the real estate agent

or broker refers, such payments are not

bona fide returns on ownership interest,

but instead, are an indirect method of

paying a kickback based on the amount

of business referred. 24 CFR

3500.15(b)(3).

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. 96–14331 Filed 6–6–96; 8:45 am]

BILLING CODE 4210–27–P

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.

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 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).

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
Federal Register / Vol. 61, No. 111 / Friday, June 7, 1996 / Rules and Regulations 29265

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).

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),1 hereby issues the

following Statement of Policy.

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.

§ 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. § 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 nonsettlement 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. § 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-generalmarket-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).
29266 Federal Register / Vol. 61, No. 111 / Friday, June 7, 1996 / Rules and Regulations

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