New from HUD: One Rule, Three Policy Changes (1996)

Real estate lenders who looked forward to a simple summer had better put away the suntan oil and pull out their compliance manuals instead. On June 7, 1996, the Department of Housing and Urban Development issued a final rule under the Real Estate Settlement Procedures Act and a series of related policy statements. The rule is effective in October, but the policy statements are already in effect. The new pronouncements concern the ability of lenders and other residential real estate settlement service providers to: pay for referrals; participate in controlled business arrangements (CBAs); offer services via computerized loan origination systems (CLOs); and lock-out certain service providers. Payments to employees Under the existing HUD Regulation X (implementing RESPA) employers may pay employees for any services, including referrals of business to the employer's affiliated businesses. Under the new rule, which will become effective Oct. 7, 1996, an employer will be able to pay its bona fide employees for referrals of business to an affiliate only under the following conditions: 1. In the case of a employee, if the payment is not calculated as a multiple of the number or value of referrals. 2. In the case of a non-managerial employee, (a) if the does not perform settlement services in any transaction and (b) prior to the referral the provides the person being referred with a written disclosure of the affiliate relationship. The new rule will not impact the ability of an employer to pay its own people for generating business for the employer itself. For purposes of this new test, a managerial employee includes an of a settlement service provider who does not routinely deal directly with consumers, but who hires, directs, or otherwise supervises employees or independent contractors or is in a position to formulate, determine, or influence the policies of the employer. This new test will permit an employer to hire and compensate a financial services representative or an hired in a similar capacity to market the employer's affiliated providers (e.g., title insurance, appraiser, termite inspection, etc.). However, the representative can only serve as marketing support--he or she may not actually perform settlement services in any transaction. These rules may be applied only to benefit bona fide employees and their employers. HUD is concerned that individuals are being hired on a basis for the purpose of making referrals because of their access to consumers and other settlement services (e.g., a real estate agent hired on a part-time basis but who merely refers real estate customers to the mortgage lender or other settlement service provider). HUD views such arrangements as shams which violate RESPA Section 8. Such employees may not be compensated. However, employees who are not commonly involved in settlement services may benefit from this exemption. For example, a bank teller may refer a bank customer to the bank's affiliated mortgage company or other settlement service provider and obtain a fee from the bank. Controlled business arrangements HUD has taken action on several fronts in regard to these arrangements. New CBA Disclosure. The new rule redrafts the Regulation X controlled business arrangement disclosure to soften the language concerning the ability of a consumer to find similar services from others at possibly lower costs. That provision of the controlled business arrangement disclosure is now revised to read: ARE NOT REQUIRED TO USE _____________ AS A CONDITION FOR SETTLEMENT OF YOUR LOAN ... THERE ARE FREQUENTLY OTHER SETTLEMENT SERVICE PROVIDERS AVAILABLE WITH SIMILAR SERVICES. YOU ARE FREE TO SHOP AROUND AND DETERMINE THAT YOU ARE RECEIVING THE BEST SERVICES AND THE BEST RATE FOR THESE SERVICES. Sham joint ventures. In tandem with the new final rule, HUD issued a Statement of Policy condemning sham joint ventures. …