RESPA: Controlled Business Referrals

HUD has released a new final rule on permissible referrals and required notices for controlled business arrangements. The new rule emerges after months of negotiated rule-making failed to reach a consensus. The new rule was published in the Federal Register on June 7, 1996 at page 29237. In HUD's new position, banks seem to be big losers.

Under the new rule, every referral to a controlled business arrangement must be accompanied by a disclosure. The disclosure must be given before the referral is made. The regulation contains a sample notice to be used for the disclosure. As under the previous rule, the notice must be on a separate piece of paper. The notice explains the nature of the relationship, identifies the party making the referral, includes the charge or range of charges as they would be presented on the HUD-1 or good faith estimate, and warns the customer that the referral may provide the referring party a financial or other benefit. Another change in the new regulation involves whether the bank may compensate its own employees for referrals to affiliates or referrals of customers in to the bank. The new regulatory language in section 3500.14(g) is changed. New section 3500.14(g)(vii) only permits payment to its own bona fide employee for "generating business" for that employer. The previous rule permitted compensating employees for referrals to affiliates such as a mortgage banking company owned by the same holding company. Under the new rule, the bank may not compensate its own employees for referrals to an affiliate mortgage lender as an incentive to make referrals.

The new regulation deletes the language exemption for referrals through computer loan originations. This deletion may have a serious impact on loan shopping services. Charging fees in computer loan shopping will only be permissible if settlement services are actually performed. In addition, if the computer loan service includes any businesses that have a control relationship with the service, the controlled business disclosure will have to be given before the referral is made.

Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 10, 6/96