Question & Answer

Question: One bank in our holding company takes and processes mortgage loan applications but the loans are funded by another bank in the holding company The loans are closed by an outside settlement service. The applicant,/ borrower pays a fee at closing to pay for several services. The servicing agent forwards the fee to the funding bank and the funding bank pays the affiliate for processing the application. The fees cover the appraisal and the application processing. Do we have a RESPA problem?

Answer: Maybe yes, maybe no. It depends on the amount of the fees and the value of services performed. The bank taking the application (let's call it Bank A) is performing certain services. These may include compiling information, obtaining a credit report, getting employment verifications, and obtaining the appraisal. As long as the work performed by Bank A is in fact used in the underwriting and decision-making process, Bank As work has value and Bank A may be compensated for it.

The essential issue is whether the amount of the fee paid by Bank B to Bank A for work performed is appropriate under RESPA. To survive the act's scrutiny, the fees must be reasonable within the market and the service must be actually performed. You should periodically review the fees charged by lenders and other settlement service providers in your market to determine whether the fees that are paid to Bank A are reasonable and represent fair market value.

The second consideration is whether the service actually had value. This depends on whether the service was needed and whether the lender (Bank B) or other settlement service provider such as the settlement agent, actually used the work performed by Bank A and did not duplicate it. In other words, Bank B and the independent settlement agent must accept Bank As work in order for it to have value that supports the fee.

Your holding company is using the system of collecting the funds at settlement, paying them to Bank B and then having Bank B pay Bank A for the services. Although you did not ask about controlled business arrangement (now called "affiliated business arrangements") this is another area of RESPA that you should review. You may need to be giving the customer referral notices.

Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 16, 10/96