RESPA: The Section 8 Analysis

We have been getting a lot of questions about whether different arrangements are permissible or violate RESPA. The world of mortgage lending has become incredibly creative. New ideas are popping up each day, suggested by mortgage brokers, mortgage loan officers with ambitious targets, and anyone trying to join in the action.

This increase in activity has not been matched with any increase in regulatory guidance. In fact, HUD has given no real RESPA guidance in several years, so these growing number of questions are going without any official answers. However, examiners are obligated to deal with them - and so are you.

The risk of an arrangement being construed as a Section 8 violation is high, and the stakes are even higher. Unfortunately, financial institutions and their affiliates are the most closely regulated players in the mortgage market and therefore the most likely to get caught or criticized. After dealing with several decades of financial institution crises, examiners are uncomfortable letting a questionable situation sit. The result is that, when in doubt, they treat a situation as a problem or even a violation.

What is permissible is to pay for work performed. What is not permissible is to structure a transaction for mutual profit - which is inevitably at the expense of the customer. The only true control available to you as a measurement of illegal fee splitting is the market.

It all comes down to what the customer pays. When evaluating loans for Section 8 violations, you should look carefully at the services performed, the cost of those services, what the customer paid (including fees paid directly by the customer to third parties) and how these costs compare to the general costs in your market.

Compare the cost of this loan with the cost of loans with different delivery methods.

1. Determine value to the customer by identifying the services that were actually performed for the customer:
   • What specific services were performed? RESPA looks separately at each service that is performed in preparation for or in conducting a real estate settlement. The starting point of any review is to know what services were actually performed. There should be no charges for fees that were not performed.
   • What did each service cost? Measure the cost by the fee the service provider charged, not by the amount you charged the customer. Any difference is a fee add-on. HUD considers such add-on fees to be illegal, but federal courts have allowed them. Under Truth in Lending, an add-on fee is a finance charge and should be included in the TIL calculations.
   • Were any services performed twice? Duplicate services are prohibited. Duplicate services are only allowed when the service is needed. For example, an application for pre-approval or for construction would justify a second credit report to verify that the credit qualifications had not changed over the shopping or construction period.
   • Were the fees reasonable and based on typical costs in the market? RESPA compares fees charged to the value of the service. Value of service is measured by typical prices in the market. Fees that are higher than the market rates are presumed to contain illegal kickbacks or unearned fees.
   • How and when were the fees paid, by whom and to whom? Fees are paid to the party that provided the service, even if they are collected through a third party such as the settlement agent. The HUD-1 should name the party that provided the service.
   • Were any services covered by points? Fees should not be double-charged. If a service is included in points charged to a customer, the specific service and charge must be disclosed. Double charging for a service is a violation.
2. Compare the fees charged to the services performed:
   • Are there any charges for services that were not performed? Charging for a phantom service (one that was not actually performed) violates Section 8. Any charge imposed for settlement should be supported by real work actually performed. To audit this, know what each task was for.
   • Are there points or similar fees that are not supported by the services identified? This is another way of looking at the value of the service. The charge for appraisals should be supported by an appraisal report. A valuation done by checking tax assessment values does not support a full appraisal fee.
   • Compare the cost of this loan with the cost of loans with different delivery methods. To be sure that the borrower has been given a fair deal, review the services performed in the context of the market and the type of loan. Services and fees should be appropriate for the transaction. There should be no fee or service packing to make the loan more expensive.