RESPA and Regulation X

Question: An answer in the last issue stated that it is permissible for a lender to pay a referral fee to a referring entity that is not a settlement service provider. We (me and my examiner) disagree. Regulation X says that "No person shall give and no person shall accept any fee, kickback or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a settlement service involving a federally related mortgage loan shall be referred to any person. Any referral of a settlement service is not a compensable service, except as set forth in Section 3500.14(g)(1). A company may not pay any other company or the employees of any other company for the referral of settlement service business." Because a financial institution is a provider of settlement services, how would they not be in violation of 3500.14(b) for paying any person a referral fee of a federally regulated mortgage loan if that person did not perform any of the named services (related to the taking and processing of an application) identified by HUD?

Answer: The key to this question is how far RESPA actually reaches. All laws have limits. There is no question that the act and Regulation X reach all aspects of settlement for consumer-purpose real estate secured loans. The important language here is in Section 8 of RESPA. It reads: "No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person." The additional language in the regulation was added by HUD.

When an agency is given authority to issue regulations, the agency is given specific and limited authority as specified in the pertinent law. RESPA was enacted to regulate real estate settlement practices and relationships or arrangements between settlement service providers that were unfairly structured to the disadvantage of the consumer. RESPA does not reach other banking relationships. As such, HUD has no authority to tell financial institutions what they may or may not do with other products, services, and business relationships. Unless the participating entity and product touches on providing real estate settlement services, it cannot be reached by RESPA - no matter what HUD tries to say.

Some examiners read RESPA and Regulation X in pieces. For example, they separate "no person shall give" from "no person shall accept." When laws and regulations are parsed down to this level, they can be made to mean almost anything. When interpreting specific clauses or phrases, they should be read in their entire context. The court in Echevarria v. Chicago Title applied this principle in disagreeing with HUD's interpretation of Section 8. The short version of that court's opinion with respect to fee splitting is that it takes two to tango. Taking a single phrase, such as "no person shall accept" as a rule constituted taking it out of context. The context is what the exchange of fees is about. A similar interpretation would apply to this question.

In deciding whether RESPA reaches the payment of referral fees to non-settlement service provider customers, it is also significant to note that all specific references in Regulation X refer only to situations involving two settlement service providers. When the rule was drafted, this is how it was understood and implemented. In recent years, some have tried to broaden the rule. While a literal reading, clause by clause, appears to support this extended reach, the purpose of RESPA does not.

With all this being said, we do not recommend paying referral fees. Not all courts are as wise and careful as the court deciding the Echevarria case.

Copyright © 2005 Compliance Action. Originally appeared in Compliance Action, Vol. 10, No. 8, 7/05