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When RESPA Doesn't Protect The Consumer
by Robert Franco | 2008/02/21 |

I recently got wind of a RESPA violation that just blew into my office yesterday. It really bothers me, but I know that it happens all the time in this industry and nobody seems to care.

A buyer had his attorney draw up a sales contract on a $600,000 home he is buying; there are no Realtors involved. He told his attorney that he wanted my office to handle his closing. The attorney, a partner at the firm, told him that they own a title agency and if he closed there they would do it for premium only; they would waive his exam and closing fees. The buyer still insisted that the closing be held at my office, and he called to let me know that I would be getting the order.

I was very appreciative, but I told him that I cannot do it for premium only and I explained that waiving those fees to induce the referral of the order was a RESPA violation. I told him that if they were willing to close it for premium only, there would be no hard feelings if he took them up on their offer. He still insisted that we close the transaction for him.

Then I thought, I should call and ask our underwriters if I could do it for premium only - knowing the answer already. Of course not. But, it brought up a couple of interesting questions. First, RESPA is a consumer protection statute. How is the consumer "protected" if he has to pay more to close at my office than with a competitor who is willing to violate RESPA? It would seem that a discount given directly to the consumer is actually in his best interest and RESPA is doing him more harm than good.

Second, this customer had already referred the order to my office with no expectation that he would get a discount and, in fact, I had told him that I could not waive the fees. At that point, the order had already been referred. Thus, if I were to waive his exam and closing fees it could not be an inducement for the "referral" of settlement services because the referral had already taken place. It was actually the competitor who made the offer to close the transaction for premium only that was attempting to "induce the referral" when the buyer had previously stated that he wanted to close elsewhere.

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The premium on this deal is substantial - around $2,500. I really do not need to charge the exam and settlement fee (about $300 combined) to make money on this one. But, to abide by RESPA, I must. It is these types of situations where Mark Pilatowski makes a great point in his My Closing Space Blog, See What Happens When You Charge Less...

If a title company is able to find a way to offer lower rates while still running their business they should be allowed. And that is the crux of the issue.

I disagreed with him in my post, The Fix Is in, but this is one of those cases where his point of view is very convincing. Of course, the issue that Mark and I addressed in our previous posts was the state filed rates and whether it was a good idea to have mandatory fees for title insurance. This case is a bit different because we aren't concerned with the actual premium, but the other fees that get tacked on for ancillary services.

I think in this instance, Mark and I would agree that RESPA actually works to the detriment of the borrower. That seems to be contrary to the stated purpose of RESPA.

Sec. 2601. Congressional findings and purpose
(a) The Congress finds that significant reforms in the real estate settlement process are needed to insure that consumers throughout the Nation are provided with greater and more timely information on the nature and costs of the settlement process and are protected from unnecessarily high settlement charges caused by certain abusive practices that have developed in some areas of the country.

Now that we have taken a look at a prime example of when RESPA doesn't protect the consumer, we have to wonder about the exceptions that RESPA has made for affiliated business arrangements (AfBA). I could see where an exception to RESPA should be made for a reduction in fees directly to the consumer who would ultimately benefit. However, HUD has gone the opposite direction to make fee splitting legal when the settlement service provider and the referrer go to the great lengths to set up an AfBA. In those cases, it's a third party who is getting a share of the fees for referring business. That seems to be fine with HUD, yet the consumer who is supposed to be protected is actually prohibited from receiving a discount. Where is the logic in that?

Robert A. Franco


Categories: RESPA

1104 words | 6538 views | 10 comments | log in or register to post a comment

That is the entire problem with the...
That is the entire problem with the logic of RESPA and any overly complex legislative scheme designed to "protect" consumers. In an ideal world, the market would set the correct price for title insurance services through the collective individual decisions of sellers and buyers. Insurance is admittedly a different situation because the consumer won't know if the product is worth the cost until perhaps several years down the road. That is why these companies should be bonded or have some minimum premium to cover losses. And that should be it.

Anything above a basic minimum solvency requirement should be determined by the producers so that the consumer can make their own choice about the best combination of price and service. Anything else distorts natural market forces and leads to the kinds of absurdities that you point out.

There is an nationally recognized RESPA expert named Shulman, I believe. In every lecture he gives about RESPA violations he says that if it sounds like a violation it probably isn't and if it doesn't sound like one, it probably is. That is likely the best proof that this area is overly regulated, counter to basic free market principles, and hence more harmful to consumers than helpful.

The solution is not more legislation. Just makes sure the companies are solvent, let everyone set their own rates above that minimum premium, and let them offer whatever discounts or referral fees they like. That way the consumer will be protected because they will have all the information up front and have the steady force of free and fair competition driving down prices.
by David Jenkins | 2008/02/22 | log in or register to post a reply

Robert: What part of RESPA do you ...
Robert: What part of RESPA do you believe you would be violating? I am unaware of any provision in the rules that prohibit you from reducing your fee for a consumer. I do it all the time. I simply cannot reduce my charges below state mandated minimums.  
by Diane Cipa | 2008/02/22 | log in or register to post a reply

Reducing your fee is a "thing of va...
Reducing your fee is a "thing of value." RESPA does not distinguish between the consumer and a third party. RESPA states:
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.

So, "close here and I will waive your fees" is a violation of RESPA.

I have discussed a similar situation with the state department of insurance, which has a similar provision that limits discounts, or other things of value, to $50 per calendar year. They were clear that a discount to a consumer is a violation. I have also discussed this with my underwriter and they were also clear that it would be a RESPA violation.

I can think of situations where this would make sense; such as giving discounts to lenders or Realtors on their personal transactions, because they are in a position to refer other work. Most of the time, though, giving the consumer a break would not seem to be an inducement for the referral of business and ultimately it would be a benefit for the consumer. We should be encouraging discounts to consumers, shouldn't we?
by Robert Franco | 2008/02/23 | log in or register to post a reply

You are reading way too much into i...
You are reading way too much into it. The thing of value can't be given to a person in a position to refer. Giving a consumer a break in a price negotiation to close with you versus closing with a competitor is GOOD competition.

As long as you aren't going below any state regulated floors for fees I don't see a problem.

I'd recommend checking out Howard Lax's newsletter on his law office web site. I don't have the URL here at home but you can Google Howard Lax. He also wrote a terrific RESPA series for RESPAnews.com last year.
by Diane Cipa | 2008/02/23 | log in or register to post a reply

I am interpreting RESPA literally, ...
I am interpreting RESPA literally, which is the way our underwriters and the state department of insurance have explained it. As is often said, "if you give anyone a discount - you must give everyone a discount."

However, even beyond RESPA, our state rule in Ohio is much more specific about those to which it applies:

§ 3953.26. Payment to induce title insurance business; prohibition

No title insurance company and no title insurance agent shall pay or give [to] any applicant for insurance, or to any person, firm, or corporation who is acting as agent, representative, attorney, or employee of the owner, lessee, mortgagee, or of the prospective owner, lessee, or mortgagee of the real property or any interest therein, either directly or indirectly, any commission or any part of its fees or charges, or any other consideration or valuable thing, as an inducement for, or as compensation for, any title insurance business.

You might want to take another look at the law in Pennsylvania. Their statute seems to be very clear on the matter as well. It would appear to me that a discount, even to the insured, is a violation.

§ 310.46. Inducements prohibited

(a) PROHIBITION.-- No insurance producer shall, directly or indirectly, offer, promise, give, option, sell or purchase any stocks, bonds, securities or property, or any dividends or profits accruing or to accrue thereon, or other thing of value whatsoever, as an inducement to purchase a contract of insurance. Nothing in this section shall be construed to prevent the taking of a bona fide obligation, with legal interest, in payment of any premium. This section shall not prohibit payment or receipt of referral fees in accordance with this act.

The Pennsylvania courts have said that the the thrust of the statute is "against the placement of insurance at a favorable rate regardless of the mode or manner in which such favored rate is obtained, and in circumstances that are not available to all other insured of the same class. [It] prohibits insured persons or parties or applicants for insurance from receiving any rebates of premiums, or all or any part of the commissions of an agent or broker, or any other favor or advantage, valued consideration or inducement other than such as are specified in the policy."

It would appear that you have committed several third degree misdemeanors. Oops!

(b) PENALTY.-- A person that violates subsection (a) commits a misdemeanor of the third degree.

I could be wrong, but it seems to be clear that giving a consumer a discount to get his insurance business is a violation of state law and RESPA, if interpreted literally.
by Robert Franco | 2008/02/23 | log in or register to post a reply

I think this points out the biggest...
I think this points out the biggest problem with these regulations. I don't think RESPA has defined what we as insurers are really required to do. In California, there were discounts to Senior Citizens and First Time Buyers. I believe the DOI forced those discounts to be removed because we were discriminating against others who did not qualify. I do believe giving a consumer a discount is a violation in California and it is pretty specific in the insurance code.  
by Greg Knowles | 2008/02/23 | log in or register to post a reply

Robert: In PA we have optional fee...
Robert: In PA we have optional fees and mandatory fees. We are permitted to forego optional fees on any transaction and that does not fall under the prohibitions of the statute you cited.

The approved attorney program, interestingly, isn't subject to the regulated rate structure and attorneys writing under that program may negotiate rates on a per deal basis.

I don't follow Ohio law, so I trust your opinion that you are prohibited from offering a discount to any one consumer. That's a shame.
by Diane Cipa | 2008/02/25 | log in or register to post a reply

Two observations need to be added t...
Two observations need to be added to this posting. First, RESPA does not control prices. The courts have rejected claims that overages violate RESPA, even though 24 CFR 3500.14(g)(2), HUD Statement of Policy 1999-1, and HUD Statement of Policy 2001-1 all state that overcharging is contrary to the requirement that the cost of a service bear a reasonable relationship to its market value and thus “may be used as evidence of a violation of Section 8 and may serve as a basis for a RESPA investigation.” See Santiago v. GMAC Mortgage Corp., 417 F .3d 384 (3d Cir. 2005) and Kruse v. Wells Fargo Home Mortgage, Inc., 383 F .3d 49 (2d Cir. 2004).

Second, Sosa v. Chase Manhattan Mortgage Corporation, 348 F.3d 979, 981 (11th Cir. 2003) stated that it is absurd to hold a consumer liable for participating in a kickback. RESPA is designed to protect the consumer. That is why you can give a consumer an incentive (e.g. a free computer) to close a loan with your company. State insurance code anti-rebate laws prohibit giving incentives to the insured when selling title insurance.
by Howard Lax | 2008/02/25 | log in or register to post a reply

Thank you, Howard....
Thank you, Howard. 
by Diane Cipa | 2008/02/25 | log in or register to post a reply

Yes, thank you, Howard. Howard was...
Yes, thank you, Howard. Howard was kind enough to send me links to a couple of interesting "informal advice" letters from HUD that help put this type of discount in context.

Question 12: The bank offers the customer a coupon for money towards closing costs. May the amount of the coupon be shown as a credit on the front of the HUD-1? Or must it be applied toward particular closing fees?

Answer: This amount must be shown on lines 204-209, which are used to list "items paid by or on behalf of the borrower."

Question 17: Can a lender give a borrower an incentive, such as a chance to win a trip or a rebate, for doing business with the lender?

Answer: RESPA does not prohibit a lender or other settlement provider from giving the borrower an incentive for doing business with it as long as the incentive is not based on the borrower referring business to the lender.

This does show that HUD is probably not going to concern itself with discounts given directly to consumers. However, the state law does seem to prohibit exactly that kind of arrangement.

Perhaps "RESPA" is just a sort of shorthand to refer to such rules, whether based on state law or RESPA, but in Ohio (and some other states) inducements paid directly to consumers is a violation of state law. These laws do ensure that all consumers are treated equally and possibly are geared toward preventing some consumers from getting discounts at the expense of others.

In any regard this consumer was offered a deal that I cannot match and he seems to be paying more for his services than is necessary. I just don't like that end result, but my hands are tied.

by Robert Franco | 2008/02/25 | log in or register to post a reply
Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco



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