February 2007, Posted On: 1/31/2007
Affinity relationships under RESPA: Inside Section 8(b)
Welcome to the fourth installment of our new RESPA column, written by attorney Howard A. Lax of Lipson, Neilson, Cole, Seltzer & Garin, P.C. (See complete bio below). In this weekly column, Lax explains the basics of RESPA Section 8 and describes how to establish relationships that don’t violate the law.
Section 8(b) of RESPA - The other shoe
The “little brother” of Section 8(a) of RESPA is Section 8(b):
“No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.”Section 8(b) prohibits a mortgage broker or a title agent from taking a fee without providing substantial services. That much was established in two HUD Statements of Policy. HUD Statement of Policy 1999-1 defined the minimal services that a mortgage broker must perform to earn a fee. HUD Statement of Policy 1996-4 defined the core title services that a title agency must perform to earn the title insurance premium. The Statement of Policy covering mortgage broker fees was needed to stem a tide of litigation that threatened to swamp the mortgage broker industry. The Statement of Policy regarding title insurance services was needed to stem business arrangements that allowed referral sources to earn a fee without providing much in the way of services.
The minimal services that a mortgage broker must perform were first espoused by HUD in an informal letter to the Independent Bankers Association of America, dated February 14, 1995. This letter identified fourteen services that a mortgage broker may perform to originate a mortgage loan. These include:
(a) Taking information from the borrower and filling out the application;
(b) Analyzing the prospective borrower's income and debt and pre-qualifying the prospective borrower to determine the maximum mortgage that the prospective borrower can afford;
(c) Educating the prospective borrower in the home buying and financing process, advising the borrower about the different types of loan products available, and demonstrating how closing costs and monthly payments could vary under each product;
(d) Collecting financial information (tax returns, bank statements) and other related documents that are part of the application process;
(e) Initiating/ordering VOEs (verifications of employment) and VODs (verifications of deposit);
(f) Initiating/ordering requests for mortgage and other loan verifications;
(g) Initiating/ordering appraisals;
(h) Initiating/ordering inspections or engineering reports;
(i) Providing disclosures (truth in lending, good faith estimate, others) to the borrower;
(j) Assisting the borrower in understanding and clearing credit problems;
(k) Maintaining regular contact with the borrower, realtors, lender, between application and closing to apprise them of the status of the application and gather any additional information as needed;
(l) Ordering legal documents;
(m) Determining whether the property was located in a flood zone or ordering such service; and
(n) Participating in the loan closing.
These fourteen services were incorporated into a formal Statement of Policy and published by HUD on March 1, 1999. HUD’s Statement of Policy required a mortgage broker to provide five services from the list above in addition to taking the loan application. HUD also recognized that services (b), (c), (d), (j), and (k) on the list above were “counseling type” services that could provide more of a substantive benefit to the lender than to the borrower. Hence, a mortgage broker’s services would be closely scrutinized if the mortgage broker provided only these five “counseling services.”
HUD acknowledged that these are not the only services that a mortgage broker may provide, and that some of these services may be provided through technology rather than the efforts of a mortgage broker. Nevertheless, the important principle of this Statement of Policy is that it provided a safe harbor for mortgage brokers. Mortgage brokers could earn a fee by providing a limited number of identifiable services. Furthermore, the mortgage broker’s total compensation should be measured against the totality of the services provided. Class action lawsuits that separately measured the services provided to the mortgage lender and services provided to the borrower against the amount that each party paid were no longer viable.
HUD also published a Statement of Policy establishing minimum title agency services. HUD stated:
“Section 8(c)(1)(B) specifically exempts payments of a fee ‘by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance.’ A more general provision, section 8(c)(2), exempts the ‘payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.’ (See also 24 CFR 3500.14(g)(1).)….
“To qualify for a section 8(c)(1)(B) exemption, the attorney title insurance agent must ‘provide his client with core title agent services for which he assumes liability, and which includes, at a minimum, the evaluation of the title search to determine insurability of the title, and the issuance of a title commitment where customary, the clearance of underwriting objections, and the actual issuance of the policy or policies on behalf of the title company.’”
More specifically, HUD defined five services that a title agent must perform to earn the entire title insurance premium:
“'Core title services' are those basic services that a title insurance agent must actually perform for the payments from or retention of the title insurance premium to qualify for RESPA’s section 8(c)(1)(B) exemption for ‘payments by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance.’ In performing core title services, the title insurance agent must be liable to his/her title insurance company for any negligence in performing the services. In considering liability, HUD will examine the following type of indicia: the provisions of the agency contract, whether the agent has errors and omissions insurance or malpractice insurance, whether a contract provision regarding an agent's liability for a loss is ever enforced, whether an agent is financially viable to pay a claim, and other factors the Secretary may consider relevant.
“‘Core title services’ mean the following in Florida:
a. The examination and evaluation, based on relevant law and title insurance underwriting principles and guidelines, of the title evidence (as defined below) to determine the insurability of the title being examined, and what items to include and/or exclude in any title commitment and policy to be issued.
b. The preparation and issuance of the title commitment, or other document, that discloses the status of the title as it is proposed to be insured, identifies the conditions that must be met before the policy will be issued, and obligates the insurer to issue a policy of title insurance if such conditions are met.
c. The clearance of underwriting objections and the taking of those steps that are needed to satisfy any conditions to the issuance of the policies.
d. The preparation and issuance of the policy or policies of title insurance.
e. The handling of the closing or settlement, when it is customary for title insurance agents to provide such services and when the agent's compensation for such services is customarily part of the payment or retention from the insurer.”
Controversy exists regarding core title services and retained risk, even after this guidance was published. For example, title plants provide an electronic document that mimics Schedule B of a title commitment. HUD’s position is that “if the title insurance company provides its title insurance agent with a pro forma commitment, typing, or other document preparation services, the title insurance agent is not ‘actually performing’ these services. As such, the title insurance agent would not be providing ‘core title services’ for the payments to come within the section 8(c)(1)(B) exemption.” What level of scrutiny of the title search is required before the commitment can be generated from the search document? Does the agency fulfill its obligation to provide all “core title services” if the title agent simply accepts the document provided by the search service and pushes a few keys to create the commitment?
Controversy also exists regarding the sharing of risks between insurance companies. State insurance commissioners recently fined several title insurance companies for entering into reinsurance agreements with title companies owned by builders. The reinsurance agreement paid the builders’ reinsurance companies a fee that was disproportionate to the risk that the reinsurer absorbed. The commissioners found that splitting the insurance premium, without absorbing substantial risk, violated state insurance codes and RESPA.
HUD has not officially established minimum or core services that other settlement service providers must perform to earn a fee. Therein lies a problem. Section 8(b) implies that splitting a fee by agreement is illegal if no services are performed. However, is a modicum of service all that is necessary to earn a substantial fee? Furthermore, is it illegal to take a fee without providing a service when there is no second party that knowingly splits the fee? Without guidance from HUD, the issue of what other settlement service providers must do to earn a fee was left to the courts.
Next Week: Back to Court
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Previous columns:
Affinity relationships under RESPA: Making money the 'old-fashioned way'
Affinity relationships under RESPA: What is an illegal kickback?
Affinity relationships under RESPA: Knocking the stool over
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Howard A. Lax is a corporate law attorney with the Bloomfield Hills, Mich.-based firm Lipson, Neilson, Cole, Seltzer & Garin, P.C. His practice concentrates on financial institutions consumer compliance and regulatory affairs, and real property law. Mr. Lax earned his J.D., cum laude, from Wayne State University's School of Law and holds a bachelor's degree from the University of Michigan. Active in the legal community, he is a member of the State Bar of Michigan's Business Law Section and is a member of the governing council of the Real Property Law Section. He also publishes a bimonthly legal newsletter for the mortgage banking industry. Contact Howard A. Lax at hlax@lipsonneilson.com.
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