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RESPA's new enforcement muscle.

HUD's RESPA enforcement unit is showing some real muscle in cracking down on offenders, as this report from the front reveals. Two hundred suspected violators were probed last year and now state attorneys general and the U.S. Attorney's Office are getting into the war on paying for referrals.

It has been a year since the Department of Housing and Urban Development (HUD) established an enforcement unit to police the anti-kickback provisions of the Real Estate Settlement Procedures Act (RESPA). Those provisions make it a crime to pay out or receive a thing of value for the referral of a settlement service. Two hundred or so settlement service providers were investigated by the RESPA enforcement unit last year and if you talk to any of these people you will quickly realize that this small enforcement team means business.

Lenders that provide money, vacation trips, fax machines or low-interest loans to real estate brokers to encourage referrals; title agents that receive the lion's share of insurance premiums while title underwriters do all the work; or real estate brokers that form settlement service companies and then require customers to use these affiliates--all have found themselves easy targets for the new RESPA unit.

Exaggeration? Consider the numbers. During RESPA's first 17 years, HUD received perhaps 800 inquiries. In the two years since the RESPA enforcement unit was formed, the total has soared to nearly 400 complaints each month. And where are these complaints coming from? From businesses mad about the unfair advantage competitors get by paying referral fees.

Let's look at what the RESPA enforcement unit has been up to this past year. What violations drew their attention? Does it make sense to approach HUD about entering into a consent agreement or other form of amnesty--to avoid RESPA's penalties?

About the statute

Congress enacted the Real Estate Settlement Procedures Act in 1974 to protect homebuyers by requiring advance disclosure of settlement charges and by eliminating kickbacks and referral fees, both of which could cause higher settlement service costs. RESPA applies to "federally related mortgage loans," which means virtually all purchase-money, first-lien, residential loans, including both conventional and government (FHA and VA) loans. It does not presently apply to refinancings, second-lien loans or most construction loans; but that may soon change.

It is the anti-kickback provisions in Section 8 that are the primary focus of the RESPA enforcement unit. Section 8 of RESPA generally prohibits a person or entity from giving or accepting a fee or thing of value for the mere referral of business related to a settlement service. Settlement services include title searches and examinations, surveys, title insurance, attorney services and the preparation of documents and services by real estate agents and brokers.

Court cases have held that the origination of a loan is not a settlement service--although HUD takes a different view. If RESPA regulations implementing 1983 amendments to the law ever see the light of day, HUD is almost certain to define settlement services to include the making of a loan. For now, loan originators had better tread carefully.

This past year, the RESPA enforcement unit has focused on whether the payment of a fee or thing of value was for services actually performed, or whether all or part of the payment was for a referral of business. A "thing of value" is broadly defined to include money, commissions, profits, property, discounts, credits, low-interest loans, free fax machines, computers and the like. Virtually anything someone receives in consideration for making a referral is considered by HUD to be a thing of value.

In addition, no person or entity may give or accept any portion, split or percentage of any charge made or received for the rendering of a real estate settlement service other than for services actually performed. Referrals per se are not outlawed by RESPA. What the act does prohibit is any payment for referral of certain types of business.

Violators should realize Section 8 gives the RESPA unit some impressive firepower. HUD may, for instance:

* seek a court order to enjoin a company's business activities;

* require restitution, paid to the person or persons unfairly charged a settlement service fee, in an amount three times that of the original charge;

* require the company to return all profits made through an unauthorized activity; or

* seek debarment of real estate agents, mortgage lenders and brokers, title agents and underwriters and developers from further participation in government loan programs.

For those considering launching a program they are not quite sure about on RESPA grounds, if those sanctions don't get your attention, consider this: the act also permits HUD to seek $10,000 fines or criminal penalties of up to one year's imprisonment.

What you need to know about the RESPA enforcement unit

First, it's small. With fewer than a half dozen full-time staffers, the RESPA unit cannot possibly monitor or supervise an entire industry. They have, however, maximized their efforts by contacting state attorneys general, insurance commissioners and consumer-interest groups, who act as the unit's eyes and ears. The most fertile source of leads by far comes from businesses making allegations against their competitors. RESPA Enforcement Unit Director David Williamson estimates that 80 percent of the unit's 400 monthly complaints come from "tattletale" competitors.

Although more than 200 reviews were initiated in the first year, with its small staff the RESPA unit has had to become more selective in deciding which cases it will investigate. Some complaints may be handled by telephone. A RESPA investigator will call the subject and determine whether the matter is serious enough to warrant a full review. In many of these cases, especially where the questionable activity has stopped, the unit simply requests that the person or entity sign an affidavit declaring that the practice has ceased and swear that future activities will comply with the act.

If the facts warrant, on the other hand, count on a full investigation. That means requests for documents; written responses to detailed questions about the subject's business activities; or, in more serious cases, the issuance of subpoenas compelling production of documents and testimony.

The RESPA unit has joined forces with state attorneys general. The act permits state attorneys general to bring actions on behalf of consumers. In addition, many states have their own unfair trade practices acts that give their attorney general the authority to investigate and enjoin violators who engage in kickback activities. Minnesota and Illinois, for example, have teamed up with HUD to initiate joint reviews. State and federal investigators today are reviewing the business practices of real estate brokers, lenders, title agents/underwriters and attorneys engaged in settlement services.

The Philadelphia story

HUD's RESPA unit also has enlisted the department's regional offices as an enforcement resource. An experiment in the Philadelphia area has resulted in a frenzy of RESPA investigative activities.

The Philadelphia regional office's jurisdiction encompasses Pennsylvania, Delaware, Maryland, Virginia, West Virginia and the District of Columbia. The Philadelphia regional administrator offered the RESPA unit the services of his region's fair housing investigators to conduct on-site investigations of settlement service providers.

At a public meeting in April, the regional administrator and the RESPA enforcement staff told their audience--more than 400 settlement service providers--to expect vigorous enforcement of the anti-kickback provisions of the act. Phones at HUD rang off the hook, letters and allegations came in fast and furiously--and approximately 50 RESPA enforcement actions already have been opened. Director Williamson is seeking to initiate similar programs in other HUD regional offices.

All in all, this small band of RESPA enforcement investigators are making their presence felt. What types of RESPA violations have attracted the unit's attention?

Common findings

HUD informs the industry of its RESPA obligations through regulations and informal advisory opinions. Unfortunately, the department has all but stopped issuing advisory opinions and the regulations have not been materially updated in eight years. That means that many settlement service practices and procedures now in use have not been addressed by agency regulations. Proposed regulations continue to be bottlenecked at HUD or the Office of Management and Budget--the result is confusion and uncertainty on the part of the industry. The RESPA unit has recognized this shortcoming and is less likely to penalize settlement service providers for activities that have yet to be addressed by regulations.

Instead, the RESPA unit has concentrated most of its enforcement efforts in areas where existing rules are clear, or at least clearer. Here is a summary of this year's HUD hit list.

Thing of value--HUD is presently investigating arrangements in which various things of value are provided to persons in a position to refer settlement business, or other arrangements where services and equipment are provided referrers at less than their reasonable value. For example, referrers have been supplied computer equipment and fax machines that can be used to communicate with the providers, but also may be used by the referrers for their own purposes. HUD has taken the position that providing "non-dedicated" equipment violates Section 8. Lenders have had to return or pay for computers, fax machines and printers supplied by attorneys, credit reporting bureaus and title agents. Real estate brokers accepting a portion of a title agent's premium or excessive fees from lenders for taking a credit application also have been required to end these practices.

Sham companies--A common violation involves referrers of settlement services joining together to form settlement companies that perform little or no work yet receive excessive fees. Groups of real estate brokers, for example, have formed mortgage companies and title agencies and then subcontracted out all or nearly all of the settlement functions, while retaining a substantial portion of the fees. HUD finds such conduct to be in violation of the act.

Controlled business arrangements--HUD is engaged in several investigations of controlled business arrangements that involve the relationship and business activities among affiliated service providers. Investigations to date have focused primarily on real estate brokers that own an interest in a mortgage company, mortgage broker or title agency. HUD investigators have come down hard on controlled business arrangements when consumers have not been informed of the affiliated relationship or of the true costs charged by the affiliated entity; not been given the option of selecting a non-affiliated settlement provider; or payments to the real estate brokers/owners are based on the volume of business referred by the individual broker, rather than a return on ownership interest.

True title agents--Title agents typically refer title business to title underwriters. In most cases, the agents receive the largest portion of the insurance premium. HUD claims that title agents are only entitled to this larger share if they perform "services significant to the issuance of title policies." If, instead, title agents subcontract out all or substantially all of their duties to the title underwriter or other third party, yet retain a large piece of the premium, HUD considers the receipt of the premium to have been paid for the referral of business, not for services actually rendered.

RESPA does not define the term "title agent" nor describe "significant services" to the issuance of a title policy. In a settlement agreement reached with a title agent last October, however, in which the agent paid HUD $1 million, the department did define what it considered to be "significant services." HUD maintains that to be a title agent one must examine the actual search package, determine insurability by preparing the title commitment, issue the policy in one's own name, and assume liability for one's acts or omission to act. HUD is actively investigating the relationship between title underwriters and their agents.

Voluntary compliance

At any stage of a RESPA investigation, a company may elect to enter into an administrative settlement with HUD. Settlement may mean modifying existing practices or forking over hard cash, or both, in order to have the matter put to rest.

The RESPA enforcement unit also encourages persons and entities to come forward voluntarily before HUD opens an investigation. This represents voluntary compliance or a form of amnesty. Voluntary compliance may or may not make sense depending on the circumstances. One would need to keep in mind, that there's a price to pay for seeking voluntary compliance. That party shouldn't expect a certificate of appreciation for stepping forward--the company in question would still get whacked. The consequences will be less severe, however, than if HUD were to find the violator on its own. Before anyone rushes to volunteer, they should consider a few questions:

* Are they a likely candidate to be investigated?

* Is the RESPA enforcement unit conducting investigations in their backyard?

* Are they likely to be "turned in" by one of their competitors or a disgruntled employee?

* What's likely to happen if they do come forward?

* Can they expect fair treatment?

Before HUD opens an investigation, it generally considers several factors:

Gravity of the offense--Was the violation intentional or inadvertent? Was the act a clear-cut violation of the anti-kickback provisions or did it involve payments in an area not yet addressed by HUD regulations? Was this an isolated instance or is the questionable practice continuing?

Injury to the public--Was the consumer ripped off? Did the company's actions result in the consumer paying a higher cost for the settlement service? Was the consumer required to use a particular settlement service provider?

Benefits received--Did the referral fees received total $5,000 or $500,000? The higher the fee accepted in violation of the act, the more likely HUD is to select the company for investigation.

Ability to pay--Does the offending company have a net worth with which to pay a sizeable fine, or are there insufficient assets available? The bigger the company, the more likely the department is to pursue the matter.

After evaluating these factors, if a company thinks it is a serious candidate for investigation--or if top management simply can't sleep at night until the matter is resolved, voluntary compliance may be the answer. It is not for everyone.

Should a decision be made to contact HUD about voluntarily entering into an agreement, here are some suggestions:

Mitigate the damages--Before approaching the RESPA unit, the company should mitigate the damages by stopping the questionable act. If the company was paying out or receiving referral fees--stop. That may mean terminating an employee engaged in an unauthorized or unlawful practice. It may require terminating relationships with errant vendors. Impose controls and, most important, take whatever corrective actions will prevent slipping back into the questionable practice.

Go in unannounced--If a company decides to march in to HUD, to disclose what they have been doing and then can't cut an acceptable deal, their cover has been blown for nothing--except making it easy for HUD to go after that company. Instead, that party should have its lawyer provide HUD with a hypothetical set of facts, and then ask HUD what their terms would be to settle. If the terms are unreasonable and the party decides to take its chances, at least the company hasn't given away the store by announcing its name and serial number.

Carefully draft the agreement--Any party approaching HUD voluntarily should be certain that any agreement entered into does not include an admission of liability or fault. Remember that RESPA authorizes criminal penalties. The last thing anyone would want to do is conclude an administrative settlement with HUD, only to have the U.S. Attorney's Office or state attorney general bring a criminal action against the company. One should make sure a settlement is conditioned upon there being no sanctions or penalties against the company or its managers.

Insist on anonymity--After settlement, HUD typically issues a press release disclosing the identity of the party and the terms of the agreement. In some cases, HUD may waive disclosure or at least may be willing to negotiate the timing of a press release. It would be worth a try for anyone in such a position.

Seek a repayment schedule--Those reaching such an agreement with HUD can expect a fine. The size of the fine will depend on the factors previously discussed: seriousness, injury, size of the fee, net worth of the company. If the fine is steep, the party should request permission to pay the fine over time. In the past, HUD has been amenable to a reasonable repayment schedule.

The RESPA enforcement unit recently has joined forces with the U.S. Attorney's Office on RESPA matters. If the U.S. Attorney's Office is involved, violators can expect a rougher ride. They should at least try for a global settlement that releases the company from all administrative, civil and criminal penalties. An interagency agreement almost certainly will carry a higher fine and bring greater publicity. Significantly, HUD's Williamson says his unit intends to seek alliances with more U.S. Attorney's Offices in the coming year.

What are the implications for the industry? For those who knowingly give or accept fees for the referral of settlement services, the stakes have been raised. RESPA enforcement may be 18 years late, but it's here in full force. You ignore it at your own peril. And for those who have watched dejectedly as the competition increasingly skirted the letter and the spirit of the law, the RESPA posse finally has arrived.

Phillip L. Schulman is a partner with the Washington, D.C. law firm of Brownstein Zeidman and Lore where he specializes in enforcement and compliance matters before the federal agencies.
COPYRIGHT 1992 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Real Estate Settlement Procedures Act of 1974
Author:Schulman, Phillip L.
Publication:Mortgage Banking
Date:Oct 1, 1992
Previous Article:Pulling houses back from the brink.
Next Article:Keeping an eye out for risk.

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