RESPA Lawyer Blog

DID THE FEDERAL RESERVE BOARD JUST QUIETLY ELIMINATE MORTGAGE BROKERAGE FIRMS EFFECTIVE APRIL 1, 2011?

Mon, 23 Aug 2010 11:13:28 -0600

The Federal Reserve Board's new final rules amending Regulation Z appear to have major implications on the real estate industry effective April 1, 2011 if the final rule isn't amended quickly. The new Fed Rule slipped in language that re-defines mortgage brokerage firms into the classification of "loan originators." Currently mortgage brokerage firms can collect an origination fee, in-direct compensation (i.e. Yield Spread Premium), and processing fees. However the re-classification of a mortgage brokerage firm into the "loan originator" classification means that mortgage brokerage firms starting on April 1, 2011 are now prohibited from collecting both origination fee and in-direction compensation in the same transaction. The mortgage brokerage firms will only be allowed to collect processing fees and either an origination fee or in-direct compensation not both.

Creditors (i.e. lenders who fund loans in their own name) can still receive an origination fee, in-direct compensation (YSP or SRP), underwriting fees, processing fees, document prep fees, and funding fees.

So what is the issue? If you look at the operating costs for a Creditor the costs typically involve office space/rent, support staff, insurance, federal & state taxes, loan originator compensation, technology, telephone & communications and advertising. The operating costs for a mortgage brokerage firm include the same but add in National Mortgage Licensing System (NMLS) fees and continuing education expenses per the SAFE Act.

What the Fed has done effectively is significantly reduced the income that mortgage brokerage firms can receive while at the same time they will continue to have the same operating costs to manage to keep their operations in business. The 70,000 plus mortgage brokerage firms across the United States won't be able to compete against banks who fund loans in their own name because they won't be able to bring in enough operating capital to keep their operations afloat.

The new Fed rule will have an impact on credit unions, small bank, and mortgage brokerages across the United States who have typically third party originated (TPO) their loans. It will have an impact on TPO warehouse lines who relied on the TPO business model and on state bond loan programs who have traditionally relied on mortgage brokerage firms, credit unions, and small banks to market their bond loan programs to consumers.

One question that we have is has the Federal Reserve Board overstepped its authority in re-classifying a mortgage brokerage firm as a "loan originator" when the Secure and Fair Enforcement Act for Mortgage Licensing Act clearly defines what a mortgage brokerage firm and loan originator both are. It should be interesting to see if the Federal Reserve Board is sued over this new re-classification..

At issue is language that was buried on the bottom of page 34 and on page 35 with regards to loan compensation.

"Furthermore, the definition of "loan originator" in Sec. 226.36(a)(1) is consistent with new TILA Section 103(cc)(2), as enacted in Section 1401 of the Reform Act, which defines "mortgage originator" to include employees of a creditor, individual brokers and mortgage brokerage firms, including entities that close loans in their own names that are table funded by a third party. Consistent with Section 1401 of the Reform Act, the Board does not purport to address transactions that occur between creditors and secondary market purchasers, to which consumers are not a direct party, and appropriately does not extend the rule to compensation earned by entities on those transactions.

Existing Section 226.36(a) defining mortgage broker is revised and re-designated as new Section 226.36(a)(2). Comments 36(a)-1 and -2 regarding the meaning of loan originator and mortgage broker, respectively are adopted substantially as proposed. However, comment 36(a)-1 regarding the meaning of loan originator is amended to clarify when table funding occurs. For example, a table funded transaction does not occur if a creditor provides the funds for the transaction at consummation out of its own resources, such as by drawing on a bona fide warehouse line of credit, or out of its deposits. In addition, comment 36(a)-1 is also amended to clarify that the definition of "loan originator" does not apply to a loan servicer when the servicer modifies an existing loan on behalf of the current owner of the loan. This final rule only applies to extensions of consumer credit and does not apply if a modification of an existing obligation's terms does not constitute a refinancing under Section 226.20(a).

Under existing Section 226.2(a)(17)(i)(B), a person to whom the obligation is initially payable on its face generally is a "creditor." However, as noted the definition of "loan originator" in Section 226.36(a)(1) provides that if a creditor closes a loan transaction in its own name using table funding by a third party, that creditor is also deemed a "loan originator" for purposes of Section 226.36. Thus, new comment 36(a)-3 clarifies that for purposes of Section 226.36(d) and (e), the provisions that refer to a "creditor" exclude those creditor that are also deemed "loan originators" under Section 226.36(a)(1) because they table funded the credit transaction (i.e. do not provide the funds for the transaction consummation out of their own resources). New comment 36(a)-4 clarifies that for purposes of Section 226.36, managers, administrative staff, and similar individuals whose compensation is not based on whether a particular loan is originated are not loan originators."

REGULATION Z (TRUTH IN LENDING) DISCLOSURE REQUIREMENTS FOR CLOSED-END MORTGAGE LOANS ANNOUNCED

Mon, 16 Aug 2010 14:02:11 -0600

The Federal Reserve Board issued an interim proposed rule today, August 16, 2010, that revises the disclosure requirements for closed-end mortgages under Regulation Z (Reg Z) of the Truth In Lending Act (TILA). The Fed said the proposed rule implements provisions of the Mortgage Disclosure Improvement Act (MDIA) which require lenders to disclose how loan borrower's regular mortgage payments can change over time.

The Fed's notice can be accessed by clicking here:
http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20100816b1.pdf

HUD RELEASES 1st EDITION OF RESPA ROUNDUP

Tue, 27 Jul 2010 12:41:17 -0600

The Office of RESPA and Interstate Land Sales has released a new communications article aimed at consumers and the real estate industry called "RESPA ROUNDUP." The RESPA Roundup is aimed at providing more information on issues where HUD believes more clarification is needed. The first volume focuses on the new Home Warranty interpretive rule and questions on the Good Faith Estimate.

REAL ESTATE SETTLEMENT PROCEDURES ACT: RESPA ISSUES INTERPRETIVE RULE ON HOME WARRANTY MARKETING AGREEMENTS

Tue, 29 Jun 2010 20:14:51 -0600

The Department of Housing and Urban Development (HUD) issued an interpretive rule on June 26, 2010 in the Federal Register on the issue of how home warranty companies can pay real estate agents and real estate brokers under the Real Estate Settlement Procedures Act (RESPA) without violating Section 8(a) and 8(b).

The interpretive rule was released in response to a Feb. 21, 2008 unofficial staff interpretation letter that Paul Ceja of HUD's Office of General Counsel issued that caused a great deal of confusion in the real estate industry. Since the letter was issued The National Association of Realtors (NAR), Real Estate Settlement Providers Council (RESPRO), National Home Service Contract Association (NHSC), and others pressed HUD to clarify the rule on the subject of home warranty compensation.

HUD's new clarification breaks down the issue into three distinct categories:

1. Unlawful Compensation for Referrals: RESPA does not prohibit a real estate broker or real estate agent from referring business to a home warranty company. But RESPA does prohibit a real estate broker or agent from receiving a fee for merely referring or "marketing" a buyer or seller to purchase an insurance policy from the home warranty company. A referral by itself is not a compensable service for which compensation can be given and would be a violation of Section 8(a) illegal kickback and Section 8(b) unearned fees under RESPA.

2. Bona Fide Compensation for Service Provided: HUD's RESPA guidance rule says that Section 8(c) allows payment of bona fide compensation for services actually performed. HUD said that depending on the facts of a particular case (based on a case-by-case determination), a home warranty company may compensate a real estate broker or agent for services when those services are actual, necessary, and distinct from the primary services provided by the real estate broker or agent and those additional services must not be nominal or duplicative. An example would be a real estate agent filling out all the information required to issue a home warranty policy and submitting the policy to the home warranty company.

3. Reasonableness of Compensation: Lastly, HUD said they want to assess whether the value of the payment by the home warranty company is reasonably related to the value of the services actually performed by the real estate agent or broker and not just compensation for the mere referral of business. The compensation from the Home Warranty Company to the real estate agent must be based on the fair market value of the services performed in the area where real estate agent operates. For example if the fair market value is $200 dollars in New York but in Missoula the fair market value is $60 to fill out the home warranty application, fill in the registration codes for various appliances, and do some other functions then the real estate agent in Missoula should recieve $60 dollars for that work not $200 if that is the going rate in New York. HUD appears to have taken the position that charging $200 in Des Moine when the fair market value is $60 is unreasonable compensation.

The RESPA interpretive rule raises a large legal question on the issue of whether this rule expands the definition of who a settlement service provider is. Lenders do not typically require a home warranty policy to be purchased by a buyer (or seller) as a condition in securing a federally related residential loan. The result has been that in many jurisdictions across the United States the home warranty policy is paid outside of closing and not listed on the HUD-1.

The question we need clarification on is whether RESPA believes that all home warranty policies issued on the purchase of a home where a federally related mortgage is involved be listed on the HUD-1. If that is not the case does this interpretive rule extend to companies that traditionally were not considered settlement service providers (pest inspection companies, home repair companies, privacy protection companies, etc.) under the original definition?

RESPA: REAL ESTATE SETTLEMENT PROCEDURES ACT AfBA DISCLOSURE FORM NOTIFICATION

Mon, 21 Jun 2010 16:09:11 -0600

One question that we are routinely asked about is the timing of the Affiliated Business Arrangement disclosure form under the Real Estate Settlement Procedures Act "RESPA." The RESPA Affiliated Business Arrangement (AfBA) disclosure form is required to be given to a consumer whenever a settlement service provider refers that consumer to a another settlement service provider with whom the referring party has an ownership interest or other beneficial interest in.

The RESPA AfBA ownership threshold is any person or corporate entity who holds more than a one percent (1%) ownership in both companies. HUD says the referring party must give the affiliated business arrangement disclosure form to the consumer at or prior to the time of referral. If the AfBA disclosure form is only signed at the closing then HUD deems the disclosure to be out of compliance with the RESPA regulations. The Affiliated Business Disclosure form must describe the business arrangement that exists between the two settlement service providers and the AfBA disclosure must give the borrower an estimate of the referred settlement service providers fees.

RESPA SECTION 9: HUD SEEKS COMMENTS ON REAL ESTATE SETTLEMENT PROCEDURES ACT'S "REQUIRED USE" PROHIBITION

Sat, 05 Jun 2010 12:49:47 -0600

The United States Department of Housing and Urban Development is seeking public comments relating to Section 9: "Required Use" under RESPA. "The Real Estate Settlement Procedures Act (RESPA): Strengthening and Clarifying RESPA's "Required Use" Prohibition Advance Notice of Proposed Rule making" was made public on June, 3, 2010.

HUD appears to be concentrating on home builder owned title and mortgage companies where homebuilders offered construction upgrades or discounts to consumers if the home buyers used their ancillary title or mortgage company. The controversy centered around a few homebuilders who offered consumers free upgrades (i.e. bonus rooms, automobiles, or other extravincentives) if the consumer used the home builders affiliated mortgage or title company. The controversy escalated when some of these free upgrades exceeded tens of thousands of dollars. The cost to use another mortgage or title company did not make sense because the consumer would lose out on the extravagant free upgrade. Some consumers felt like they had to use the home builders affiliated business because the incentive was so excessive they had no choice but to use the homebuilders mortgage company.

The affiliated business model is encouraged by HUD when the consumer saves money but some some felt like the practice that a few homebuilders engaged in did not really save the consumers money on the mortgage side because they claim the interest rates were higher.

HUD appears to be looking at how to clarify the incentive language under "Required Use" so that the incentive offered actually benefits the consumer yet still allows the consumer to shop around.

The comment period ends on September 1, 2010.
All interested parties wishing to submit a comment should direct their comments to:
Regulations Division, Office of General Counsel, Department of Housing and Urban Development, 451 7th Street, SW Room 10276, Washington, D.C. 20410-0500

NEW RESPA REGULATIONS CAUSING CONFUSION

Fri, 04 Jun 2010 12:32:01 -0600

Sylvia Hsieh with Lawyers USA recently interviewed several attorneys from across the United States on how the new Real Estate Settlement Procedures Act (RESPA) regulations have created confusion for both the real estate industry and for consumers. Hsieh's article "New Real Estate Settlment Procedure Act regs stir confusion, frustration" is a good article on how the rule is creating many challenges. For disclosure purposes she also interviewed Marx Sterbcow with the Sterbcow Law Group LLC for this article.

RESPA: DEPUTY DIRECTOR IVY JACKSON IS SHUFFLED OUT OF RESPA DIVISION

Fri, 09 Apr 2010 10:11:37 -0600

The U.S. Housing and Urban Development (HUD) made a number of surprising management changes last month including the shuffling of Ivy Jackson, the Director of the Office of RESPA and Interstate Land Sales to the Office of Insured Health Care Facilities. Ivy Jackson's departure took the real estate industry by surprise and created uncertainty for state regulators who were relying on her to educate them the new RESPA regulations this year.

The Sterbcow Law Group would like to thank Ivy Jackson for her contributions over the years at RESPA. She will always be remembered as a federal regulator who was fair to the real estate industry and to consumer interests while at RESPA. Ms. Jackson's work ethic, honesty, and experience will be missed.

HUD promoted Teresa Baker Payne to the position of Assistant Deputy Assistant Secretary and Barton Shapiro was named Acting Director of RESPA and Interstate Land Sales. Ms. Payne and Mr. Shapiro both bring experience to their new positions. Ms.Payne and Mr. Shapiro both are excellent choices for their respective roles at HUD.

RESPA CLASS ACTION LITIGATION: CLASS ACTION CERTIFICATION DENIED IN CARTER V. WELLES-BOWEN REALTY, INC

Thu, 01 Apr 2010 17:20:27 -0600

The United States District Court for the Northern District of Ohio denied certifying a Real Estate Settlement Procedures Act "RESPA" class action lawsuit on March 11, 2010. The Carter v. Welles-Bowen Realty, Inc., case No. 3:05 CV 7427, consolidated No. 3:09 CV 400, 2010 WL 908464 (Northern District of Ohio) is a case where the plaintiffs asserted that Welles-Bowen Realty, Inc was engaged in operating illegal affiliated business arrangements (aka sham AfBAs) which is a violation of RESPA Section 8(a) and 8(b) (12. U.S.C. 2607 (a) and (b)).

Judge Jack Zouhary's reasoning for his latest denial of class certification in this RESPA lawsuit is controversial because he believes that class actions are not a proper method of litigating RESPA civil suits. Judge Zouhary's partially based his decision to deny class certification because it was his opinion that state and federal regulators should prosecute RESPA claims not class action litigation. The controversy surrounds the opinion because the Real Estate Settlement Procedures Act does allow for civil class action lawsuits. State and federal regulators routinely rely on class action lawsuits to help them in their investigations the loss of this informational stream may have an adverse impact on the consumers some believe if this ruling is universally adopted across the United States.

It should be noted that the Court was overruled once before in this case by the U.S. Court of Appeals for the Sixth Circuit on the issue of whether a RESPA class action requires a concrete financial injury in fact. The question is whether the plaintiffs will appeal this ruling or will they find another way to continue on but avoid this particular Court.

RESPA CLASS ACTION LAWSUIT DISMISSED ON OVERCHARGING ISSUE

Thu, 18 Mar 2010 12:12:11 -0600

The United States Court of Appeals for the 9th Circuit ruled in favor of Wells Fargo Home Mortgage Inc., WFC Holdings Corporation, Wells Fargo & Company, and Wells Fargo Financial Services Inc. on the issue of whether overcharging a settlement service fee to the consumer violates the real estate settlement procedures act (RESPA). The RESPA fee at issue was an $800.00 dollar "underwriting fee" which was charged to the borrowers in Martinez v. Wells Fargo

RESPA: UPDATED RESPA RULE FAQs RELEASED ON JAN. 28, 2010

Fri, 29 Jan 2010 14:57:18 -0600

The U.S. Housing and Urban Development's Real Estate Settlement Procedures Act (RESPA) Division released new updated FAQs on Jan. 28, 2010. The new RESPA frequently asked updated question and answers (FAQs) are in bold.

One of the new questions asks whether a loan originator can require the use of its affiliate company for the tax or flood certificate. The updated RESPA guidance says that the loan originator may not require the use of its affiliate for the tax service or flood certificate, but a loan originator may require the use of a non-affiliated provider.

RESPA REFORM QUESTION: WHERE DOES THE SELLER PAID TRANSFER TAX CHARGE ON THE HUD-1 AND GOOD FAITH ESTIMATE (GFE) GO?

Thu, 21 Jan 2010 10:02:54 -0600

Three weeks have gone by since the new RESPA Regulations went into effect and the most commonly asked question we have encountered thus far is how are Seller Paid Transfer Tax Charges shown.

The Frequently Asked Questions "FAQs" state that "All charges typically paid by the borrower must be disclosed on the Good Faith Estimate regardless of whether the charges will be paid by the borrower, seller, or other party?" The FAQ under Section 4 & 5 (see pages 34 & 35): Right to Cure Tolerance Violations has caused a great deal of confusion in some areas of the country on the issue of where to put the transfer tax fee. The confusion centers on whether the transfer tax fee has to be disclosed on the borrower's Good Faith Estimate even if the seller is paying for 100% of the transfer tax.

In some areas of the United States the local custom or tradition in a real estate closing has been to make the seller pay for the entire or a portion of the transfer tax or there is language in the real estate contract stating the seller is to pay for all or part of the transfer tax.

The answer is if the seller is paying for the entire transfer tax or a portion of the transfer tax then it must be listed on the borrower's Good Faith Estimate (GFE) and must be shown on the HUD-1 on the borrower's charge column on page 2 of the HUD-1 settlement statement. A credit may be given from the seller to the borrower on page 1 of the HUD-1 to offset the charge. The only exception to this is if state or local law requires the seller pay for the transfer tax. If state law or local law specifically requires the seller to pay all or a portion of the transfer tax then that portion was not required to be on the Good Faith Estimate.

Please remember though that a transfer tax, unless state or local law requires that it be paid by the seller, is a zero tolerance charge and must be disclosed on the borrower's GFE and on the HUD-1. It should also be noted that a lender may overestimate the transfer tax charge as reductions are not considered tolerance violations under the new RESPA guidelines.

RESPA: HUD RELEASES NEW 49 PAGE SETTLEMENT COST BOOKLET

Tue, 22 Dec 2009 16:11:57 -0600

The Department of Housing and Urban Development (HUD) released the new Settlement Cost Booklet. The 49 page informational booklet must be delivered to consumers within three days of the application along with the Good Faith Estimate (GFE) for a mortgage loan by their lender or mortgage broker. Even though the HUD informational guide was released on Dec. 16, 2009 it must be used beginning on Jan. 1, 2010. Failure to provide the new HUD booklet to consumers within three days of the loan application is a violation of the Real Estate Settlement Procedures Act (RESPA) Section 5.

An electronic copy of HUD's Settlement Cost Booklet can be sent to the borrower electronically in lieu of the printed booklet.

RESPA: HUD ANNOUNCES NEW RESPA OUTREACH CAMPAIGN

Mon, 07 Dec 2009 13:20:37 -0600

The U.S. Department of Housing and Urban Development announced that it would be holding a Real Estate Settlement Procedures Act (RESPA) outreach campaign for real estate industry compliance issues last week.

RESPA: HUD OFFICIALLY DELAYS "HUD ENFORCEMENT" OF NEW RESPA REFORM RULE

Fri, 13 Nov 2009 14:23:42 -0600

HUD announced today a delay in "HUD ENFORCEMENT" on the new RESPA Rule which goes into effect on Jan. 1st, 2010 on FHA loans. We need to highlight the fact that only HUD Enforcement of the new RESPA rule has been delayed for 120 days on FHA loans. Civil litigation on the new RESPA Rule goes into effect on Jan. 1st, 2010 and therefore is not delayed.

We applaud HUD for delaying enforcement of the new rule for 4 months it still exposes companies that do not implement the new changes to potential civil litigation issues for not complying with the new rule.

Another RESPA attorney said it best: "Better pin on your badge and strap on your gun looks like HUD will look to the plaintiff's bar to bring the heat in the first 4 months."

Below is a copy of the HUD press release: