It should have been no surprise that this year's mid-year meetings of the National Association of Realtors recently featured a special forum dealing with "do's and don'ts" under RESPA (the Real Estate Settlement and Procedures Act). Just a couple of months earlier the Department of Housing and Urban Development (HUD) announced that it was stepping up its enforcement of RESPA. The enforcement staff has been tripled and the budget for enforcement has been doubled.
According to HUD spokesman, Brian Sullivan, "This department is a whole new department when it comes to enforcing the law."
HUD is charged with enforcing RESPA, a 1974 law that was enacted with the intent of protecting consumers during the home purchase process. RESPA has two main areas of emphasis:
- Giving consumers better advance disclosures of settlement (closing) costs.
- Eliminating kickbacks or referral fees that unnecessarily increase closing costs.
The latter is directed towards the practices of various "real estate settlement providers." Those entities include lenders, title companies, escrow companies, termite inspectors, insurance companies, and, of course, real estate brokers and agents.
That NAR should find it worthwhile to conduct a forum on RESPA rules is not so much a reflection on the likelihood that NAR members are liable to be noncompliant as it is a commentary on the often-Byzantine nature of the rules and their interpretations. Although, on the other hand, I must admit that to hear the discussions of these issues is to cause one to marvel at the innovative and creative thought processes that American businesspersons can come up with in attempts to work around, and find loopholes in, the regulations that government can devise.
RESPA violations in the (Section 8) "kickback" area tend to take two forms: one consists of attempts to buy referral business, the other relates to avoidance schemes that are meant to be payments for referral business.
While the former can take many forms, one of the most popular -- because less blatant -- consists of various schemes to defray the business costs of the person or entity who might give the referrals. For example, a title company (or its agent) might offer to subsidize a real estate agent's advertising costs. Probably anyone who would read this column has seen a real estate agent's advertisement with an ad for a title company or mortgage rep inserted along the bottom of the ad. And that is just fine under RESPA. Unless the rep has paid more than his or her proportionate share of the ad space. If the title ad occupies 1/8 of the space, then the title company can only pay 1/8 of the bill. Otherwise it is a violation.
Similarly, a closing service provider such as a lender or an escrow company might enter into an agreement whereby that company rents space in a real estate company's office. One of the provider's employees might, for example, use a desk where he or she can take loan applications, or process escrow instructions. That, too, is just fine. As long as the rent reflects fair market value. If a broker is paying $2,000 a month for his or her office rent, and the escrow company is paying the broker $1,000 rent for just one desk, the RESPA enforcers are not going to be happy.
RESPA also covers the manner in which real estate agents and brokers are not to be compensated for referring business. It is clear that it can't be tit for tat. But many schemes have been devised to get around the prohibition. A mortgage company might, for example, offer agents chances to be in a drawing for a vacation, based on the number of referrals an agent had given during a specified time period. The more referrals, the more chances. Clearly, not every agent will win something, so this can't be treated as an illegal payment for referrals, can it? Oh, yes, it can. The chances themselves are taken to be "things of value," and therefore are prohibited under RESPA.
Well, how about this? Agents pool together and form a mortgage company. They are then paid as investors, not as referral agents. Isn't that okay?
Yes, provided that their payment is based on their ownership interests, not on the number or dollar volume of referrals given. (And, no, you imaginative ones out there, it will not pass muster to adjust one's ownership interest periodically on the basis of referrals to the company.)
The RESPA forum was fun for the imagination and creativity it revealed, but its primary lesson was an old one: If a deal sounds too good to be true, it probably is.
