The Bush administration's Thanksgiving message to the real estate and mortgage finance industries had a distinct dearth of holiday cheer.

Housing and Urban Development (HUD) Secretary Mel Martinez announced $2.25 million in settlement agreements with banks, credit unions, title and tax service firms, home builders and mortgage lenders who allegedly violated federal anti-kickback and closing-cost "upcharging" rules.

The settlements were the first by HUD in more than 11 years, and symbolized Martinez's "reactivation" of Real Estate Settlement Procedures Act (RESPA) enforcement efforts nationwide. A top lawyer at the department told Realty Times that lenders, builders, realty agents and title companies should "take a close look" at the new legal actions because "this is just the beginning" of an aggressive RESPA enforcement campaign.

The departments of Justice, the F.B.I., federal banking regulators and state attorneys general are all cooperating with HUD to identify and prosecute firms that provide or take realty kickbacks or pocket settlement service overcharges, the lawyer said.

RESPA, a consumer protection statute enacted in 1974, requires disclosures to home buyers and mortgage borrowers about settlement costs, and provides protections to consumers during the process of closing a mortgage loan. The statute prohibits kickbacks and referral fees among settlement service providers, and bans unearned fees. Another section of the law prohibits any company from requiring a consumer to use a particular title company.

The new settlements include agreements with The First American Corp., Transamerica Corp., Conseco Finance Corp., ARVIDA/JMB Partners, Central Pacific Mortgage Corp. and 38 local banks, credit unions and thrift institutions.

Though the firms agreeing to the settlements all promised to cease the practices HUD charged were illegal, none of the companies admitted wrongdoing. The $2.25 million collected will go to nonprofit housing education organizations, refunds to consumers and payments to the federal Treasury.

Highlights of the settlements include the following:

• First American Corp. and various affiliates were accused of providing flood determination and tax services to lenders on their existing mortgage portfolios in exchange for exclusive services on newly-originated loans. The company will pay $1 million to housing education groups and $200,000 to the federal government.

• Conseco Finance Corp., formerly known as Green Tree Financial Corp., was accused of subsidizing manufactured home dealers' floor plan inventories in exchange for referral of business on new loans to home buyers. The company will pay $190,000 to the government.

• Transamerica Corp. was accused of running a referral scheme on flood and tax services for local lenders similar to that of First American's. It agreed to $500,000 in payments to nonprofit housing groups, and $113,000 to the federal Treasury.

• ARVIDA/JMB was accused of charging a percentage of home sale prices for closing costs, and pocketing excesses over actual costs. It also was alleged to have charged home buyers an extra $300 fee if they declined to use ARVIDA's affiliated title company for settlements. ARVIDA will refund $45,750.

• Central Pacific Mortgage Corp. was accused of settlement service overcharges. The company has agreed to pay $50,000 to HUD plus it will set aside $35,000 for any refunds or penalties required in California.

• Thirty-eight local financial institutions in Massachusetts, Connecticut and Rhode Island were accused of participating in referral schemes that violated RESPA. Payment amounts to settle the charges ranged from $1,000 to $15,000, according to HUD.

HUD Secretary Mel Martinez warned that while lenders and others "have a right to be reasonably compensated for their services, they don't have a right to collect illegal kickbacks and unearned fees."

The bottom line for realty and mortgage industry participants here? If you assumed that HUD's enforcement efforts on RESPA were like the Wizard of Oz -- a booming voice, but nothing of substance behind the curtain -- you're wrong. At least as long as Martinez is running the show.

For more articles by Ken Harney please press here.

Published: November 26, 2001

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.