The Bush administration has just issued a new warning that Realtors, settlement and title companies and mortgage brokers would be ill-advised to ignore: The government has more than tripled its RESPA police force, has brought in FBI investigators, and is actively seeking to prosecute anyone who violates federal anti-kickback and "mark-up" regulations.

RESPA stands for the Real Estate Settlement Procedures Act, the government’s primary consumer-protection law in the home purchase and mortgage settlement arena. The law generally prohibits kickbacks and other compensation for referring settlement-related business without providing services to the consumer.

For example, if a Realtor receives $500 for each referral of a customer to a specific title company or settlement agency -- essentially steering title and settlement work -- both the Realtor and the title company are violating RESPA. The statute carries potentially stiff fines and even prison sentences for violators, but has rarely been aggressively enforced during its 30-year history.

Mel Martinez, secretary of Housing and Urban Development (HUD) -- the agency authorized by Congress to enforce the law -- is putting an abrupt end to that tradition. In the last several months alone, Martinez has more than tripled the RESPA enforcement staff at HUD -- from 14 to 45 investigators -- and has hired outside specialists including former FBI to help out. He has also begun heavily involving state attorneys general and federal and state financial regulatory agencies in the enforcement push, extending the enforcement reach by hundreds of additional investigators. During the Clinton administration, by contrast, the RESPA enforcement staff consisted of only three to five investigators.

In the words of Martinez’s deputy, John C. Weicher, FHA Commissioner, "we are very serious" about stopping under-the-table payoffs, mark-ups and other illegal practices in the home settlement field. In an interview, Weicher cited four recent RESPA settlements as "examples of what we are doing, and where we are putting our resources."

In one case, HUD forced TitleVentures.com, a title insurance agency based in Kingsport, Tenn., to close 36 affiliated title corporations because they existed solely to funnel illegal referral fee payoffs, according to HUD. The government charged that Jerry D. Holmes, Jr., principal owner of TitleVentures.com, "established dozens of sham title insurance companies for the purpose of paying kickbacks to real estate and mortgage brokers in five states." The alleged sham corporations in North Carolina, South Carolina, Tennessee, Georgia and Ohio "had few or no employees, no office space, and did little or no title work" -- all in violation of RESPA’s ban against unearned referral fees, according to HUD.

As part of the settlement, Holmes admitted no wrongdoing but agreed to close down the affiliated companies and paid a fine to the U.S. Treasury.

Another settlement announced by Weicher involved realty firms Coldwell Banker United and Coldwell Banker Richard Smith in Texas. According to Weicher, real estate agents for the two firms "accepted free Internet-based virtual home tours from title companies in the Austin, TX area in exchange for the referral of business." RESPA prohibits acceptance of any form of compensation -- cash or anything of value -- in exchange for referrals of business. As part of the settlements, the agents involved agreed to stop accepting virtual tour services from title companies and paid fines to the federal government.

Last year, HUD settled with seven Austin area title companies that provided free virtual tours as incentives to Realtors for referring business. The companies agreed that if they offered virtual tour services in the future, they would charge a fee that represents their actual cost. In addition, the title agencies paid over $130,000 in fines and agreed to "alert real estate agents that the virtual tours come with no expectation of potential business."

In still another settlement, World Savings Bank, a California lender, agreed to stop paying $100 apiece to real estate agents for filling out and submitting online loan applications for prospective borrowers. HUD has long ruled that a realty agent may not be compensated merely for filling out a loan application. As part of its settlement, World Savings agreed to discontinue its $100 fees and paid a fine to the government.

In an interview, Weicher said the beefed-up investigatory staff and outside contractors would pursue not only sham title corporations but "all unearned fees" including markups or upcharges of settlement fees. Markups typically are surcharges to the consumer imposed by a settlement services provider -- for example, adding $100 to an appraiser’s bill, or $50 on top of a $15 credit check, charging the consumer $65 at settlement.

Weicher said HUD is pursuing markup investigations "even in jurisdictions where federal appellate courts have ruled" that they are legal.

"We believe they are violations of RESPA," he said, "and we intend to challenge them wherever we find them."

Published: August 25, 2003

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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.