Full credit to the RESPA News Monthly and to attorney/columnist Howard Lax for bringing us a story that is bound to cause a few chuckles among readers of this column. But, first, a bit of background.

In 1974 Congress enacted the Real Estate Settlement and Procedures Act, commonly known as RESPA. The provisions of RESPA were intended to protect consumers during the home purchase process. Its two main areas of emphasis were (1) the provision of disclosures regarding settlement (closing) costs, and (2) the prohibition of kickbacks or referral fees that unnecessarily increase closing costs. Section 8 of RESPA makes it illegal, except for limited specified exceptions, to give someone money or any other thing of value for the referral of a real estate settlement service. For example, if I received money for referring someone to an escrow company, in most every case that would be a violation of section 8 of RESPA.

HUD, the department of Housing and Urban Development, is the agency charged with enforcing RESPA. HUD takes this very seriously. Practically every month there is an announcement of a settlement between HUD and some service provider (frequently title or mortgage companies) as a result of a HUD investigation of Section 8 violations. In 2005 HUD announced that it had tripled its enforcement staff and doubled the budget for the enforcement of RESPA. HUD spokesman Brian Sullivan announced that it was "a whole new department when it comes to enforcing the law."

Back to our story. In November of 2007 HUD issued a press release detailing a new program that had been announced by HUD Secretary Alphonso Jackson. According to the release, Jackson "highlighted the new FHASecure product and other reliable homebuying incentives … for homeowners who want to stay in their homes and prospective borrowers who want to make an educated choice when they buy." "Beginning today," the announcement said, "prospective homebuyers in Michigan and Ohio will also be offered unique incentives to purchase HUD-owned properties using financing insured by the FHA."

As part of the program, HUD offered a special incentive to real estate brokers. Any broker who sold a HUD-owned home was to receive a bonus above the usual real estate commission -- "a $500 bonus when borrowers utilize FHA financing and a $250 bonus if borrowers use other financing options." That is to say, brokers would receive an extra $250 if their clients were to choose to obtain FHA insurance for the financing of the home.

Mr. Lax, whose law practice concentrates on financial institutions consumer compliance and regulatory affairs, put the matter succinctly. "Did we just hear the Secretary of HUD knowingly announce a criminal kickback program? Yup, we sure did! Mortgage insurance is a settlement service, and HUD is not exempt from Section 8 of RESPA." Moreover, he placed it squarely within the context of the intent of RESPA. "This program was an excellent example of why RESPA outlawed referral fees. HUD should be lowering its FHA insurance premium by $250 to attract new business. Paying a referral fee to a real estate broker instead of cutting the borrower's closing costs confirms that FHA insurance is overpriced, and that referral fees drive up the borrowers' closing costs."

By the time the issue had come to attorney Lax's attention, the HUD incentive program had been adopted by HUD Homeownership Centers around the country. On Feb. 7 Howard Lax shared his perspective with a HUD attorney. Four days later the program was cancelled.

On Feb. 11 HUD spokesman Brian Sullivan (yes, the same Brian Sullivan who had announced in 2005 that HUD would be "a whole new department when it comes to enforcing the law") announced that "because this program may also leave some with the perception that this is contrary to the spirit of RESPA, we've stopped it."

It isn't always clear when a RESPA violation occurs, and a great deal of energy and ingenuity has gone into finding and/or creating loopholes within its provisions. But sometimes violations are clear, even though they may go unnoticed. Thanks to Mr. Lax for noticing this one.

Published: March 11, 2008

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Bob Hunt is a director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at .