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Holtz Remarks PLEASE NOTE THAT THE FOLLOWING REMARKS ARE NON-BINDING ON THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT ("HUD"). FURTHER, THE OPINIONS AND STATEMENTS EXPRESSED BELOW DO NOT REFLECT THE OFFICIAL POLICY OF HUD. Rebecca Holtz’s remarks on RESPA, 11/18/99 Real Property Transactions Committee of the Real Estate, Housing and Land Use Section of the D.C. Bar Hello. I am happy to be here to talk about RESPA. In preparing for today’s presentation, I remembered what happened in a criminal trial some years ago. The defendant was on trial for murder. There was strong evidence of guilt, but there was no dead body. In the defense’s closing argument, the lawyer addressed the jury and said: “Ladies and gentlemen of the jury. I have a surprise for you. In the next minute, the person presumed dead in this case will walk into this courtroom through that door.” She then looked at the courtroom door and waited. The jurors, somewhat stunned, all looked on eagerly. A minute passed. Nothing happened. Finally the lawyer said, “Actually, I made up that statement. But it made you all look. I therefore submit to you, that you have a reasonable doubt in this case, so you must return a verdict of not guilty.” The jury, clearly confused, retired to deliberate. A few minutes later, however, the jury returned and pronounced a verdict of guilty. “But how?” asked the lawyer. “You must have had some doubt; I saw all of you stare at the door.” The jury foreman replied: “Yes, we all did look, but your client didn’t.” Now, none of you would have had a client like that, I am sure…. Thank you for this opportunity to talk about the Real Estate Settlement Procedure Act, commonly known as RESPA. As most of you are aware, RESPA is a consumer protection law covering almost every residential mortgage loan in the country. The law covers four basic areas: it requires certain disclosures to consumers before closing, at closing and after closing; it prohibits certain practices, such as referral fees and unearned fees in RESPA transactions; it sets out procedures for consumer complaints about their loans; and it sets limits to the amounts held in borrower escrow accounts. The law was first passed in 1974 and has been amended several times, most recently in 1996. I don’t know how many of you studied RESPA in law school. I know that I didn’t. But back then, I thought that I’d be a litigator, so what did I know? I’ll briefly cover some of the RESPA basics, but I expect that we’ll cover more advanced issues in the question and answer period. You will encounter RESPA in any number of settings: if you conduct closings of residential loans yourself, if you advise mortgage brokers, lenders, title companies or other clients on regulatory compliance issues, or if you represent consumers who have disputes with their lenders about their loan or escrow account. The RESPA disclosures include the familiar “good faith estimate” of closing costs, the HUD-1 settlement statement, servicing transfer disclosures, escrow account statements, and disclosures of affiliated business arrangements. RESPA does not, however, extend to the Truth in Lending disclosure of the annual percentage rate. Nor does RESPA provide for a 3 day rescission of refinancings. That, too, is a TILA issue. Another law that RESPA does not cover is the PMI Act. While the PMI Act permits lenders to use the RESPA escrow account disclosures to disclose their PMI cancellation policy, HUD has no enforcement authority under that Act. RESPA’s general prohibitions against referral fees and kickbacks appear simple: Section 8 (a) of RESPA prohibits any person from giving or accepting referral fees for the referral of settlement service business involving a RESPA covered loan. Section 8 (b) prohibits giving or accepting fees for other than actual services. Section 8 (c), however, permits payments for services actually rendered. Our most challenging cases are those where a person referring business also does some work. Then the issue is whether the payment is reasonably related to the services actually performed or is a referral or unearned fee. I tend to use a “but for” test for these situations. When asked if a fee is permitted by RESPA, I ask “but for the referral, what is the service worth in the market place?” If one could outsource the work for the fee in question, then it’s probably okay. If not, then you may wish to counsel your clients to reconsider giving or accepting the payment. There are other exceptions to Section 8’s prohibitions, such as the affiliated business arrangement, which allows someone who is in the position of referring settlement service business, such as a real estate agent, to refer a customer to an affiliated business, so long as certain conditions are met. The referring party must disclose to the consumer in writing the nature of the relationship and an estimate of the charges for the referred service. With a few exceptions, the referring party cannot require the consumer to use the affiliated business and the only thing of value that is received from the relationship is a return on ownership. Section 6 of RESPA requires disclosures relating to the transfer of loan servicing, but it also sets out a complaint process for lenders to follow in answering consumer inquiries, called “qualified written requests” in the statute. Section 6 also requires timely payment of escrow account items, such as taxes and insurance. If a lender fails to comply with Section 6’s provisions, consumers can sue for damages. Section 6 of RESPA does not, however, prevent a lender from enforcing the terms of the loan agreement. The RESPA office generally does not get involve in payment disputes, but we have monitored lender compliance with Section 6 and we have investigated cases where taxes or insurance were not paid timely from escrow accounts or where the complaint process was ignored. Section 10 of RESPA limits the amount of reserve a lender may hold in a borrower’s escrow account to 1/6 of the total annual escrow charges. HUD’s regulations at 24 CFR 3500.17 set out the process for a lender to analyze the borrower’s escrow account, at least annually. In today’s remarks, I intend to discuss the RESPA work of my office. I’ll also talk about some of the regulatory issues that we are likely to face in the next year. I’ll close with some advice about how you can comply with RESPA in your own activities, or how you can advise your clients so that they will comply with RESPA in their business practices. This has been a challenging year: One of my staff members took Family Leave for most of the year to take care of her terminally ill husband. He died this spring. She died last month. Another staff member took off for several months to care for his wife during her recovery from brain surgery. Their absence has obviously affected our productivity. We currently have three RESPA compliance specialists and one vacancy on my staff. I’ll be working to fill this vacancy in the near future. You may also know that the Office Director’s position has been vacant for a year. I’ve been the Acting Office Director since August. The Office Director’s position was re-advertised and hopefully, it will be filled soon. HUD has other staff members that work on RESPA matters. There are four attorneys in the Office of General Counsel who provide RESPA regulatory counsel or enforcement work full time and others on an as needed basis. We also benefit from policy development and research staff work on regulatory or legislative proposals. At times we use HUD field staff to assist in investigations. We work closely with other regulators as often as possible, including state and federal banking regulators, insurance and real estate commissioners and State Attorneys Generals. I intend to discuss our compliance efforts over the past year and what we see as current enforcement issues. I’ll share my thoughts on how you can comply with RESPA—which I hope will help you better serve your customers in the work that you do. Public Education The public’s widespread use of the Internet has significantly impacted the work of the RESPA Division. As a result of our web site we are seeing more e-mail inquiries and more RESPA complaints. Our RESPA web site had 400,000 “hits” last fiscal year. We try to keep our web site current. My goal is to post information within one day of its publication. Our web address is available on one of the handouts. Speaking of e-mail, we’re getting lots of them. Most e-mail messages are similar to telephone inquiries. People have specific questions that they want answers to… and they want answers quickly. In FY 1999, we handled 1846 items of “general correspondence”—matters unrelated to our investigations. This doubled last year’s total of 983 items. In fiscal year 1998, RESPA staff handled about 9000 telephone calls. In fiscal year 1999, we had about 5000 calls. We’ve gotten fewer industry callers this year—maybe the publication of the statement of policy on mortgage broker fees helped reduce the number. We’ve also gotten less calls for written material. That may be because people can now download information from our web site so they don’t need to ask us to mail it to them. Whatever the reason, we have less callers so my staff is able to spend more time on other work. Rulemaking and Reform Division staff worked with other HUD staff on several policy issues over the past year. You are probably aware of the Joint Report to Congress, which HUD and the Federal Reserve Board of Governors submitted to Congress in July, 1998. Division staff specifically suggested certain changes to the law to reflect complaints that we’ve received. Throughout the year, HUD staff have met with industry and consumer groups striving to reach consensus on legislative reform. That is an ongoing process in a changing world. We are aware that the recent changes in the banking laws may also affect the participants in this discussion. Banks that may not have been as involved in the residential mortgage business, may now become more involved through subsidiaries providing a number of services, such as title insurance and closings. We’ve also provided comments on recent legislation relating to e-commerce. The world of contract law that most of us learned is quickly changing, so that in the not to distant future, someone’s fingerprint or eyeball imprint may become their “digital signature,” binding them to a contract. If contracts can be entered electronically, disclosures will need to follow. HUD realizes that some of our RESPA regulations should be reviewed to see if there are any barriers to electronic commerce. In the next year, I hope to work with others at HUD on changing the regulations to permit electronic disclosures of documents that are now required under RESPA, while at the same time making sure that the protections that are currently in place for consumers are not adversely impacted. HUD also issued a statement of policy on the legality of mortgage broker fees this past spring. HUD staff worked closely with industry and consumer groups to arrive at a statement clarifying that payments of yield spread premiums were not illegal per se. The RESPA Division will use this statement in enforcing Section 8 against mortgage brokers and wholesale lenders. In considering whether a payment from a lender to a mortgage broker is permissible under Section 8 of RESPA, we will first consider whether goods or facilities were actually furnished or services were actually performed for the compensation paid. If so, then we’ll look at the second question of whether the payments are reasonably related to the value of the goods or facilities that were actually furnished or services that were actually performed. We’ll look at all fees paid to the mortgage broker to determine whether the total compensation is reasonably related, and we’ll do so in relation to price structures and practices in similar transactions and in similar markets. Compliance and Investigative Activities: Enforcement Work The Department’s fiscal year runs from October 1-September 30 of each year and that’s how we’ve kept our investigative records. In fiscal year 1998, we had a total inventory of 344 RESPA cases. In fiscal year 1999, we had 835 cases. We saw a significant increase in complaints under Section 6, in the loan servicing area. Part of this increase is due to a change in our record keeping. We’re now tracking all the complaints we receive, not just the enforceable ones. Twenty-one (21) % of the complaints are not RESPA related, yet people expect a response from us. In addition, we’ve seen a significant increase in Section 6 servicing complaints. In FY 1998, Section 6 complaints were about 19% of our cases. In FY 1999, they were 38 % of the cases received. It’s interesting to note that our percentages of Section 8 and Section 6 complaints have switched places. While in FY 1998, Section 8 complaints were 43% of our case load, in FY 1999 the percentage was 22%. That doesn’t mean that the number of Section 8 cases was down—in fact we had 33 more Section 8 complaints this past year. What it does mean is that we’re getting a lot more consumer complaints than we’ve ever had before. I do attribute our web site for this rise in Section 6 complaints as we’ve given guidance to consumers about the complaint process. And we are seeing more consumer complaints. People do not like how they are being treated and they are complaining to us. Many of the servicing complaints are about the failure of a servicer to pay taxes timely, as well as the failure to respond to the complaint process set out in Section 6. Section 6(g) of RESPA requires servicers to pay escrow items timely. If they don’t, consumers complain and they may sue. Servicing mistakes do happen. And people will complain to us. This is especially true now after people have done their income taxes and discovered problems with their property tax payments. Where we see a systemic problem, we will contact the servicer to investigate further to assure compliance with RESPA’s requirements. As of yesterday, we had 310 open RESPA investigations. I’ve brought with me some settlement agreements that we reached this year. These included resolution of numerous complaints by a settlement with a major lender concerning its handling of escrow accounts, another case where referral fees were paid by a mortgage broker to a real estate agency and where a mortgage company padded the appraisal fees. You’ll see that payments were made to the government in some settlements, but in the unearned fee scenario, we got refunds for the home buyers. With respect to our Section 8 cases, Division staff work with our attorneys to develop strong, solid enforcement cases, some of which may take months (or years) to fully develop: Here are some examples of the kinds of complaints we see: Basic referral fee/kickback issues:
Unearned fee issues:
Affiliated business arrangement related issues:
General enforcement approach: We handle cases at the lowest level necessary. If a phone call will do it, then we call. If an e-mail message will convey the point quickly, then we do it by e-mail. We will issue warning letters where appropriate, but don’t expect to get a second warning from us. We seek voluntary compliance where appropriate. For example, we have gotten companies to end promotions and contests and publish retractions. We seek restitution to consumers where appropriate. We will go to court if necessary. We won’t hesitate to enforce the law. We work with state and other federal agencies. We have advised the FBI and AUSA’s on RESPA issues. We work closely with State Attorney General’s Offices, state Departments of Financial Institutions, and Insurance Divisions. Many times when we have no specific enforcement authority over a disclosure issue (gfe or HUD-1), we’ll send a warning to the company and copy the state regulator. This way we hope that in the next state audit of that company they’ll check on whether the company has corrected its practices. We work with Federal Reserve Board staff in reviewing proposed joint ventures that are subject to Fed approval. How you or your client can comply with RESPA: So, how do you assure that you or your
client are complying with RESPA?
Don’t take a part of a fee for something you did not do. Do give the AfBA disclosure before referring someone to an affiliated company. A few months ago, I spoke to a mortgage broker from Texarkana, Texas. He’s from a small town on the Texas border with Arkansas. He had called to talk about HUD’s position on disclosing his yield spread premiums. I heard his point, and then told him about some of the abuses that we had seen. Cases where a consumer paid 10 points as an origination fee and the mortgage broker received 5 points as a backfunded fee on a high interest rate loan with a prepayment penalty. He told me that there was no way that he could get away with that in his small town, because he knew his customers and people would talk if he scammed them. He would lose customers and then he’d be out of business. While it may be hard for many people working in large metropolitan areas to keep this in mind, it may give some guidance on how to stay in compliance with RESPA. The advice may sound simple: It starts with the basic suggestion that service providers should respect their customers. Treat the customers as if you were working in that small Texas town. Realize that they may be smart enough to know, just like the jurors in the story I mentioned earlier, whether they are being scammed. If one were to follow this basic tenet of treating customers with respect, I believe that businesses can both prosper and comply with RESPA. Now if you have any questions, I’ll be happy to try to answer them. |
