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INITIAL COMMENTS ON HUD STATEMENT OF POLICY On RESPA 2001-1

October 18, 2001

Ann vom Eigen, Legislative and Regulatory Counsel

October 18, 2001

INITIAL COMMENTS ON HUD STATEMENT OF POLICY 2001-1

On October 15, Secretary of HUD Martinez announced "several bold steps towards significant reform and simplification of the homebuying process." The announcement was the culmination of the Secretary?s meetings with consumer and industry groups (including a meeting with ALTA representatives) to discuss RESPA reform. Rather than recommending wholesale revision to RESPA or a new exception to Section 8, the Secretary?s steps include a new HUD Statement of Policy that addresses two issues: (a) disclosure obligations of mortgage brokers and the legality of so-called "yield spread premiums" paid to mortgage brokers by funding lenders, and (b) the scope and coverage of RESPA §8(b) and it?s application to mark-ups and other charges by settlement service providers. In addition, Secretary Martinez indicated that HUD was committing an additional $1.5 million to RESPA investigations and enforcement.

Of particular interest to the title insurance industry is the fact that the Secretary?s reform package did not include any proposal for a new exception to Section 8 for lender-packaging or lender-payment of settlement services, an option that in the past has been opposed by the title insurance industry. Further, the enforcement process at HUD will remain the same. Written complaints from consumers or competitors will be referred to the outside contractors for investigation. The greatest effect on our industry will be that settlement service providers that engage in marking up the charges of other providers can expect to see greater scrutiny of those practices by HUD and bank examiners. We may also see an increase in consumer litigation involving such practices. ALTA is scheduled to meet with HUD officials later this month to discuss the implications of the policy statement on the industry.

STATEMENT OF POLICY 2001-1

  1. Mortgage broker fees and yield spread premiums

In a recent decision (Culpepper v. Irwin Mortgage Corp., 253 F.3d 1324 (11th Cir. 2001)), the U.S. Court of Appeals for the Eleventh Circuit concluded that an earlier HUD Statement of Policy on the circumstances in which yield spread premiums (YSPs) paid by funding lenders to mortgage brokers may constitute violations of RESPA §8 was ambiguous and that such payments could be the subject of a class action if the YSP were based solely on the interest rate on the loan produced by the mortgage broker. In response to that decision (and at the urging of the mortgage brokerage industry), the HUD Policy Statement reiterates HUD?s position that, in considering the legality of a YSP payment (a) it is necessary to look at each transaction individually, examining all of the services provided by the broker and all of the compensation received from both the borrower and the lender, and (b) the total compensation received by the broker must be reasonably related to the total set of services performed. The first position is directly at odds with the Eleventh Circuit?s approach of focusing on whether the lender?s YSP payment, standing alone, represented compensation for services rendered.

While the mortgage brokerage industry will be happy to have this reiteration of HUD?s views, which would, if followed by the courts, make it difficult to maintain class actions in most YSP cases (because of the need for individualized proof of the services performed and compensation received in the individual transactions), the Statement of Policy contains several statements that may prove to be of concern to mortgage brokers and lenders. In particular, HUD indicates that:

  • because HUD believes the "purpose of the yield spread premium . . . is to lower up front cost{s} to the borrower," the receipt of a YSP that is not accompanied by a reduction in up-front cash charges to the borrower may be a violation of §8;
  • it is "prudent for a lender to take action so as to ensure that brokers are performing compensable services and receiving only compensation that, in total, is reasonable for those services provided"; and
  • "meaningful disclosure" by a mortgage broker "includes many types of information: what services a mortgage broker will perform, the amount of the broker?s total compensation for performing those services (including any yield spread premium paid by the lender, and whether or not the broker has an agency or fiduciary relationship with the borrower) . . . and should identify the specific trade-off between the amount of the increase in the borrower?s monthly payment (and also the increase in the interest rate) and the amount by which up front costs are reduced."
  1. Scope of RESPA §8(b)

The second part of the Policy Statement discusses "unearned fees" and how RESPA §8(b) applies to such fees. This discussion addresses ? and seeks to undermine ? several recent court rulings (most particularly, the decision in Echevarria v. Chicago Title and Trust Co., 256 F.3d 623 (7th Cir. 2001)) that §8(b) only applies where a party has paid a portion of its fees to a third party who has not performed services to justify that payment, but may not apply to "mark-ups" where the party marking up another party?s fee retains a portion of the fee paid by the consumer without rendering services. Two aspects of the Policy Statement on this subject are worth noting.

First, HUD reiterates its long-standing position that §8(b) applies in the "mark-up" situation and that it is irrelevant whether the person paying or the person receiving the portion, split, or percentage of the charge paid by the consumer has failed to render any services that would justify the split paid or retained. This statement may cause many courts to apply HUD?s view, rather than the views reflected in the Echevarria decision.

Of greater concern, however, is the discussion on the applicability of §8(b) to a charge by a "single service" provider who does not split that charge with any third party. In HUD?s view "{a} single service provider also may be liable under Section 8(b) when it charges a fee that exceeds the reasonable value of goods, facilities, or services provided." This statement will likely generate more controversy than any other aspect of the Policy Statement. There are good arguments that this is an incorrect interpretation of the RESPA statute and several courts have already rejected HUD?s interpretation. Moreover, HUD has never provided substantive guidance on how it would (or a court should) determine the "reasonable value" of a settlement service. Indeed, any attempt to establish the reasonable value of a settlement service would be at odds with the legislative history of RESPA, in which Congress expressly rejected the approach that HUD (or the courts) should engage in federal rate regulation of settlement service charges.

In short, while providing no guidance on when a charge is reasonable and when it is unreasonable, HUD has appeared to conclude that charges made by settlement service providers can be subject to §8(b) attack if it can be argued that the charge "exceeds the reasonable value" of the service rendered. It is likely that many settlement service groups will be concerned by this aspect of the Policy Statement and it is far from clear that the courts will find HUD?s interpretation to be consistent with the statute.



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