RESPA
The Real Estate Settlement Procedures Act (RESPA) is a consumer protection statute, first passed in 1974. The purposes of RESPA are
- to help consumers become better shoppers for settlement services and
- to eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services.
Details about RESPA
Corresponding with the above purposes:
1. RESPA requires that borrowers receive disclosures at various times. Some disclosures spell out the costs associated with the settlement, outline lender servicing and escrow account practices and describe business relationships between settlement service providers.
2. RESPA also prohibits certain practices that increase the cost of settlement services. Section 8 of RESPA prohibits a person from giving or accepting any thing of value for referrals of settlement service business related to a federally related mortgage loan. It also prohibits a person from giving or accepting any part of a charge for services that are not performed. Section 9 of RESPA prohibits home sellers from requiring home buyers to purchase title insurance from a particular company.
RESPA in general
RESPA covers loans secured with a mortgage placed on a one-to-four family residential property. These include most purchase loans, assumptions, refinances, property improvement loans, and equity lines of credit. HUD's Office of RESPA and Interstate Land Sales is responsible for enforcing RESPA.
More information about RESPA
ABA’s
Section 8: kickbacks, fee-splitting, unearned fees
Section 8 of RESPA prohibits anyone from giving or accepting a fee, kickback or any thing of value in exchange for referrals of settlement service business involving a federally related mortgage loan. In addition, RESPA prohibits fee splitting and receiving unearned fees for services not actually performed.
Violations of Section 8's anti-kickback, referral fees and unearned fees provisions of RESPA are subject to criminal and civil penalties. In a criminal case a person who violates Section 8 may be fined up to $10,000 and imprisoned up to one year. In a private law suit a person who violates Section 8 may be liable to the person charged for the settlement service an amount equal to three times the amount of the charge paid for the service.
ABA’s
Affiliated Business Arrangements (ABA’s) are the only legal exception to Section 8 of RESPA. An ABA is a business typically owned by a title company and someone capable of referring business to a title company such as a Mortgage or Real Estate Broker. It is a separate title company set up for purpose of servicing the business referred by the co-owner so that the referring partner receives a monetary benefit for said referrals.
When setting up an ABA, also know as a Joint Venture, it is very important to comply with RESPA’s guidelines for what is and is not an ABA. Many ABA’s are sham ABA because they do not comply with RESPA. There are very stiff penalties for non-compliance. Regulation and enforcement of RESPA regarding ABA’s has increase dramatically over the last several years.
It is CLT’s policy to avoid ABA’s whenever possible. To do one legally it is expensive, time consuming and cumbersome. Not to mention, it severely cuts into the profit margin. If you are an Account Manager and a prospective company has approached the subject of creating an ABA, your first step is to determine the volume of business they are capable of referring. It must average no less than 20-30 transaction per month. If it meets that requirement, contact one of the home offices to further explore the possibility.
Power Point Presentation on the 10 Guidelines to determining if an ABA meets RESPA Requirements
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