May 26, 2018

5 Real-life RESPA Violations and How You Can Avoid Them

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5 Real-life RESPA Violations and How You Can Avoid Them

1. Inflating costs may cost you. The U.S. Department of Housing and Urban Development considers it a violation under the Real Estate Settlement Procedures Act to inflate the cost of third party settlement services. That means your mortgage broker can’t charge your buyers more for a credit report at closing than it paid to pull their credit report. HUD recently settled a case against a national mortgage company for committing just that kind of violation and fined the company $370,000. If your company offers mortgages, charge consumers only what you pay for third party services.

2. Take no captives. HUD considers it a violation of RESPA when your brokerage’s title company or its owners have a financial interest in a captive reinsurance program formed by the title insurer that underwrites your title company’s policies. (A captive insurance company is wholly owned by the company with which it does business.) HUD’s investigations have uncovered strong evidence that such arrangements attempt to disguise the fact that the referral fee paid by the primary title company to the reinsurer is being funneled to the brokerage’s title company. The practice of paying referral fees to a captive seems particularly questionable when there are limited risks and a history of few payouts by the reinsurance company. Not convinced participating in captives is risky? Ask the three home builders who recently paid HUD $1,950,000 to settle claims that their affiliated reinsurance companies were captive.

3. Payments aren’t just money. When you make or receive a payment or anything else of value in exchange for referral of a settlement service, you’re violating RESPA. For example, HUD recently settled with an appraiser who gave a mortgage company’s employees restaurant gift certificates in exchange for referrals. The appraiser settled with HUD by agreeing to pay $4,000, stop providing the gifts, and cooperate with HUD’s ongoing investigation of the mortgage company whose employees accepted the gifts.

4. More than the market will bear. It’s OK to charge for services you provide to third party vendors, but inflating the fees is just a quick step down the path to trouble. HUD recently accepted settlements totaling $80,000 from four real estate companies that charged title companies using their conference rooms for closings at what HUD considered rates substantially higher than the rooms’ fair market value. HUD considered the amounts over fair market as disguised referral fees, which violated RESPA’s anti-kickback provisions.

5. No one wins at a shell game. Setting up shell entities to receive otherwise prohibited referral fees cost one real estate company and some of its associates $325,000. HUD found that the company encouraged its associates to establish a shell organization, a company with no significant assets or business operations, and use it to purchase an interest in a title company partly owned by the real estate company. The shell company collected a portion of the title company’s profits and then redistributed those profits to the associates on the basis of the number of transactions the associates referred to the title company. HUD also alleged that the associates paid below-market prices for their ownership interests in the title company. Where did the company and associates go wrong? HUD says the creation of the shell company and the purchase of interests in the title company at below market value were attempts to skirt the anti-kickback provisions of RESPA. Those methods disguised the financial benefit the company and associates received by referring business to the title company.

Source: U.S. Department of Housing and Urban Development (

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