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The Residential Real Estate Settlement Procedures Act protects consumers from unfair or deceptive mortgage lending practices, and requires lenders to have an escrow account. If you think your lender is violating the Consumer Protection Act by charging a fee without providing a loan, then read on! We’ll cover what types of fees are prohibited under RESPA and help you take action against your lender.
The “RESPA Violations: Definition, Examples & Penalties” is a term that is used for violations of the Real Estate Settlement Procedures Act. The penalties for violating this law are severe.
RESPA (Real Estate Settlement Procedures Act) is a 1974 statute enacted by Congress to prevent unethical activities and consumer exploitation in real estate settlement fees. Prior to RESPA, real estate agents and closing service providers often overcharged clients for closing costs.
RESPA mandates home loan servicers, mortgage brokers, and lenders to give timely and relevant disclosures to borrowers on the nature and expenses of the real estate settlement process. In addition, the Act outlaws kickbacks and restricts the usage of escrow accounts. Continue reading for more information.
Examples of RESPA Violations and Penalties
The consequences of breaking RESPA are serious. A mortgage lender, two real estate agents, and a mortgage servicer were penalized almost $4 million in fines and consumer relief by the Consumer Financial Protection Bureau (CFPB) at one point.
The following are five frequent RESPA infractions and fines. It’s important to understand what they are so that you can avoid them.
1. Exchanging (non-monetary) presents for referrals.
When you accept or provide a payment (or anything else of value) in return for a recommendation of a settlement service, you are in violation of RESPA. For example, HUD recently reached an agreement with an appraiser who paid restaurant gift cards to workers of a mortgage firm in return for recommendations. HUD received $4,000 in compensation from the appraiser. They also had to promise to cease giving gifts and help HUD with its probe into the mortgage firm.
2. Inflating the price of goods and services.
It is a violation of RESPA to raise the price of third-party settlement services. A mortgage broker isn’t allowed to charge purchasers more for a credit report at closing than it spent for pulling their credit report. HUD previously resolved a lawsuit against a big mortgage business for violating the same rule, fining the company $370,000. If your business provides mortgages, only charge customers the amount you pay for third-party services.
3. Excessive costs for ordinary services
It’s OK to charge third-party suppliers for services, but it’s not okay to exaggerate rates. HUD fined four real estate businesses a total of $80,000 for charging title companies to use their conference rooms for closings at prices much higher than the rooms’ fair market value, according to HUD. HUD saw it as a disguised referral fee, in violation of the anti-kickback requirements of RESPA.
4. Paying an insurance company referral fee.
When a broker’s title firm (or any of its owners) has a financial interest in a captive reinsurance program developed by the title insurer that underwrites the title company’s policies, it’s also a violation of RESPA, according to HUD. (The firm with which it conducts business owns a captive insurance company.) The HUD determined that such an arrangement is being used to hide the fact that referral fees paid by the main title company to the reinsurer are being diverted to the brokerage’s title firm. When there are little risks and the reinsurance provider has a history of few payments, this technique is extremely dubious. Ask the three homebuilders who paid $1,950,000 to HUD to resolve charges that their associated reinsurance firms were captive.
5. Establishing shell corporations to conceal kickbacks.
A real estate firm was once fined $325,000 for using shell companies to collect referral fees. The corporation urged its employees to form a shell company, one that has no commercial activities or substantial assets, and use it to buy a stake in a title company that is partially owned by the real estate firm. The shell business took a cut of the title firm’s income and divided it to the associates. HUD also claimed that the affiliates paid below-market pricing for their title business ownership holdings. Furthermore, the construction of the shell corporation and the acquisition of shares in the title firm at a discount were both efforts to circumvent RESPA’s anti-kickback requirements.
4 RESPA Violation Tips from Real Estate & Law Professionals
We’ve compiled some quotations or thoughts from real estate or legal specialists on the hazards of RESPA infractions and how to prevent them to assist you avoid RESPA penalties:
RESPA Regulations and HUD Clarifying Statements should both be read.
“RESPA is not difficult. Real estate professionals, such as agents and brokers, should never ask for or take anything of significant value from another real estate professional (such as lenders, inspectors, appraisers, or title insurers) unless it is for a clear, evident, and public market rate service.
In real estate, the most prevalent RESPA violation we observe is “paying” for recommendations. This payment may be made in cash or in the form of presents, such as tickets or gift cards. We advise our agents to refer business with no expectations other than that the other specialists provide excellent service to our customers. Period. It’s a good idea to provide our customers numerous service provider options wherever feasible (for example, “Here are three lenders I believe can assist you in this local market.”).
Some agents I’ve met have never read the RESPA requirements or the HUD clarifying remarks. Instead, the RESPA guidelines may create a false narrative that is passed down and trusted over time. For example, I knew a lender that would reward each referral with a $25 gift card. “It is not a RESPA concern as long as each recommendation is no more than $25,” she answered when questioned. Even if the lender did not grasp the remainder of the law, the rules and clarifying papers reveal where the $25 came from, despite the fact that RESPA does not specify a monetary figure. In general, a reward may be up to $25 in total every year (not $25 per referral). Furthermore, the present must be distributed evenly across an office, not simply to those who may suggest business. My advise is to read the rule as well as the HUD clarification paper. When it comes to RESPA, don’t depend on “word of mouth.”
— Lake Homes Realty CEO Glenn S. Phillips
For the time being, stay away from Zillow’s co-marketing program.
“I’m a real estate broker in four northeastern states and a big fan of Zillow, but there’s a flaw with their software.”
Zillow’s co-marketing initiative is now under investigation by the Consumer Financial Protection Bureau. This service enables agents and mortgage brokers to split the expense of promoting on Zillow’s website.
I’ve long wondered how this software conforms with RESPA, and I believe any agent should avoid it until the inquiry is completed. Any agent’s bottom line will suffer if they get caught up in such a major narrative or built their company on a program that might collapse.”
— Kris Lippi, Get LISTED Realty Broker and Owner
Don’t do anything if you’re not sure whether it’s a RESPA violation.
“Real estate may be a slippery slope at times, but I’ve found that when it comes to RESPA, agents are quite risk adverse.” Stop doing what you’re doing if you’re not sure whether it’s a RESPA violation. The apparent offence is accepting a title officer’s offer to bring wine to your book club meeting, but it may also be something as simple as accepting a title officer’s offer to bring wine to your book club meeting. I held one of these parties with another agent, and we were so worried about RESPA and the gorgeous title officer we had invited that we were anxiously talking in the kitchen whether we should even let her assist serve the snacks! With consequences that are harsher than a DUI, it’s worth pausing to consider.”
— Linda Bettencourt, Sotheby International Realty Realtor
The CFPB’s RESPA enforcement policy is still unclear.
“RESPA enforcement is overseen by the Consumer Financial Protection Bureau, a government agency. The Bureau has adopted a fairly broad approach to RESPA enforcement under the former head, Richard Cordray. It looked at a bigger group of real estate experts and a broader range of industry activities than prior enforcers.
OMB Director Mick Mulvaney and CFPB Deputy Director Leandra English are actively fighting for control of the CFPB. Although a federal judge has determined that Mulvaney is the Acting Director of the Consumer Financial Protection Bureau, English, Cordray’s Deputy Director, has filed a lawsuit claiming that she is the Acting Director under the Dodd-Frank Act. This issue should prevent the CFPB from taking any decisive action on RESPA enforcement policy in the near future. However, it is evident that the CFPB will adopt a far more restricted approach to RESPA enforcement if President Trump picks a new Director. This new strategy will most likely be predicated on more transparency for industry participants, fewer enforcement actions, and lower fines. However, any clarity in this area will take time to emerge.”
Professor of Law and Academic Program Director at Brooklyn Law School, David Reiss
Final Thoughts
The Real Estate Settlement Procedures Act (RESPA) was enacted to safeguard homeowners by restricting potentially harmful activities in the real estate settlement process. In this respect, Glenn S. Phillips, CEO of Lake Homes Realty, offers sound advice: “Don’t depend on word of mouth regarding RESPA. Read both the RESPA requirements and the HUD clarifying paper if you’re unsure.”
RESPA stands for Real Estate Settlement Procedures Act. It is a law that regulates the settlement process of real estate transactions in the United States. The penalties for violating these procedures are quite harsh. Reference: what is respa.
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