Referral Fees and Fee Splitting

QUESTION

We have heard a lot recently about the prohibition against referral fees. Another subject that has come up also is how fee splitting is a violation, too. Please let us know the distinction between referral fees and fee splitting?

ANSWER

Both prohibitions against referral fees and fee splitting are set forth in Section 8(a) and Section 8(b), respectively, of the Real Estate Settlement Procedures Act (RESPA).

Let us define what a “referral” is in the context of RESPA. A referral includes any oral or written action directed to a person that has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business incident to or part of a settlement service when such person will pay for the settlement service or business incident thereto or pay a charge attributable in whole or in part to the settlement service or business.

A referral also occurs when a person paying for a settlement service or a business incident thereto is required to use a particular provider of a settlement service or business incident thereto. [24 CFR § 3500.14(f)]

RESPA provides that no person shall give and no person shall accept any fee, kickback or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person. [24 CFR § 3500.14(b)] A referral of a settlement service is not a compensable service, except as provided in certain exemptions to Section 8.

With respect to fee splitting, RESPA provides that no person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed. [24 CFR § 3500.14(c)] (My emphasis.)

A charge by a person for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee and violates the fee splitting provision. [24 CFR § 3500.14(c)]

To clarify further, the fee splitting prohibition bars all unearned fees, including, but not limited to, cases in which:

1. Two or more persons split a fee for settlement services, any portion of which is unearned;
2. One settlement services provider marks up the cost of the services performed or goods provided by another settlement service provider without providing additional actual, necessary, and distinct services, goods, or facilities to justify the additional charge; or
3. One service provider charges the consumer a fee where no, nominal, or duplicative work is done, or the fee is in excess of the reasonable value of goods or facilities provided of the services actually performed [Statement of Policy 2001-1, Department of Housing and Urban Development, 66 FR 53052, 53059 (2001)] 

Jonathan Foxx

President & Managing Director 

Lenders Compliance Group

Closing Disclosure: Three Day Waiting Period

QUESTION

We are a settlement agent and the mortgage lender we are representing is sending out an incomplete Closing Disclosure (“CD“) in order to start the “3-day process.” Is this acceptable? What are the lender’s obligations with regards to the contents of the CD?

ANSWER

No, it is not acceptable. Under the TILA-RESPA Integrated Disclosure Rule (“TRID”), a lender must provide the CD no later than three business days before consummation of the loan. The purpose of the CD is to finalize information that appears on the Loan Estimate, including the mortgage terms and the projected payment amount, as well as to summarize the closing costs incurred by the purchaser and seller (if applicable). [1026.19(f)(1)(ii)]

TRID generally requires that the CD contain the actual terms and costs of the transaction. However, when actual costs are not “reasonably available,” lenders may estimate the disclosures using the “best information” that is “reasonably available.” [Comments 1-26.19(f)(1)(i)-2.1] This requires due diligence on the part of the lender.

If a lender estimates costs based on the “best information reasonably available” and this information changes prior to consummation, the lender must provide a revised CD at or before consummation with the actual terms of the transaction. [1026.19(f)(1)(i)] However, this is not an opportunity for the lender to amend a CD when it did not use due diligence or good faith in preparing the initial CD. 

Comment 1026.19(f)(1)(i)-2.i states:

                i. Actual term unknown. An actual term is unknown if it is not reasonably available to the creditor at the time the disclosures are made. The “reasonably available” standard requires that the creditor, acting in good faith, exercise due diligence in obtaining the information. For example, the creditor must at a minimum utilize generally accepted calculation tools, but need not invest in the most sophisticated computer program to make a particular type of calculation. The creditor normally may rely on the representations of other parties in obtaining information. For example, the creditor might look to the consumer for the time of consummation, to insurance companies for the cost of insurance, to realtors for taxes and escrow fees, or to a settlement agent for homeowner's association dues or other information in connection with a real estate settlement. The following examples illustrate the reasonably available standard for purposes of § 1026.19(f)(1)(i).

A. Assume a creditor provides the disclosure under § 1026.19(f)(1)(ii)(A) for a transaction in which the title insurance company that is providing the title insurance policies is acting as the settlement agent in connection with the transaction, but the creditor does not request the actual cost of the lender's title insurance policy that the consumer is purchasing from the title insurance company and instead discloses an estimate based on information from a different transaction. The creditor has not exercised due diligence in obtaining the information about the cost of the lender's title insurance policy required under the “reasonably available” standard in connection with the estimate disclosed for the lender's title insurance policy.

As such, the statute makes clear that a lender may not send out an incomplete CD to a borrower simply to satisfy the 3-day advance notice requirement. If a lender does not exercise due diligence in preparing the CD and, as a result, the CD does not contain accurate fees or estimates of fees based on at least the “best information reasonably available,” this would be a clear violation of TRID.

Neil Garfinkel

Executive Director/Realty Compliance Group

Director/Legal & Regulatory Compliance

Lenders Compliance Group

Closing Disclosure: Non-Purchasing Spouse

QUESTION

We are a lender with some questions regarding disclosing the Closing Disclosure (CD). If we have a borrower and a co-borrower, must we send both individuals the CD for review? If we e-disclose, for the three day waiting period requirement do we use the date the disclosure was sent or the date we receive confirmation that the borrower received the CD? Lastly, if we have a non-purchasing spouse (NPS), can we add their name to the CD and have them sign at closing? 

ANSWER

In a rescindable transaction, such as a refinance, the Closing Disclosure must be given separately to each consumer who has the right to rescind, which includes, in most states, a spouse not on title. In transactions that are not rescindable, such as purchases, the CD may be provided to any consumer with primary liability on the obligation.  [12 CFR 1026.17(d)]

As to having the NPS sign at closing on a rescindable transaction, there is no requirement for the CD to be signed by the consumer under the TRID rules. The use of signature lines for documenting receipt of the disclosure is at the option of the creditor. That being said, you should ascertain whether or not this may be required by a specific loan program or investor to ensure a purchase of the loan. 

With respect to notification through e-disclosure, if the creditor has evidence that the consumer received the CD earlier than three business days after it is mailed or delivered, the creditor may rely on that evidence and consider it to be received on that date. Most lenders and investors appear to be accepting the tracked opening of an email as receipt provided in conjunction with the E-Sign Act. However, this is not a universal practice, so make sure you check individual investor guidelines to determine what they will accept as evidence of receipt.  

Joyce Wilkins Pollison

Director/Legal & Regulatory Compliance 

Lenders Compliance Group

TRID: Itemizing Fees on the Closing Disclosure

QUESTION

Is it true that a creditor cannot itemize recording fees and other government fees and taxes on the Closing Disclosure (“CD”)? If so, how does a creditor reflect such fees and taxes on the CD?

ANSWER

Yes, it is true! The TILA-RESPA Integrated Disclosure Rule (“TRID”) does not permit the itemization of recording fees and other government fees and taxes on the CD.  Instead, TRID requires that all recording fees and government fees and taxes, other than transfer taxes, be added together and listed as a lump sum on the CD. [§ 1026.37(g)(1)(i)] 

The lump sum total must be recorded in Section E of the CD as “Recording Fees and Other Taxes” under the “Taxes and Other Government Fees” subheading. [Idem] 

Additionally, all transfer taxes must be totaled and recorded as a lump sum on the next line.

[§ 1026.37(g)(1)(ii)].

See below:

Moreover, TRID does not permit additional lines or items to be added to individually catalogue these fees and taxes. [Commentary at 1026.37(g)(1)-6] If no recording fees or transfer taxes are charged, these lines should simply be left blank. Lines from this section should never be deleted. [Idem]

In the event a creditor desires to itemize and disclose these fees and taxes, or state law requires such disclosure, we suggest the creditor do so using a separate document. To meet this need, the American Land Title Association (“ALTA”) has developed the ALTA Settlement Statement (http://www.alta.org/cfpb/documents.cfm), which provides a model form for disclosure of all itemized fees and charges that buyers and sellers pay during the settlement process.

Michael Barone

Executive Director

Director/Legal & Regulatory Compliance 

Lenders Compliance Group

Communications to Collect a Debt

QUESTION

Recently, we were cited by our regulator for not stopping our communications in our debt collection efforts. Apparently, we violated a regulation that requires us to stop such communications at a certain point. When should we stop communicating with a borrower for debt collection purposes?

ANSWER

Under the Fair Debt Collection Practices Act (FDCPA), once a debt collector receives written notice from a consumer that either the consumer refuses to pay the debt or that the consumer wishes the debt collector to cease further communication with the consumer, the debt collector must cease communicating with the consumer with respect to such debt. [15 USC § 1692c(c)]

Note that the term “consumer” includes the consumer’s spouse, parent (if the consumer is a minor), guardian, executor, or administrator. [15 USC § 1692c(d)]

Notification is effective upon receipt by the debt collector. Due to the strict liability standard of the FDCPA, the debt collector will generally be liable for any communication sent after the date of receipt, even if the debt collector has no actual knowledge of the request.

Issues will arise under the applicable provision with respect to what constitutes a valid written notice from the consumer, or whether a consumer’s subsequent communication to the debt collector waives the prior request to cease communication. One suggestion is to use the “least sophisticated consumer” standard, as courts have used this standard in interpreting the FDCPA; that is, courts will liberally interpret a notice to be valid and will uphold a consumer’s rights despite communications that appear to waive the request to cease communication.

Also note, issues may arise with respect to multiple debts owed by a consumer. The Federal Trade Commission (FTC) has weighed in on this subject. According to the FTC, a consumer who requests that communication be ceased with respect to a previous debt, must repeat that request in connection with a subsequent debt being collected by the same debt collector. [Atteberry, FTC Informal Staff Letter, 12/30/77]

Jonathan Foxx

President & Managing Director 

Lenders Compliance Group