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Webinar Recap: The RESPA Dilemma

respa

The Real Estate Settlement Procedures Act is a 43 year old statute that governs virtually every relationship there is in the mortgage loan origination business. The industry thought they understood how RESPA worked. Then the CFPB changed the interpretation of Section 8(c)(2), opening up an onslaught of questions and concerns about what actually is and is not compliant with RESPA.

In order to help you, our loyal readers, decipher everything RESPA-related, we brought in industry veteran Mitch Kider for his presentation “The RESPA Dilemma – Doing Business With Your Partners Within the Confines of a 43 Year Old Law.” So what did Mitch have to say about the recent interpretation modification?

Background

RESPA was enacted by Congress to address abuses in the real estate settlement services industry.  It changed the settlement process – which included removing kickbacks or referral fees that tended to unnecessarily increase the costs of certain settlement services. RESPA covers practically all relationships among business partners and referral sources in the industry, including marketing services, brokering activity, affiliated businesses, joint ventures, and desk/office rentals, and the application of RESPA to these relationships has been interpreted in different ways as the enforcement authority for RESPA was passed from one government agency to the next. But with the law being in existence for so long, it should be second nature to most folks in the industry, right? Right?! Bueller? Bueller?

…Well, not exactly.

Laws are not monoliths. They are constantly updated and revised. And with Dodd Frank handing over RESPA to CFPB in 2010, it’s not only the revisions that need to be tracked, but how the CFPB views the law. The problem? The head of the CFPB, and thus RESPA’s interpretation, can and most likely will change with each administration.

What Has Changed?

Mitch began his discussion on RESPA changes at the CFPB’s formation: all the way back to July 21, 2011. He stated that the CFPB’s position under the Cordray administration has been that if a settlement service provider receives referrals from a 3rd party, it cannot otherwise do business with that party because CFPB will attribute compensation to that party to the referrals, even if the settlement service provider paid fair market value for services actually rendered.  Basically, they want to make sure without a shadow of a doubt that businesses are not trading things of value for referrals.  Mitch believes that, since a new administration has come into power, it will most likely revert to pre-Dodd Frank interpretations of RESPA. This means that the interpretation of Section 8(c)(2) will remain as a safe harbor.

Another area that has changed drastically has been in marketing, particularly with co-marketing. The rise of the internet and growing popularity of social media and sites like Zillow that allow for co-marketing arrangements have created a complex environment where the lines of RESPA compliance have become more complicated. Under RESPA, any companies marketing together must make sure they split costs proportionately to what they spent on the ad.  Online advertising has made ad cost compliance more difficult to maintain. If considering entering into a co-marketing arrangement, a company should ensure that the arrangement fits within certain parameters, including, among other things, ensuring that the agreed upon marketing is actually performed, performing due diligence and continued oversight over service providers, considering how to document the arrangement in order to demonstrate compliance with Section 8 of RESPA before entering into it, and maintaining and documenting reasonable procedures to calculate the co-marketing charges and/or creating standardized rate sheets that represent fair market value for the marketing services that will be completed. If one company is the gatekeeper in the relationship, that role alone may be a thing of value – so consider this issue if the parties are referral sources for one another.

What Hasn’t Changed?

Office rental arrangements fall under the same guidelines they have in the past – basically, if you rent space from another service provider, you MUST rent the furniture or space at fair market prices. The intent is to ensure that the rental payments under the arrangement do not amount to a referral fee. For instance, the desk or office space should be rented at the general market value, which essentially is the amount of rent that would be paid by a non-settlement service provider for the same space and services in the local market. Mr. Kider discussed the ease of tracking prices with the current tools available. There are now many more local online tools to help make sure you don’t slip up and accidentally (or purposely) get a huge discount.

Affiliated business arrangements have also stayed relatively the same. You must disclose relationship, no requirement to use and the only thing of value is return on ownership interest and other compensation permitted under RESPA, all of which should be documented.

In Conclusion

The regulatory environment is in a state of transition, but RESPA is a 43 year old statute that has survived 8 presidents, from both major parties. Since RESPA violations can be pursued for up to 3 years after the violation, you must protect yourself regardless of who’s in control of the White House or the CFPB. Mitch left the webinar with one clear message. “Make compliance a top priority on a company-wide basis… stay tuned, stay informed, train your company, retrain, stay on top of all of the evolving regulatory requirements, and most of all…work with integrity and don’t take any shortcuts.”  All good words to live by for any firm.