RESPA (Real Estate Settlement Procedures Act) is a law passed by Congress in 1974 to curb unethical practices and consumer abuse in real estate settlement charges. Before RESPA, real estate professionals and closing service providers routinely abused consumers with unnecessary fees to close on their homes.
RESPA requires servicers of home loans, mortgage brokers, or lenders to provide borrowers with timely and pertinent disclosures regarding the nature and costs of the real estate settlement process. The Act also prohibits kickbacks and places limitations upon the use of escrow accounts. For more specific details, keep reading.
RESPA Violation Examples and Penalties
The penalties for violating RESPA are quite severe. At one time, the Consumer Financial Protection Bureau (CFPB) fined a mortgage lender, two real estate brokers, and a mortgage servicer almost $4 million in penalties and consumer relief.
Here are five examples of common RESPA violations and penalties. It’s good to know what they are so they can be avoided.
1. Giving (non-monetary) gifts in exchange for referrals.
You violate RESPA when you receive or make a payment (or anything else of value) in exchange for a referral of a settlement service. For example, HUD once recently settled with an appraiser who gave a mortgage company’s employees restaurant gift certificates in exchange for referrals. The appraiser paid HUD $4,000 in settlements. In addition, they had to agree to stop providing the gifts and cooperate with HUD’s investigation of the mortgage company.
2. Inflating the cost of services.
Raising the price of third-party settlement services is a RESPA violation. A mortgage broker can’t charge buyers more for a credit report at closing than it paid to pull their credit report. HUD once 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.
3. Overcharging for common fees
It’s OK to charge for services you provide to third-party vendors, but it’s not OK to inflate fees. Four real estate companies once settled with HUD by paying a total of $80,000 for charging title companies using their conference rooms for closings at what HUD considered rates much higher than the rooms’ fair market value. HUD considered it as disguised referral fees, violating RESPA’s anti-kickback provisions.
4. Paying referral fees to an insurance company.
It’s also a violation of RESPA, according to HUD, when a broker’s title company (or any of its owners) have a financial stake in a captive reinsurance program created by the title insurer that underwrites the title company’s policies. (A captive insurance company is owned by the company with whom it does business.) Such an arrangement, the HUD discovered, is an attempt to disguise the fact that referral fees paid by the primary title company to the reinsurer are being funneled to the brokerage’s title company. This practice is especially questionable when there are limited risks and a history of few payouts by the reinsurance company. Just ask the three homebuilders who paid HUD $1,950,000 to settle claims that their affiliated reinsurance companies were captive.
5. Setting up shell entities to cover up kickbacks.
Once, a real estate company was fined $325,000 for setting up shell entities to receive referral fees. The company encouraged its associates to create a shell organization, a company with no business operations or significant assets, to purchase an interest in a title company that’s partly owned by the real estate company. The shell organization collected a portion of the title company’s profits and then redistributed those profits to the associates. HUD also alleged that the associates paid below-market prices for their ownership interests in the title company. Furthermore, the creation of the shell organization and the purchase of interests in the title company at below market value were attempts to skirt the anti-kickback provisions of RESPA.
4 RESPA Violation Tips from Real Estate & Law Professionals
To help you avoid RESPA penalties, we have gathered some quotes or insights from real estate or legal professionals on the pitfalls of RESPA violations and how to avoid them:
Read both the RESPA Regulations and the HUD Clarifying Statements
“RESPA is not hard. Real estate professionals, including agents and brokers, should never request or accept anything of meaningful value from another real estate professional (including lenders, inspectors, appraisers, and title insurers) if it is not for a service that is clear, obvious, and public market rate.
The most common RESPA violation we see in real estate is “paying” for referrals. This payment can be cash or gifts, including tickets and gift cards. We recommend that our agents refer business with no expectation except that the other professionals help our clients with great service. Period. Where possible, it is a good idea to provide our clients multiple service provider choices (such as, “Here are three lenders I think can help you in this local market.”).
I have seen some agents who have never read the RESPA regulations or HUD’s clarifying statements. Instead, the rules of RESPA can become an incorrect myth that is shared and believed over time. For instance, I knew a lender that would send out $25 gift cards for each referral. When asked, she said, “It is not a RESPA issue so long as it is no more than $25 for each referral.” While RESPA does not set out a dollar amount, the regulations and clarifying documents do indicate where that $25 amount came from, even though the lender did not understand the rest of the rule. In general, the total annual amount of a gift can be up to $25 (not $25 per referral). Furthermore, the gift must be given equally to everyone at an office, not just the people who may refer business. My advice: Read both the regulation and the HUD clarifying document. Don’t rely on “word of mouth” about RESPA.”
– Glenn S. Phillips, CEO, Lake Homes Realty
Avoid Zillow’s Co-Marketing Program for Now
“I’m a real estate broker in four states in the northeast and I’m a huge proponent of Zillow, but there is one problem with their platform.
Currently, there is an open investigation by the Consumer Financial Protection Bureau into Zillow’s co-marketing program. This program allows agents to share the cost of marketing with mortgage brokers on Zillow’s website.
I have always questioned how this program complies with RESPA and feel any agent should steer clear until the investigation is final. Getting caught up in such a big headline or building your business around a program that could disappear will have a large impact on any agent’s bottom line.”
– Kris Lippi, Broker and Owner of Get LISTED Realty
If You’re in Doubt Whether It’s a RESPA Violation, Don’t Do It
“Real estate can be a slippery slope at times, but I find that agents are pretty risk averse when it comes to RESPA. If you are wondering whether what you’re doing is a RESPA violation, stop doing it! Financial consideration is the obvious offense, but it can also be something as innocent as accepting a title officer’s offer to bring wine to your book club meeting. I hosted one such party with another agent, and we were so paranoid about RESPA and the lovely title officer that we had invited that we were nervously whispering in the kitchen whether or not we should even allow her to help serve the appetizers! With penalties worse than a DUI… it is worth taking a moment to think about it.”
– Linda Bettencourt, Realtor at Sotheby International Realty
Right Now, CFPB Lacks Clarity Regarding RESPA Enforcement Policy
“The Consumer Financial Protection Bureau is the federal agency in charge of RESPA enforcement. Under the previous director, Richard Cordray, the Bureau has taken a very expansive approach to RESPA enforcement. It looked to a broader set of real estate professionals than previous enforcers, and it also looked to a broader array of industry practices.
There is currently a battle for control of the CFPB between OMB Director Mick Mulvaney and CFPB Deputy Director Leandra English. A federal court has ruled that Mulvaney is the CFPB Acting Director but English, Cordray’s Deputy Director, has brought a lawsuit seeking a determination that she is the Acting Director pursuant to the Dodd-Frank Act. This dispute should keep the CFPB from taking any clear steps in the short term regarding RESPA enforcement policy. But once President Trump appoints a new Director, it is pretty clear that the CFPB will take a much more restrictive approach to RESPA enforcement. This new approach will likely be based on clarity for industry players, fewer enforcement actions, and smaller penalties. But it will take time for any clarity to develop in this area.”
– David Reiss, Professor of Law and Academic Program Director at Brooklyn Law School
The Bottom Line
RESPA is a law created to protect homeowners by prohibiting potentially abusive practices in the real estate settlement process. In this regard, it would be smart to heed the advice of Glenn S. Phillips, CEO of Lake Homes Realty: “Don’t rely on word of mouth about RESPA. If in doubt, read both the RESPA regulations and the HUD clarifying document.”