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RESPA Statements of Policy

6-1447
STATEMENT 1996-1 (May 31, 1996)
To give guidance to interested members of the public on the application of RESPA and its implementing regulations to these issues, the secretary, pursuant to section 19(a) of RESPA (12 USC 2617(a)) and 24 CFR 3500.4(a)(1)(ii), hereby issues the following statement of policy.
For purposes of this statement of policy, a CLO is a computer system that is used by or on behalf of a consumer to facilitate a consumer’s choice among alternative products or settlement-service providers in connection with a particular RESPA-covered real estate transaction. Such a computer system (1) may provide information concerning products or services; (2) may prequalify a prospective borrower; (3) may provide consumers with an opportunity to select ancillary settlement services; (4) may provide prospective borrowers with information regarding the rates and terms of loan products for a particular property in order for the borrower to choose a loan product; (5) may collect and transmit information concerning the borrower, the property, and other information on a mortgage loan application for evaluation by a lender or lenders; (6) may provide loan origination, processing, and underwriting services, including but not limited to, the taking of loan applications, obtaining verifications and appraisals, and communicating with the borrower and lender; and (7) may make a funding decision.
This definition is not meant to be restrictive or exhaustive; it merely attempts to describe existing practices of service providers. With the use of technology evolving so rapidly, however, it is difficult for the department to provide guidance on future unspecified practices in the abstract.
This statement of policy provides guidance on how RESPA applies to service providers and interprets existing law. It does not add any new restrictions on business practices.
Section 3 of RESPA defines “settlement services” to include:
[A]ny service provided in connection with a real estate settlement including, but not limited to . . . the origination of a federally related mortgage loan (including, but not limited to, the taking of loan applications, loan processing, and the underwriting and funding of loans), and the handling of the processing, and closing or settlement (12 USC 2602(3)).
The regulations define a “settlement service” to mean “any service provided in connection with a prospective or actual settlement” (24 CFR 3500.2). This definition specifically includes the providing of any services related to the origination, processing, or funding of a federally related mortgage loan (24 CFR 2500.2). To the extent that a CLO performs “settlement services,” it is a settlement-service provider. Conversely, if a CLO does not perform settlement services, it is not a settlement-service provider.
NOTHING IN THIS POLICY STATEMENT SHOULD BE READ AS A HUD ENDORSEMENT OF ANY CHARGE TO CONSUMERS OR AS A REQUIREMENT FOR ANY CHARGE TO CONSUMERS.
1. Payments by Consumers to CLOs
CLOs that provide services to consumers may charge consumers for services performed (12 USC 2607(c)(2)). RESPA requires that all charges for settlement services be reported on the Good Faith Estimate and the HUD-1 or HUD-1A; however, the regulations do not address the exact timing of the payment (12 USC 2603(a) and 2604(c)). Similarly, any payment for CLO services that is paid outside of closing must be so identified on the HUD-1 or HUD-1A settlement statement (24 CFR 3500, app. A, General Instructions). In addition, settlement-service providers whose products are made available on CLOs may reimburse consumers for any fee charged them by the CLO.
2. Payments by Settlement-Service Providers to CLOs
Section 8(a) of RESPA prohibits payments for the referral of a consumer to a settlement-service provider; however, section 8(c)(2) permits payments for goods or facilities actually furnished or for services actually performed (12 USC 2607(c)(2)).
The definition used in this policy statement encompasses various types of CLOs. Regardless of the type of CLO, compensable goods, facilities, or services must be provided by the CLO in return for payments by settlement service providers. Any such payment must bear a reasonable relationship to the value of the goods, facilities, or services provided (24 CFR 3500.14(g)(2)). A charge for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee (24 CFR 3500.14(c)). For example, if a CLO lists only one settlement-service provider and only presents basic information to the consumer on the provider’s products, then there would appear to be no or nominal compensable services provided by the CLO to either the settlement-service provider or the consumer, only a referral; and any payment by the settlement-service provider for the CLO listing could be considered a referral fee in violation of section 8 of RESPA. Note, however, that a new provision of HUD’s RESPA rules at 24 CFR 3500.14(g)(1)(ix), discussed at section 4 below, allows employees who do not perform settlement services to market settlement services or products of an affiliated entity and to receive employer payments for these referrals. A company may not pay any other company for the referral of settlement-service business (24 CFR 3500.14(b)).
RESPA places no restrictions on the pricing structure of CLOs as long as the payments are not referral fees and are reasonably related to the value of the services provided. However, the value of a referral is not to be taken into account in determining whether the payment exceeds the reasonable value of the goods, facilities, or services (24 CFR 3500.14(g)(2)). If these requirements are met, CLOs may charge settlement-service providers a fixed or periodic fee or a fee for each closed transaction arising from the use of the CLO. However, if a CLO charges different fees to different settlement-service providers in similar situations, an incentive may exist for the CLO to steer the consumer to the settlement-service provider paying the highest fees. HUD may scrutinize these circumstances to determine if the differentials constitute referral fees.*
Settlement-service providers may pay CLOs a reasonable fee for services provided by the CLO to the settlement-service provider, such as having information about the provider’s products made available to consumers for comparison with the products of other settlement-service providers. If a CLO elects to act as a mortgage broker, as that term is defined in 24 CFR 3500.2, then all RESPA rules related to compensation of mortgage brokerage services apply to the CLO. On December 13, 1995, HUD convened a negotiated rulemaking that could result in changes to these RESPA rules. CLOs should review carefully any changes in the regulations applicable to mortgage brokers and others that result from this rulemaking.
3. CLOs in a Controlled Business Context
When a CLO is used in a controlled business arrangement, the RESPA regulations relating to controlled business arrangements apply. Section 3(7) of RESPA (12 USC 2602(7)) defines a controlled business arrangement in terms of an affiliate relationship or a direct or beneficial ownership. The regulations provide definitions of affiliate relationship, beneficial ownership, and direct ownership (24 CFR 3500.15(c)). Separate entities are a necessary component of the controlled business arrangement definitions. For example, if a real estate brokerage firm uses a CLO within its own business structure and there is no separate affiliated business entity involved, then the CLO is not being used in a controlled business arrangement with the real estate brokerage firm.
A controlled business arrangement does not violate RESPA if three conditions are met (12 USC 2607(c)(4)(A)-(C)). Section 3500.15(b) of the regulations elaborates on the three requirements. First, when consumers are referred from one business entity to an affiliated business entity, a written disclosure of the affiliate relationship must be provided. For example, if a real estate firm has an affiliate relationship with a company providing CLO services and an agent of the real estate firm refers a customer to the CLO company, then the real estate agent must provide the required disclosure to the customer at the time of the referral. Similarly, if the CLO company has an affiliate relationship with one of the settlement-service providers listed on the CLO, then the CLO operator must provide the customer with the required disclosure before the consumer uses the CLO. Second, there can be no required use, i.e., the referring entity cannot require the consumer to use the CLO and the CLO cannot require the consumer to use an affiliated company listed on the CLO. Thirdly, the only thing of value that is received by one business entity from other business entities in the controlled business arrangement, other than payments permitted under 24 CFR 3500.14(g) for services actually performed, is a return on an ownership interest or franchise relationship.
4. Payments of Commissions or Bonuses to Employees
CLOs are subject to the same RESPA provisions regarding employee compensation as any service provider. For example, a settlement-service provider listed on the CLO may not pay a CLO employee a referral fee or commission if the consumer selects that settlement-service provider (24 CFR 3500.14(b)). Employees of a CLO may receive a bona fide salary or compensation from the CLO—their employer (24 CFR 3500.14(g)(1)(iv)). Compensation from CLOs to their employees may include commissions for transactions closed on the system (24 CFR 3500.14(g)(1)(vii)). However, if a CLO pays commissions for transactions closed with some settlement-service providers but not for transactions closed with other settlement-service providers, HUD may scrutinize these payments to determine if the commissions constitute referral fees or are exempt under other provisions (see below).
HUD established two new exemptions related to compensation of employees in a final rule published today and effective 120 days from their publication. The first exemption (24 CFR 3500.14(g)(1)(viii)) allows an employer to pay managerial employees who do not routinely deal with the public bonuses related to the referral of settlement-service business to a business entity in a controlled business arrangement. The CLO employee who routinely deals with customers is not considered a managerial employee within the meaning of 24 CFR 3500.2. A CLO may have managerial employees within the meaning of 24 CFR 3500.2, such as a district manager who oversees several CLO operators who work in different locations. Such a managerial employee may receive bonuses based on criteria related to the performance of a business entity in an affiliate relationship, such as profitability, capture rate, or other thresholds. However, the amount of such bonus may not be calculated as a multiple of the number or value of referrals of settlement-services business to a business entity in a controlled business arrangement (24 CFR 3500.14(g)(1)(viii)).
The second exemption (24 CFR 3500.14(g)(1)(ix)) allows employer payments to their own bona fide employees for referrals of business to affiliated entities if the employee does not perform settlement services in any transaction and provides the consumer with a written disclosure in the format of the Controlled Business Arrangement Disclosure Statement. Employer payments to a CLO employee who does not perform settlement services may qualify for this exemption. This exemption permits employer payments to employees who do not perform settlement services for referrals to affiliates. Under this exemption, the employee may market a settlement service or product of an affiliated entity, including collecting and conveying information and taking an application or order for the services of an affiliated entity. Marketing also may include incidental communications with the consumer after the application or order, such as providing the consumer with information about the status of an application or order; marketing may not include serving as the ongoing point of contact for coordinating the delivery and provision of settlement services. Under the exemption, a CLO employee who takes an application and collects information for an affiliate but performs no other settlement services may receive a payment from his or her employer for a referral to an affiliated entity.
5. Neutral Display of Information on Settlement-Service Providers and Their Products
Section 8(a) of RESPA prohibits compensated referrals. HUD may scrutinize nonneutral displays of information on settlement-service providers and their products because favoring one settlement-service provider over others may be affirmatively influencing the selection of a settlement-service provider which could constitute a referral under RESPA (24 CFR 3500.14(f)). An agreement or understanding for the referral of business incident to or part of a settlement service may be established by a practice, pattern, or course of conduct (24 CFR 3500.14(e)). For example, if one lender always appears at the top of any listing of mortgage products and there is no real difference in interest rates and charges between the products of that lender and other lenders on a particular listing, then this may be a nonneutral presentation of information which affirmatively influences the selection of a settlement-service provider. Furthermore, if there is an affiliate relationship between the CLO and a favored settlement-service provider, the non-neutral presentation of information under certain circumstances could constitute a required use in violation of 3500.15(b)(2). This guidance on neutral displays should not be read to discourage CLOs from assisting consumers in determining which products are most advantageous to them. For example, if a CLO consistently ranks lenders and their mortgage products on the basis of some factor relevant to the borrower’s choice of product, such as APR calculated to include all charges and to account for the expected tenure of the buyer, HUD would consider this practice as a neutral display of information.
*
Depending upon the circumstances of the referrals and the design of the CLO system, this steering of consumers may violate the Fair Housing Act, as may selective marketing of CLO systems.
6-1447.1

STATEMENT 1996-2 (May 31, 1996)

To give guidance to interested members of the public on the application of RESPA and its implementing regulations to these issues, the secretary, pursuant to section 19(a) of RESPA and 24 CFR 3500.4(a)(1)(ii), hereby issues the following Statement of Policy.
Congress did not intend for the controlled business arrangement (CBA) amendment to be used to promote referral fee payments through sham arrangements or shell entities (H.R. Rep. 123, 98th Cong., 1st Sess. 76 (1983)). The CBA definition addresses associations between providers of settlement services (12 USC 2602(7)). In order to come within the CBA exception, the entity receiving the referrals of settlement-service business must be a “provider” of settlement service business. If the entity is not a bona fide provider of settlement services, then the arrangement does not meet the definition of a CBA. If an arrangement does not meet the definition of a CBA, it cannot qualify for the CBA exception, even if the three conditions of section 8(c) are otherwise met (12 USC 2607(c)(4)(A-C)). Therefore, subsequent compliance with the CBA conditions concerning disclosure, nonrequired use and payments from the arrangement that are a return on ownership interest will not exempt payments that flow through an entity that is not a provider of settlement services.
Thus, in RESPA enforcement cases involving a controlled business arrangement created by two existing settlement-service providers, HUD considers whether the entity receiving referrals of business (regardless of legal structure) is a bona fide provider of settlement services. When assessing whether such an entity is a bona fide provider of settlement services or is merely a sham arrangement used as a conduit for referral fee payments, HUD balances a number of factors in determining whether a violation exists and whether an enforcement action under section 8 is appropriate. Responses to the questions below will be considered together in determining whether the entity is a bona fide settlement-service provider. A response to any one question by itself may not be determinative of a sham controlled business arrangement. The department will consider the following factors and will weigh them in light of the specific facts in determining whether an entity is a bona fide provider:
  • 1.
    Does the new entity have sufficient initial capital and net worth, typical in the industry, to conduct the settlement-service business for which it was created? Or is it undercapitalized to do the work it purports to provide?
  • 2.
    Is the new entity staffed with its own employees to perform the services it provides? Or does the new entity have “loaned” employees of one of the parent providers?
  • 3.
    Does the new entity manage its own business affairs? Or is an entity that helped create the new entity running the new entity for the parent provider making the referrals?
  • 4.
    Does the new entity have an office for business which is separate from one of the parent providers? If the new entity is located at the same business address as one of the parent providers, does the new entity pay a general market value rent for the facilities actually furnished?
  • 5.
    Is the new entity providing substantial services, i.e., the essential functions of the real estate settlement service, for which the entity receives a fee? Does it incur the risks and receive the rewards of any comparable enterprise operating in the market place?
  • 6.
    Does the new entity perform all of the substantial services itself? Or does it contract out part of the work? If so, how much of the work is contracted out?
  • 7.
    If the new entity contracts out some of its essential functions, does it contract services from an independent third party? Or are the services contracted from a parent, affiliated provider or an entity that helped create the controlled entity? If the new entity contracts out work to a parent, affiliated provider or an entity that helped create it, does the new entity provide any functions that are of value to the settlement process?
  • 8.
    If the new entity contracts out work to another party, is the party performing any contracted services receiving a payment for services or facilities provided that bears a reasonable relationship to the value of the services or goods received? Or is the contractor providing services or goods at a charge such that the new entity is receiving a “thing of value” for referring settlement-service business to the party performing the service?
  • 9.
    Is the new entity actively competing in the market place for business? Does the new entity receive or attempt to obtain business from settlement-service providers other than one of the settlement-service providers that created the new entity?
  • 10.
    Is the new entity sending business exclusively to one of the settlement-service providers that created it (such as the title application for a title policy to a title insurance underwriter or a loan package to a lender)? Or does the new entity send business to a number of entities, which may include one of the providers that created it?
Even if an entity is a bona fide provider of settlement services, that finding does not end the inquiry. Questions may still exist as to whether the entity complies with the three conditions of the controlled business arrangement exception (12 USC 2607(c)(4)(A-C)). Issues may arise concerning whether the consumer received a written disclosure concerning the nature of the relationship and an estimate of the controlled entity’s charges at the time of the referral (12 USC 2607(c)(4)(A); 24 CFR 3500.15(b)(1)). Other issues may arise concerning whether the referring party is requiring the consumer to use the controlled entity (12 USC 2607(c)(4)(B); 24 CFR 3500.15(b)(2)).
Still another area that may arise concerns the third condition of the CBA exception, whether the only thing of value that comes from the arrangement, other than permissible payments for services rendered, is a return on ownership interest or franchise relationship (12 USC 2607(c)(4)(C); 24 CFR 3500.15(b)(3)). Section 3500.15(b)(3)(ii) of the regulations provides that a return on ownership interest does not include payments that vary by the amount of actual, estimated or anticipated referrals or payments based on ownership shares that have been adjusted on the basis of previous referrals. When assessing whether a payment is a return on ownership interest or a payment for referrals of settlement-service business, HUD will consider the following questions:
  • 1.
    Has each owner or participant in the new entity made an investment of its own capital, as compared to a “loan” from an entity that receives the benefits of referrals?
  • 2.
    Have the owners or participants of the new entity received an ownership or participant’s interest based on a fair value contribution? Or is it based on the expected referrals to be provided by the referring owner or participant to a particular cell or division within the entity?
  • 3.
    Are the dividends, partnership distributions, or other payments made in proportion to the ownership interest (proportional to the investment in the entity as a whole)? Or does the payment vary to reflect the amount of business referred to the new entity or a unit of the new entity?
  • 4.
    Are the ownership interests in the new entity free from tie-ins to referrals of business? Or have there been any adjustments to the ownership interests in the new entity based on the amount of business referred? Responses to these questions may be determinative of whether an entity meets the conditions of the CBA exception. If an entity does not meet the conditions of the CBA exception, then any payments given or accepted in the arrangement may be subject to further analysis under section 8(a) and (b) (12 USC 2607(a) and (b)).
Some examples of how HUD will use these factors in an analysis of specific circumstances are provided below.
Examples:
1. An existing real estate broker and an existing title insurance company form a joint venture title agency. Each participant in the joint venture contributes $1000 towards the creation of the joint venture title agency, which will be an exclusive agent for the title insurance company. The title insurance company enters a service agreement with the joint venture to provide title search, examination and title commitment preparation work at a charge lower than its cost. It also provides the management for the joint venture. The joint venture is located in the title insurance company’s office space. One employee of the title insurance company is “leased” to the joint venture to handle closings and prepare policies. That employee continues to do the same work she did for the title insurance company. The real estate broker participant is the joint venture’s sole source of business referrals. Profits of the joint venture are divided equally between the real estate broker and title insurance company.
HUD Analysis. After reviewing all of the factors, HUD would consider this an example of an entity which is not a bona fide provider of settlement-service business. As such, the payments flowing through the arrangement are not exempt under section 8(c)(4) and would be subject to further analysis under section 8. In looking at the amount of capitalization used to create the settlement-service business, it appears that the entity is undercapitalized to perform the work on a full-service title agency. In this example, although there is an equal contribution of capital, the title insurance company is providing much of the title insurance work, office space and management oversight for the venture to operate. Although the venture has an employee, the employee is leased from and continues to be supervised by the title insurance company. This new entity receives all the referrals of business from the real estate broker participant and does not compete for business in the market place. The venture provides a few of the essential functions of a title agent, but it contracts many of the core title agent functions to the title insurance company. In addition, the title insurance company provides the search, examination and title commitment work at less than its cost, so it may be seen as providing a “thing of value” to the referring title agent, which is passed on to the real estate broker participant in a return on ownership.
2. A title insurance company solicits a real estate broker to create a company wholly owned by the broker to act as its title agent. The title insurance company sets up the new company for the real estate broker. It also manages the new company, which is staffed by its former employees that continue to do their former work. As in the previous example, the new company also contracts back certain of the core title agent services from the title insurance company that created it, including the examination and determination of insurability of title, and preparation of the title insurance commitment. The title insurance company charges the new company less than its costs for these services. The new company’s employees conduct the closings and issue only policies of title insurance on behalf of the title insurance company that created it.
HUD Analysis. As was the case in the first example, HUD would not consider the new entity to be a bona fide settlement-service provider. The legal structure of the new entity is irrelevant. The new company does little real work and contracts back a substantial part of the core work to the title insurance company that set it up. Further, the employees of the new company continue to do the work they previously did for the title insurance company which also continues to manage the employees. The new entity is not competing for business in the market place. All of the referrals of business to the new entity come from the real estate broker owner. The creating title insurance company provides the bulk of the title work. On balance HUD would consider these factors and find that the new entity is not a bona fide title agent, and the payments flowing through the arrangement are not exempt under section 8(c)(4) and would be subject to further analysis under section 8.
3. A lender and a real estate broker form a joint venture mortgage broker. The real estate broker participant in the joint venture does not require its prospective home buyers to use the new entity and it provides the required CBA disclosures at the time of the referral. The real estate broker participant is the sole source of the joint venture’s business. The lender and real estate broker each contributes an equal amount of capital towards the joint venture, which represents a sufficient initial capital investment and which is typical in the industry. The new entity, using its own employees, prepares loan applications and performs all other functions of a mortgage broker. On a few occasions, to accommodate surges in business, the new entity contracts out some of the loan-processing work to third-party providers, including the lender participant in the joint venture. In these cases, the new entity pays all third-party providers a similar fee, which is reasonably related to the processing work performed. The new entity manages its own business affairs. It rents space in the real estate participant’s office at the general market rate. The new entity submits loan applications to numerous lenders and only a small percent goes to the lender participant in the joint venture.
HUD Analysis. After reviewing all of the factors, HUD would consider this an example of an entity which is a bona fide provider of settlement-service business rather than a sham arrangement. The new entity would appear to have sufficient capital to perform the services of a mortgage broker. The participant’s interests appear to be based on a fair value contribution and free from tie-ins to referrals of business. The new entity has its own staff and manages its own business. While it shares a business address with the real estate broker participant, it pays a fair market rent for that space. It provides substantial mortgage brokerage services. Even though the joint venture may contract out some processing overflow to its lender participant, this work does not represent a substantial portion of the mortgage brokerage services provided by the joint venture. Moreover, the joint venture pays all third-party providers a similar fee for similar processing services.
While the real estate broker participant is the sole source of referrals to the venture, the venture only sends a small percent of its loan business to the lender participant. The joint venture mortgage broker is thus actively referring loan business to lenders other than its lender participant. Since the real estate broker provides the CBA disclosure and does not require the use of the mortgage broker and the only return to the participants is based on the profits of the venture and not reflective of referrals made to the venture, it meets the CBA exemption requirements. HUD would consider this a bona fide controlled business arrangement.
4. A real estate brokerage company decides that it wishes to expand its operations into the title insurance business. Based on a fair value contribution, it purchases from a title insurance company a 50 percent ownership interest in an existing full-service title agency that does business in its area. The title agency is liable for the core title services it provides, which includes conducting the title searches, evaluating the title search to determine the insurability of title, clearing underwriting objections, preparing title commitments, conducting the closing, and issuing the title policy. The agent is an exclusive title agent for its title insurance company owner. Under the new ownership, the real estate brokerage company does not require its prospective home buyers to use its title agency. The brokerage has its real estate agents provide the required CBA disclosures when the home buyer is referred to the affiliated title insurance agency. The real estate brokerage company is not the sole source of the title agency’s business. The real estate brokerage company receives a return on ownership in proportion to its 50 percent ownership interest and unrelated to referrals of business.
HUD Analysis. A review of the factors reflects an arrangement involving a bona fide provider of settlement services. In this example, the real estate brokerage company is not the sole source of referrals to the title agency. However, the title agency continues its exclusive agency arrangement with the title insurance company owner. While this last factor initially may raise a question as to why other title insurance companies are not used for title insurance policies, upon review there appears to be nothing impermissible about these referrals of title business from the title agency to the title insurance company.
This example involves the purchase of stock in an existing full-service provider. In such a situation, HUD would carefully examine the investment made by the real estate brokerage company. In this example, the real estate brokerage company pays a fair value contribution for its ownership share and receives a return on its investment that is not based on referrals of business. Since the real estate brokerage provides the CBA disclosure, does not require the use of the title agency and the only return to the brokerage is based on the profits of the agency and not reflective of referrals made, the arrangement meets the CBA exemption requirements. HUD would consider this a bona fide controlled business arrangement.
5. A mortgage banker sets up a limited liability mortgage brokerage company. The mortgage banker sells shares in divisions of the limited liability company to real estate brokers and real estate agents. For $500 each, the real estate brokers and agents may purchase separate “divisions” within the limited liability mortgage brokerage company to which they refer customers for loans. In later years ownership may vary by the amount of referrals made by a real estate broker or agent in the previous year. Under this structure, the ownership distributions are based on the business each real estate broker or real estate agent referrs to his/her division and not on the basis of their capital contribution to the entity as a whole. The limited liability mortgage brokerage company provides all the substantial services of a mortgage broker. It does not contract out any processing to its mortgage banker owner. It sends loan packages to its mortgage banker owner as well as other lenders.
HUD analysis. Although HUD would consider the mortgage brokerage company to be a bona fide provider of mortgage brokerage services, this example illustrates an arrangement that fails to meet the third condition of the CBA exception (12 USC 2607(c)(4)(C)). Here, the capitalization, ownership and payment structure with ownership in separate “divisions” is a method in which ownership returns or ownership shares vary based on referrals made and not on the amount contributed to the capitalization of the company. In cases where the percent of ownership interest or the amount of payment varies by the amount of business the real estate agent or broker refers, such payments are not bona fide returns on ownership interest, but instead, are an indirect method of paying a kickback based on the amount of business referred (24 CFR 3500.15(b)(3)).
6-1447.2

STATEMENT 1996-3 (May 31, 1996)

To give guidance to interested members of the public on the application of RESPA and its implementing regulations to these issues, the secretary, pursuant to section 19(a) of RESPA and 24 CFR 3500.4(a)(1)(ii),* hereby issues the following statement of policy.
Rental of Office Space
Section 8 of RESPA prohibits a person from giving or from accepting any fee, kickback or thing of value pursuant to an agreement that business incident to a settlement service involving a federally related mortgage loan shall be referred to any person (12 USC 2607(a)). an example of a thing of value is a rental payment that is higher than that ordinarily paid for the facilities. The statute, however, permits payments for goods or facilities actually furnished or for services actually performed (12 USC 2607(c)(2)). Thus, when faced with a complaint that a settlement-service provider is paying a high rent for referrals of settlement-service business, HUD analyzes whether the rental payment is bona fide or is really a disguised referral fee.
HUD’s regulations implement the statutory provisions at 24 CFR 3500.14 and give greater guidance to this analysis. Section 3500.14(g)(2) of the regulations provides that the department may investigate high prices to see if they are the result of a referral fee or a split of a fee. It states: “If the payment bears no reasonable relationship to the market value of the goods or services provided, then the excess is not for services or goods actually performed or provided . . . . The value of a referral (i.e., the value of any additional business obtained thereby) is not to be taken into account in determining whether the payment exceeds the reasonable value of such goods, facilities or services.”
Thus, under existing regulations, when faced with a complaint that a person is renting space from a person who is referring business to that person, HUD examines the facts to determine whether the rental payment bears a reasonable relationship to the market value of the rental space provided or is a disguised referral fee. The market value of the rental space may include an appropriate proportion of the cost for office services actually provided to the tenant, such as secretarial services, utilities, telephone and other office equipment. In some situations, a market price rental payment from the highest-bidding settlement-service provider could reflect payments for referrals of business to that settlement-service provider from the person whose space is being rented. Thus, to distinguish between rental payments that may include a payment for referrals of settlement-service business and a payment for the facility actually provided, HUD interprets the existing regulations to require a “general market value” standard as the basis for the analysis, rather than a market rate among settlement-service providers.
In a rental situation, the general market value is the rent that a nonsettlement service provider would pay for the same amount of space and services in the same or a comparable building. A general market value standard allows payments for facilities and services actually furnished, but does not take into account any value for the referrals that might be reflected in the rental payment. A general market standard is not only consistent with the existing regulations, it furthers the statute’s purpose. Congress specifically stated that it intended to protect consumers from unnecessarily high settlement charges caused by abusive practices (12 USC 2601). Some settlement-service providers might be willing to pay a higher rent than the general market value to reflect the value of referrals of settlement-service business. The cost of an above-general-market-rate rental payment could likely be passed on to the consumer in higher settlement costs. If referrals of settlement-service business are taking place in a given rental situation, and the rental payment is above the general market value, then it becomes difficult to distinguish any increase in rental payment over the general market from a referral fee payment.
HUD, therefore, interprets section 8 of RESPA and its implementing regulations to allow payments for the rental of desk space or office space. However, if a settlement-service provider rents space from a person who is referring settlement-service business to the provider, then HUD will examine whether the rental payments are reasonably related to the general market value of the facilities and services actually furnished. If the rental payments exceed the general market value of the space provided, then HUD will consider the excess amount to be for the referral of business in violation of section 8(a).
As an additional consideration, HUD will examine whether the rent is calculated, in whole or in part, on a multiple of the number or value of the referrals made. If the rental payment is conditioned on the number or value of the referrals made, then HUD will consider the rental payment to be for the referral of business in violation of section 8(a).
In its RESPA enforcement work, HUD has also encountered “bogus” rental arrangements that are really agreements for the payment of referral fees. For example, one case involved a title insurance company that paid a “rental fee” to a real estate broker for the “per use rental” of a conference room for closings. The title insurance company paid a $100 fee for each transaction. This “rental fee” was greater than the general market value for the use of the space. In addition, the facts revealed that the room was rarely actually used for closings. In this case, HUD examined whether a “facility” was actually furnished at a general market rate. HUD concluded that this was a sham rental arrangement; the “rent” was really a disguised referral fee in violation of section 8(a).
Lock-Outs
A lock-out situation arises where a settlement-service provider prevents other providers from marketing their services within a setting under that provider’s control. A situation involving a rental of desk or office space to a particular settlement-service provider could lead to other, competing, settlement-service providers being “locked out” from access to the referrers of business or from reaching the consumer. The existence of a lock-out situation could, therefore, give rise to a question of whether a rental payment is bona fide. A lock out situation without other factors, however, does not give rise to a RESPA violation.
The RESPA statute does not provide HUD with authority to regulate access to the offices of settlement-service providers or to require a company to assist another company in its marketing activity. This interpretation of RESPA does not bear on whether state consumer, antitrust or other laws apply to lock-out situations. Of course, section 8 still applies to any payments made to a referrer of business by a settlement-service provider who is not “locked out” of the referrer’s office and receives referrals of settlement-service business from that office.
Retaliation
Section 8 of RESPA expressly prohibits giving positive incentives, “things of value,” for the referral of settlement-service business (12 USC 2607(a)). The act is silent as to disincentives. If HUD were to find that section 8 also prohibited disincentives for failure to make referrals, HUD would find itself being called upon to resolve numerous employment disputes under RESPA. HUD does not believe that Congress intended that RESPA reach these matters. Retaliatory actions against employees are more appropriately governed by state labor, contract, and other laws. However, the department will continue to examine for possible violations of section 8 whether payments or other positive incentives are given employees or agents to make referrals to other settlement-service providers.
New RESPA regulations are being issued simultaneously with this Statement of Policy. With regard to this area, the public should note the new exemptions for payments to employees in 24 CFR 3500.14
*
All citations in this statement of policy refer to recently streamlined regulations published on March 26, 1996 (61 FR 13232), in the Federal Register (to be codified at 24 CFR 3500).
6-1447.3

STATEMENT 1996-4 (September 6, 1996)

To give guidance to interested members of the public on the application of RESPA and its implementing regulations to these issues, the secretary, pursuant to section 19(a) of RESPA and 24 CFR 3500.4(a)(1)(ii), hereby issues the following statement of policy.* In issuing this statement, HUD is not dictating particular practices for title insurance companies and their agents but is setting forth HUD’s enforcement position for qualification in Florida for exemptions from section 8 violations.
Generally, it is beneficial for title insurance companies and their agents to qualify under the section 8(c)(1)(B) exemption since HUD does not normally scrutinize the payments as long as they are “for services actually performed in the issuance of a policy of title insurance.” (HUD will, however, continue to examine payments to agents that are merely for the referral of business such as gifts or trips based on the volume of business referred.) If the practices of a title insurance company or its agent do not qualify under the section 8(c)(1)(B) exemption, the company and the agent may still qualify under section 8(c)(2). Under a section 8(c)(2) standard, HUD will examine the amount of the payments to or retentions by the title insurance agent to see if they are reasonably related to services actually performed by the agent.
A. Definitions
For purposes of this statement, the terms listed below are defined as follows:
1. “Title insurance agent” means a person who has entered into an agreement with a title insurance company to act as an agent in connection with the issuance of title insurance policies, and includes title agents, title agencies, attorneys, and law firms.
2. “Core title services” are those basic services that a title insurance agent must actually perform for the payments from or retention of the title insurance premium to qualify for RESPA’s section 8(c)(1)(B) exemption for “payments by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance.”
In performing core title services, the title insurance agent must be liable to his/her title insurance company for any negligence in performing the services. In considering liability, HUD will examine the following type of indicia: the provisions of the agency contract, whether the agency has errors and omissions insurance or malpractice insurance, whether a contract provision regarding an agent’s liability for a loss is ever enforced, whether an agent is financially viable to pay a claim, and other factors the secretary may consider relevant.
“Core title services” mean the following in Florida:
a. The examination and evaluation, based on relevant law and title insurance underwriting principles and guidelines, of the title evidence (as defined below) to determine the insurability of the title being examined, and what items to include and/or exclude in any title commitment and policy to be issued.
b. The preparation and issuance of the title commitment, or other document, that discloses the status of the title as it is proposed to be insured, identifies the conditions that must be met before the policy will be issued, and obligates the insurer to issue a policy of title insurance if such conditions are met.
c. The clearance of underwriting objections and the taking of those steps that are needed to satisfy any conditions to the issuance of the policies.
d. The preparation and issuance of the policy or policies of title insurance.
e. The handling of the closing or settlement, when it is customary for title insurance agents to provide such services and when the agent’s compensation for such services is customarily part of the payment or retention from the insurer.
3. A “pro forma commitment” is a document that contains a determination of the insurability of the title upon which a title insurance commitment or policy may be based and that contains essentially the information stated in schedule A and B of a title insurance commitment (and may legally constitute a commitment when countersigned by an authorized representative). A pro forma commitment is a document that contains determinations or conclusions that are the product of legal or underwriting judgment regarding the operation or effect of the various documents or instruments or how they affect the title, or what matters constitute defects in title, or how the defects can be removed, or instructions concerning what items to include and/or to exclude in any title commitment or policy to be issued on behalf of the underwriter.
4. “Title evidence” means a written or computer-generated document that identifies and either describes or compiles those documents, records, judgments, liens, and other information from the public records relevant to the history and current condition of the title to be insured. Title evidence does not, however, include a pro forma commitment.
B. Qualification Under Section 8(c)(1)(B)
To qualify for an exemption as an agent in Florida under section 8(c)(1)(B), the payments to (or retentions by) a title insurance agent must be “for services actually performed in the issuance of a policy of title insurance.” HUD interprets this language as requiring a title insurance agent to perform core title services, as defined above, in order for title insurance company payments to the title insurance agent to qualify for this exemption. These “core title services” describe the type of services that Congress stated would come within this exemption, that is, the type of work that a branch office of the title insurance company would otherwise have to perform in the issuance of a title insurance policy. Thus, as applied to practices in Florida, for a title insurance agent to be able to retain the maximum agency portion of the risk premium payment allowed under Florida law, the title insurance agent must actually perform “core title services,” and generally may not contract out those services.
HUD recognizes, however, that there may be a legitimate temporary need (such as surges in business) for the title insurance agent to contract out some part of the core title services to an independent third party, not affiliated with the title insurance company. In such cases, payments to these agents still qualify under section 8(c)(1)(B). However, there is no qualification for the exemption if such contracting out of core title services is done on a regular basis.
HUD also will not consider a title insurance agent to be an agent for purposes of section 8(c)(1)(B) and to have actually performed (or incurred liability for) core title services when the service is undertaken in whole or in part by the agent’s insurance company (or an affiliate of the insurance company). For example, if the title insurance company provides its title insurance agent with a pro forma commitment, typing, or other document-preparation services, the title insurance agent is not “actually performing” these services. As such, the title insurance agent would not be providing “core title services” for the payments to come within the section 8(c)(1)(B) exemption. HUD acknowledges, however, that title insurance companies often provide their own title insurance agents with general advice and assistance on a particular unusual question or concern on an individual case by case basis, and this type of assistance would not affect the scrutiny of the payments to the title insurance agent under this exemption.
Within the section 8(c)(1)(B) context, moreover, title insurance companies may provide their title insurance agents with title evidence, as defined above. HUD acknowledges that title insurance companies have invested in title plants and may sell title evidence to their title insurance agents. In doing so, however, title insurance companies should not charge fees that reflect a payment for the referral of the title insurance order. (See 24 CFR 3500.14(b).) By this, HUD interprets the section 8 requirements to mean that the title insurance company must charge its title insurance agents a fee for title evidence that is not a disguised referral fee given in exchange for the referral of title business. It is evidence of a thing of value given for referrals if the title insurance company is not charging fees for title evidence that cover its costs of producing the title evidence or if the title insurance company charges less for title evidence to be used for a commitment or policy issued on behalf of the title insurance company than on another company’s behalf.
In performing core title services, a title insurance agent is likely to use employees. If a title insurance company supplies employees or has control over or directs the work of employees of the title insurance agent, then the title insurance agent is not actually performing the core title services. In such a case, HUD will review the services provided by the insurance company to the agent for sufficiency under section 8(c)(2).
C. Qualification Under Section 8(c)(2)
If a title insurance agent does not perform “core title services” to qualify for the exemption under section 8(c)(1)(B) of RESPA, that agent may receive payment for services actually performed pursuant to section 8(c)(2), so long as the payment is reasonably commensurate with the reduced level of responsibilities assumed by the agent.
With respect to practices under Florida’s title insurance statute, it is HUD’s enforcement position that it is difficult to justify the payment (or retention) of a significant portion of the title insurance risk premium to a title insurance agent who fails to perform and assume responsibility for the title examination function. Likewise, if the title insurance company provides other services, or carries out the title insurance agent functions, or provides or controls “part-time examiners,” HUD may scrutinize the net level of retention realized by the agent to determine whether the agent’s compensation from the insurer reflects a meaningful reduction from the compensation generally paid to agents in the area who perform all core title services. The level of such reduction in compensation must be reasonably commensurate with the reduced level of responsibilities assumed by such person for the services provided and the underwriting risks taken. The value of a referral, however, is not to be taken into account in determining whether the payment bears a reasonable relationship to the services rendered. (See 24 CFR 3500.14(g)(2).)
D. Unearned Fees
Under the RESPA regulations, when a person in a position to refer title insurance business, such as an attorney, real estate broker or agent, mortgage lender, or developer or builder, receives a payment for providing title insurance agent services, such payment must be for services that are actual, necessary, and distinct from the primary services provided by such person. (See 24 CFR 3500.14(g)(3).) Thus, if an attorney is representing a consumer in a home purchase and also acting as a title insurance agent, he or she may not receive duplicate fees for the same work.
If a title insurance agent obtains third-party services, such as the provision of title evidence, and does not add any additional value to the service provided by the third party, but increases the charge to the consumer for that service and retains the difference, then HUD views the amount that the person retains as an unearned fee in violation of section 8(b) of RESPA. (See 24 CFR 3500.14(c).)
*
This statement provides additional guidance to the 1995 standards issued to the particular companies and, to the extent there are any inconsistencies, supersedes those standards.
6-1447.4

STATEMENT 1999-1 (March 1, 1999)

A. Introduction
The department hereby states its position on the legality of payments by lenders to mortgage brokers under the Real Estate Settlement Procedures Act (12 USC 2601 et seq.) (RESPA) and its implementing regulations at 24 CFR 3500 (Regulation X). This statement of policy is issued pursuant to section 19(a) of RESPA (12 USC 2617(a)) and 24 CFR 3500.4(a)(1)(ii). HUD is cognizant of the conferees’ statement in the conference report on the FY 1999 HUD Appropriations Act that “Congress never intended payments by lenders to mortgage brokers for goods or facilities actually furnished or for services actually performed to be violations of section 8(a) or (b) (12 USC 2607) in its enactment of RESPA.” (H. Rep. 105-769, at 260.) The department is also cognizant of the congressional intent in enacting RESPA of protecting consumers from unnecessarily high settlement charges caused by abusive practices. (12 USC 2601.)
In transactions where lenders make payments to mortgage brokers, HUD does not consider such payments (i.e., yield-spread premiums or any other class of named payments), to be illegal per se. HUD does not view the name of the payment as the appropriate issue under RESPA. HUD’s position that lender payments to mortgage brokers are not illegal per se does not imply, however, that yield spread premiums are legal in individual cases or classes of transactions. The fees in cases or classes of transactions are illegal if they violate the prohibitions of section 8 of RESPA.
In determining whether a payment from a lender to a mortgage broker is permissible under section 8 of RESPA, the first question is whether goods or facilities were actually furnished or services were actually performed for the compensation paid. The fact that goods or facilities have been actually furnished or that services have been actually performed by the mortgage broker does not by itself make the payment legal. The second question is whether the payments are reasonably related to the value of the goods or facilities that were actually furnished or services that were actually performed.
In applying this test, HUD believes that total compensation should be scrutinized to assure that it is reasonably related to goods, facilities, or services furnished or performed to determine whether it is legal under RESPA. Total compensation to a broker includes direct origination and other fees paid by the borrower, indirect fees, including those that are derived from the interest rate paid by the borrower, or a combination of some or all. The department considers that higher interest rates alone cannot justify higher total fees to mortgage brokers. All fees will be scrutinized as part of total compensation to determine that total compensation is reasonably related to the goods or facilities actually furnished or services actually performed. HUD believes that total compensation should be carefully considered in relation to price structures and practices in similar transactions and in similar markets.
B. Scope
In light of 24 CFR 3500.5(b)(7), which exempts from RESPA coverage bona fide transfers of loan obligations in the secondary market, this policy statement encompasses only transactions where mortgage brokers are not the real source of funds (i.e., table-funded transactions or transactions involving “intermediary” brokers). In table-funded transactions, the mortgage broker originates, processes and closes the loan in the broker’s own name and, at or about the time of settlement, there is a simultaneous advance of the loan funds by the lender and an assignment of the loan to that lender. (See 24 CFR 3500.2 (Definition of “table funding”).) Likewise, in transactions where mortgage brokers are intermediaries, the broker provides loan-origination services and the loan funds are provided by the lender; the loan, however, is closed in the lender’s name.
C. Payments Must Be for Goods, Facilities, or Services
In the determination of whether payments from lenders to mortgage brokers are permissible under section 8 of RESPA, the threshold question is whether there were goods or facilities actually furnished or services actually performed for the total compensation paid to the mortgage broker. In making the determination of whether compensable services are performed, HUD’s letter to the Independent Bankers Association of America, dated February 14, 1995, (IBAA letter) may be useful. In that letter, HUD identified the following services normally performed in the origination of a loan:
  • a.
    taking information from the borrower and filling out the application;1
  • b.
    analyzing the prospective borrower’s income and debt and pre- qualifying the prospective borrower to determine the maximum mortgage that the prospective borrower can afford;
  • c.
    educating the prospective borrower in the home-buying and -financing process, advising the borrower about the different types of loan products available, and demonstrating how closing costs and monthly payments could vary under each product;
  • d.
    collecting financial information (tax returns, bank statements) and other related documents that are part of the application process;
  • e.
    initiating/ordering VOEs (verifications of employment) and VODs (verifications of deposit);
  • f.
    initiating/ordering requests for mortgage and other loan verifications;
  • g.
    initiating/ordering appraisals;
  • h.
    initiating/ordering inspections or engineering reports;
  • i.
    providing disclosures (truth in lending, good faith estimate, others) to the borrower;
  • j.
    assisting the borrower in understanding and clearing credit problems;
  • k.
    maintaining regular contact with the borrower, realtors, lender, between application and closing to appraise them of the status of the application and gather any additional information as needed;
  • l.
    ordering legal documents;
  • m.
    determining whether the property was located in a flood zone or ordering such service; and
  • n.
    participating in the loan closing.
While this list does not exhaust all possible settlement services, and while the advent of computer technology has, in some cases, changed how a broker’s settlement services are performed, HUD believes that the letter still represents a generally accurate description of the mortgage-origination process. For other services to be acknowledged as compensable under RESPA, they should be identifiable and meaningful services akin to those identified in the IBAA letter including, for example, the operation of a computer loan origination system (CLO) or an automated underwriting system (AUS).
The IBAA letter provided guidance on whether HUD would take an enforcement action under RESPA. In the context of the letter’s particular facts and subject to the reasonableness test which is discussed below, HUD articulated that it generally would be satisfied that sufficient origination work was performed to justify compensation if it found that—
  • the lender’s agent or contractor took the application information (under item (a)); and
  • the lender’s agent or contractor performed at least five additional items on the list above.
In the letter and in the context of its facts, HUD also pointed out that it is concerned that a fee for steering a customer to a particular lender could be disguised as compensation for “counseling-type” activities. Therefore, the letter states that if an agent or contractor is relying on taking the application and performing only “counseling-type” services—(b), (c), (d), (j), and (k) on the list above—to justify its fee, HUD would also look to see that meaningful counseling—not steering—is provided. In analyzing transactions addressed in the IBAA letter, HUD said it would be satisfied that no steering occurred if it found that—
  • counseling gave the borrower the opportunity to consider products from at least three different lenders;
  • the entity performing the counseling would receive the same compensation regardless of which lender’s products were ultimately selected; and
  • any payment made for the “counseling-type” services is reasonably related to the services performed and not based on the amount of loan business referred to a particular lender.
In examining services provided by mortgage brokers and payments to mortgage brokers, HUD will look at the types of origination services listed in the IBAA letter to help determine whether compensable services are performed.2 However, the IBAA letter responded to a program where a relatively small fee was to be provided for limited services by lenders that were brokering loans.3
Accordingly, the formulation in the IBAA letter of the number of origination services which may be required to be performed for compensation is not dispositive in analyzing more costly mortgage broker transactions where more comprehensive services are provided. The determinative test under RESPA is the relationship of the services, goods or facilities furnished to the total compensation received by the broker (discussed below). In addition to services, mortgage brokers may furnish goods or facilities to the lender. For example, appraisals, credit reports, and other documents required for a complete loan file may be regarded as goods, and a reasonable portion of the broker’s retail or “store-front” operation may generally be regarded as a facility for which a lender may compensate a broker. However, while a broker may be compensated for goods or facilities actually furnished or services actually performed, the loan itself, which is arranged by the mortgage broker, cannot be regarded as a “good” that the broker may sell to the lender and that the lender may pay for based upon the loan’s yield’s relation to market value, reasonable or otherwise. In other words, in the context of a non-secondary market mortgage broker transaction, under HUD’s rules, it is not proper to argue that a loan is a “good,” in the sense of an instrument bearing a particular yield, thus justifying any yield-spread premium to the mortgage broker, however great, on the grounds that such yield-spread premium is the “market value” of the good.
D. Compensation Must Be Reasonably Related to Value of Goods, Facilities, or Services
The fact that goods or facilities have been actually furnished or that services have been actually performed by the mortgage broker, as described in the IBAA letter, does not by itself make a payment by a lender to a mortgage broker legal. The next inquiry is whether the payment is reasonably related to the value of the goods or facilities that were actually furnished or services that were actually performed. Although RESPA is not a rate-making statute, HUD is authorized to ensure that payments from lenders to mortgage brokers are reasonably related to the value of the goods or facilities actually furnished or services actually performed, and are not compensation for the referrals of business, splits of fees or unearned fees.
In analyzing whether a particular payment or fee bears a reasonable relationship to the value of the goods or facilities actually furnished or services actually performed, HUD believes that payments must be commensurate with that amount normally charged for similar services, goods or facilities. This analysis requires careful consideration of fees paid in relation to price structures and practices in similar transactions and in similar markets.4 If the payment or a portion thereof bears no reasonable relationship to the market value of the goods, facilities or services provided, the excess over the market rate may be used as evidence of a compensated referral or an unearned fee in violation of section 8(a) or (b) of RESPA. (See 24 CFR 3500.14(g)(2).) Moreover, HUD also believes that the market price used to determine whether a particular payment meets the reasonableness test may not include a referral fee or unearned fee, because such fees are prohibited by RESPA. Congress was clear that for payments to be legal under Section 8, they must bear a reasonable relationship to the value received by the person or company making the payment. (S. Rep. 93-866, at 6551.)
The department recognizes that some of the goods or facilities actually furnished or services actually performed by the broker in originating a loan are “for” the lender and other goods or facilities actually furnished or services actually performed are “for” the borrower. HUD does not believe that it is necessary or even feasible to identify or allocate which facilities, goods or services are performed or provided for the lender, for the consumer, or as a function of state or federal law. All services, goods and facilities inure to the benefit of both the borrower and the lender in the sense that they make the loan transaction possible (e.g., an appraisal is necessary to assure that the lender has adequate security, as well as to advise the borrower of the value of the property and to complete the borrower’s loan).
The consumer is ultimately purchasing the total loan and is ultimately paying for all the services needed to create the loan. All compensation to the broker either is paid by the borrower in the form of fees or points, directly or by addition to principal, or is derived from the interest rate of the loan paid by the borrower. Accordingly, in analyzing whether lender payments to mortgage brokers comport with the requirements of section 8 of RESPA, HUD believes that the totality of the compensation to the mortgage broker for the loan must be examined. For example, if the lender pays the mortgage broker $600 and the borrower pays the mortgage broker $500, the total compensation of $1,100 would be examined to determine whether it is reasonably related to the goods or facilities actually furnished or services actually performed by the broker.
Therefore, in applying this test, HUD believes that total compensation should be scrutinized to assure that it is reasonably related to goods, facilities, or services furnished or performed to determine whether total compensation is legal under RESPA. Total compensation to a broker includes direct origination and other fees paid by the borrower, indirect fees, including those that are derived from the interest rate paid by the borrower, or a combination of some or all. All payments, including payments based upon a percentage of the loan amount, are subject to the reasonableness test defined above. In applying this test, the Department considers that higher interest rates alone cannot justify higher total fees to mortgage brokers. All fees will be scrutinized as part of total compensation to determine that total compensation is reasonably related to the goods or facilities actually furnished or services actually performed.
In so-called no-cost loans, borrowers accept a higher interest rate in order to reduce direct fees, and the absence of direct payments to the mortgage broker is made up by higher indirect fees (e.g., yield-spread premiums). Higher indirect fees in such arrangements are legal if, and only if, the total compensation is reasonably related to the goods or facilities actually furnished or services actually performed.
In determining whether the compensation paid to a mortgage broker is reasonably related to the goods or facilities actually furnished or services actually performed, HUD will consider all compensation, including any volume-based compensation. In this analysis, there may be no payments merely for referrals of business under section 8 of RESPA. (See 24 CFR 3500.14.)5
Under HUD’s rules, when a person in a position to refer settlement-service business receives a payment for providing additional settlement services as part of the transaction, such payment must be for services that are actual, necessary and distinct from the primary services provided by the person. (24 CFR 3500.14(g)(3).) While mortgage brokers may receive part of their compensation from a lender, where the lender payment duplicates direct compensation paid by the borrower for goods or facilities actually furnished or services actually performed, section 8 is violated. In light of the fact that the borrower and the lender may both contribute to some items, HUD believes that it is best to evaluate seemingly duplicative fees by analyzing total compensation under the reasonableness test described above.
E. Information Provided to Borrower
Under current RESPA rules mortgage brokers are required to disclose estimated direct and indirect fees on the Good Faith Estimate (GFE) no later than 3 days after loan application. (See 24 CFR 3500.7(a) and (b).) Such disclosure must also be provided to consumers, as a final exact figure, at closing on the settlement statement. (24 CFR 3500.8; 24 CFR 3500, appendix A.) On the GFE and the settlement statement, lender payments to mortgage brokers must be shown as “Paid Outside of Closing” (POC), and are not computed in arriving at totals. (24 CFR 3500.7(a)(2).) The requirement that all fees be disclosed on the GFE is intended to assure that consumers are shown the full amount of compensation to brokers and others early in the transaction.
The department has always indicated that any fees charged in settlement transactions should be clearly disclosed so that the consumer can understand the nature and recipient of the payment. Code-like abbreviations like “YSP to DBG, POC”, for instance, have been noted.6 Also, the department has seen examples on the GFE and/or the settlement statement where the identity and/or purpose of the fees are not clearly disclosed.
The department considers unclear and confusing disclosures to be contrary to the statute’s and the regulation’s purposes of making RESPA-covered transactions understandable to the consumer. At a minimum, all fees to the mortgage broker are to be clearly labeled and properly estimated on the GFE. On the settlement statement, the name of the recipient of the fee (in this case, the mortgage broker) is to be clearly labeled and listed, and the fee received from a lender is to be clearly labeled and listed in the interest of clarity. For example, a fee would be appropriately disclosed as “Mortgage broker fee from lender to XYZ Corporation (POC).” In the interest of clarity, other fees or payments from the borrower to the mortgage broker should identify that they are mortgage broker fees from the borrower.7
There is no requirement under existing law that consumers be fully informed of the broker’s services and compensation prior to the GFE. Nevertheless, HUD believes that the broker should provide the consumer with information about the broker’s services and compensation, and agreement by the consumer to the arrangement should occur as early as possible in the process. Mortgage brokers and lenders can improve their ability to demonstrate the reasonableness of their fees if the broker discloses the nature of the broker’s services and the various methods of compensation at the time the consumer first discusses the possibility of a loan with the broker.
The legislative history makes clear that RESPA was not intended to be a rate-setting statute and that Congress instead favored a market-based approach. (S. Rep. No. 93-866 at 6546 (1974).) In making the determination of whether a payment is bona fide compensation for goods or facilities actually furnished or services actually performed, HUD has, in the past, indicated that it would examine whether the price paid for the goods, facilities or services is truly a market price; that is, if in an arm’s-length transaction a purchaser would buy the services at or near the amount charged. If the fee the consumer pays is disclosed and agreed to, along with its relationship to the interest rate and points for the loan and any lender-paid fees to the broker, a market price for the services, goods or facilities could be attained. HUD believes that for the market to work effectively, borrowers should be afforded a meaningful opportunity to select the most appropriate product and determine what price they are willing to pay for the loan based on disclosures which provide clear and understandable information.
The department reiterates its long-standing view that disclosure alone does not make illegal fees legal under RESPA. On the other hand, while under current law, pre-application disclosure to the consumer is not required, HUD believes that fuller information provided at the earliest possible moment in the shopping process would increase consumer satisfaction and reduce the possibility of misunderstanding.
HUD commends the National Association of Mortgage Brokers and the Mortgage Bankers Association of America for strongly suggesting that their members furnish consumers with a form describing the function of mortgage brokers and stating that a mortgage broker may receive a fee in the transaction from a lender.
Although this statement of policy does not mandate disclosures beyond those currently required by RESPA and Regulation X, the most effective approach to disclosure would allow a prospective borrower to properly evaluate the nature of the services and all costs for a broker transaction, and to agree to such services and costs before applying for a loan. Under such an approach, the broker would make the borrower aware of whether the broker is or is not serving as the consumer’s agent to shop for a loan, and the total compensation to be paid to the mortgage broker, including the amounts of each of the fees making up that compensation. If indirect fees are paid, the consumer would be made aware of the amount of these fees and their relationship to direct fees and an increased interest rate. If the consumer may reduce the interest rate through increased fees or points, this option also would be explained. HUD recognizes that in many cases, the industry has not been using this approach because it has not been required. Moreover, new methods may require time to implement. HUD encourages these efforts going forward and believes that if these desirable disclosure practices were adhered to by all industry participants, the need for more prescriptive regulatory or legislative actions concerning this specific problem could be tempered or even made unnecessary.
While the department is issuing this statement of policy to comply with a congressional directive that HUD clarify its position on the legality of lender payments to mortgage brokers, HUD agrees with segments of the mortgage-lending and settlement-service industries and consumer representatives that legislation to improve RESPA is needed. HUD believes that broad legislative reform along the lines specified in the HUD/Federal Reserve Board report remains the most effective way to resolve the difficulties and legal uncertainties under RESPA and TILA for industry and consumers alike. Statutory changes like those recommended in the report would, if adopted, provide the most balanced approach to resolving these contentious issues by providing consumers with better and firmer information about the costs associated with home-secured credit transactions and providing creditors and mortgage brokers with clearer rules.
1
In a subsequent informal interpretation, dated June 20, 1995, HUD stated that the filling out of a mortgage loan application could be substituted by a comparable activity, such as the filling out of a borrower’s worksheet.
2
In the June 20, 1995, letter, the department clarified that the counseling test in the IBAA letter would not apply if an entity performed only non-counseling services (a, e, f, g, h, i, l, m, n) or a mix of counseling and non-counseling services (but did not rely only on the five counseling services (b, c, d, j, and k)).
3
In the particular program reviewed by HUD in the IBAA letter, the average total compensation for performing six of the origination services listed above was below $200.
4
HUD recognizes that settlement costs may vary in different markets. The cost of a specific service in Omaha, Nebraska, for example, may bear little resemblance to the cost of a similar service in Los Angeles, California.
5
The department generally has held that when the payment is based on the volume or value of business transacted, it is evidence of an agreement for the referral of business (unless, for example, it is shown that payments are for legitimate business reasons unrelated to the value of the referrals). (See 24 CFR 3500.14(e).)
6
This is an example only. HUD recognizes that current practices may leave borrowers confused. However, the use of any particular terms, including abbreviations, may not, by itself, violate RESPA. Nevertheless, going forward, HUD recommends that the disclosures on the GFE and the settlement statement be as described in the text. HUD recognizes that system changes may require time for lenders and brokers to implement.
7
HUD recognizes that current software may not currently accommodate these additional disclosures. Both industry and consumers would be better served if these additional disclosures were included in future forms.
6-1447.5

STATEMENT 2001-1—(October 18, 2001)

To give guidance to interested members of the real estate settlement industry and the general public on the application of RESPA and its implementing regulations, the secretary hereby issues the following statement of policy. The interpretations embodied in this statement of policy are issued pursuant to section 19(a) of RESPA (12 USC 2617(a)).

Part A. Mortgage Broker Fees

Yield-Spread Premiums
One of the primary barriers to homeownership and homeowners’ ability to refinance and lower their housing costs is the up-front cash needed to obtain a mortgage. The closing costs and origination fees associated with a mortgage loan are a significant component of these up-front cash requirements. Borrowers may choose to pay these fees out of pocket, or to pay the origination fees, and possibly all the closing fees, by financing them; i.e., adding the amount of such fees to the principal balance of their mortgage loan. The latter approach, however, is not available to those whose loan-to-value ratio has already reached the maximum permitted by the lender. For those without the available cash, who are at the maximum loan-to-value ratio, or who simply choose to do so, there is a third option. This third option is a yield-spread premium.
Yield-spread premiums permit homebuyers to pay some or all of the up-front settlement costs over the life of the mortgage through a higher interest rate. Because the mortgage carries a higher interest rate, the lender is able to sell it to an investor at a higher price. In turn, the lender pays the broker an amount reflective of this price difference. The payment allows the broker to recoup the up-front costs incurred on the borrower’s behalf in originating the loan. Payments from lenders to brokers based on the rates of borrowers’ loans are characterized as “indirect” fees and are referred to as yield-spread premiums.1
A yield-spread premium is calculated based upon the difference between the interest rate at which the broker originates the loan and the par, or market, rate offered by a lender. The department believes, and industry and consumers agree, that a yield-spread premium can be a useful means to pay some or all of a borrower’s settlement costs. In these cases, lender payments reduce the up-front cash requirements to borrowers. In some cases, borrowers are able to obtain loans without paying any up-front cash for the services required in connection with the origination of the loan. Instead, the fees for these services are financed through a higher interest rate on the loan. The yield-spread premium thus can be a legitimate tool to assist the borrower. The availability of this option fosters home ownership.
HUD has recognized the utility of yield-spread premiums in regulations issued prior to the 1999 statement of policy [at 6-1447.4]. In a final rule concerning “Deregulation of Mortgagor Income Requirements,” HUD indicated that up-front costs could be lowered by yield-spread premiums (54 Fed. Reg. 38646 (September 20, 1989)).
In a 1992 rule concerning RESPA, HUD specifically listed yield-spread premiums as an example of fees that must be disclosed. The example was codified as “Illustrations of Requirements of RESPA,” fact situations 5 and 13 in appendix B to 24 CFR 3500. (See also instructions at appendix A to 24 CFR 3500 for completing HUD-1 and HUD-1A settlement statements.) HUD did not by these examples mean that yield-spread premiums were per se legal, but HUD also did not mean that yield-spread premiums were per se illegal.
HUD also recognizes, however, that in some cases less scrupulous brokers and lenders take advantage of the complexity of the settlement transaction and use yield-spread premiums as a way to enhance the profitability of mortgage transactions without offering the borrower lower up-front fees. In these cases, yield-spread premiums serve to increase the borrower’s interest rate and the broker’s overall compensation, without lowering up-front cash requirements for the borrower. As set forth in this statement of policy, such uses of yield-spread premiums may result in total compensation in excess of what is reasonably related to the total value of the origination services provided by the broker, and fail to comply with the second part of HUD’s two-part test as enunciated in the 1999 statement of policy, and with section 8.
The 1999 Statement of Policy’s Test for Legality
The department restates its position that yield-spread premiums are not per se illegal. HUD also reiterates that this statement “does not imply . . . that yield-spread premiums are legal in individual cases or classes of transactions” (64 Fed. Reg. 10084). The legality of any yield-spread premium can only be evaluated in the context of the test HUD established and the specific factual circumstances applicable to each transaction in which a yield-spread premium is used.
The 1999 statement of policy established a two-part test for determining whether lender payments to mortgage brokers are legal under RESPA. In applying section 8 and HUD’s regulations, the 1999 statement of policy stated:
 In transactions where lenders make payments to mortgage brokers, HUD does not consider such payments (i.e., yield-spread premiums or any other class of named payments) to be illegal per se. HUD does not view the name of the payment as the appropriate issue under RESPA. HUD’s position that lender payments to mortgage brokers are not illegal per se does not imply, however, that yield-spread premiums are legal in individual cases or classes of transactions. The fees in cases and classes of transactions are illegal if they violate the prohibitions of section 8 of RESPA.
 In determining whether a payment from a lender to a mortgage broker is permissible under section 8 of RESPA, the first question is whether goods or facilities were actually furnished or services were actually performed for the compensation paid. The fact that goods or facilities have been actually furnished or that services have been actually performed by the mortgage broker does not by itself make the payment legal. The second question is whether the payments are reasonably related to the value of the goods or facilities that were actually furnished or services that were actually performed.
 In applying this test, HUD believes that total compensation should be scrutinized to assure that it is reasonably related to goods, facilities, or services furnished or performed to determine whether it is legal under RESPA. Total compensation to a broker includes direct origination and other fees paid by the borrower, indirect fees, including those that are derived from the interest rate paid by the borrower, or a combination of some or all. The department considers that higher interest rates alone cannot justify higher total fees to mortgage brokers. All fees will be scrutinized as part of total compensation to determine that total compensation is reasonably related to the goods or facilities actually furnished or services actually performed. HUD believes that total compensation should be carefully considered in relation to price structures and practices in similar transactions and in similar markets (64 Fed. Reg. 10084).
Culpepper
The need for further clarification of HUD’s position, as set forth in the 1999 statement of policy, on the treatment of lender payments to mortgage brokers under section 8 of RESPA (12 USC 2607), is evident from the recent decision of the Court of Appeals for the Eleventh Circuit in Culpepper.
In upholding class certification in Culpepper, the court only applied the first part of the HUD test, and then further narrowed its examination of whether the lender’s yield-spread payments were “for services” by focusing exclusively on the presumed intent of the lender in making the payments. The crux of the court’s decision is that section 8 liability for the payment of unlawful referral fees could be established under the first part of the HUD test alone, based on the facts that the lender’s payments to mortgage brokers were calculated solely on the difference between the par interest rate and the higher rate at which the mortgage brokers delivered loans, and that the lender had no knowledge of what services, if any, the brokers had performed.
HUD was not a party to the case and disagrees with the judicial interpretation regarding section 8 of RESPA and the 1999 statement of policy.
Clarification of the HUD Test
It is HUD’s position that where compensable services are performed, the 1999 statement of policy requires application of both parts of the HUD test before a determination can be made regarding the legality of a lender payment to a mortgage broker.
1. The first part of the HUD test. Under the first part of HUD’s test, the total compensation to a mortgage broker, of which a yield- spread premium may be a component or the entire amount, must be for goods or facilities provided or services performed. HUD’s position is that in order to discern whether a yield-spread premium was for goods, facilities or services under the first part of the HUD test, it is necessary to look at each transaction individually, including examining all of the goods or facilities provided or services performed by the broker in the transaction, whether the goods, facilities or services are paid for by the borrower, the lender, or partly by both.
It is HUD’s position that neither section 8(a) of RESPA nor the 1999 statement of policy supports the conclusion that a yield-spread premium can be presumed to be a referral fee based solely upon the fact that the lender pays the broker a yield-spread premium that is based upon a rate sheet, or because the lender does not have specific knowledge of what services the broker has performed. HUD considers the latter situation to be rare. The common industry practice is that lenders follow underwriting standards that demand a review of originations and that therefore lenders typically know that brokers have performed the services required to meet those standards.
Yield-spread premiums are by definition derived from the interest rate. HUD believes that a rate sheet is merely a mechanism for displaying the yield-spread premium, and does not indicate whether a particular yield-spread premium is a payment for goods and facilities actually furnished or services actually performed under the HUD test. Whether or not a yield-spread premium is legal or illegal cannot be determined by the use of a rate sheet, but by how HUD’s test applies to the transaction involved.
Section 8 prohibits the giving and accepting of fees, kickbacks, or things of value for the referral of settlement services and also unearned fees. It is therefore prudent for a lender to take action so as to ensure that brokers are performing compensable services and receiving only compensation that, in total, is reasonable for those services provided. As stated, however, in the 1999 statement of policy:
 The department recognizes that some of the goods or facilities actually furnished or services actually performed by the broker in originating a loan are “for” the lender and other goods or facilities actually furnished or services actually performed are “for” the borrower. HUD does not believe that it is necessary or even feasible to identify or allocate which facilities, goods or services are performed or provided for the lender, for the borrower, or as a function of state or federal law. All services, goods and facilities inure to the benefit of both the borrower and the lender in the sense that they make the loan transaction possible. (64 Fed. Reg. 10086)
The 1999 statement of policy provided a list of compensable loan-origination services originally developed by HUD in a response to an inquiry from the Independent Bankers Association of America (IBAA), which HUD considers relevant in evaluating mortgage broker services. In analyzing each transaction to determine if services are performed HUD believes the 1999 statement of policy should be used as a guide. As stated there, the IBAA list is not exhaustive, and while technology is changing the process of performing settlement services, HUD believes that the list is still a generally accurate description of settlement services. Compensation for these services may be paid either by the borrower or by the lender, or partly by both. Compensable services for the first part of the test do not include referrals or no, nominal, or duplicative work.
2. Reasonableness of broker fees. The second part of HUD’s test requires that total compensation to the mortgage broker be reasonably related to the total set of goods or facilities actually furnished or services performed.
The 1999 statement of policy said in part:
 The department considers that higher interest rates alone cannot justify higher total fees to mortgage brokers. All fees will be scrutinized as part of total compensation to determine that total compensation is reasonably related to the goods or facilities actually furnished or services actually performed (64 Fed. Reg. 10084).
Accordingly, the department believes that the second part of the test is applied by determining whether a mortgage broker’s total compensation is reasonable. Total compensation includes fees paid by a borrower and any yield-spread premium paid by a lender, not simply the yield-spread premium alone. Yield-spread premiums serve to allow the borrower a lower up-front cash payment in return for a higher interest rate, while allowing the broker to recoup the total costs of originating the loan. Total compensation to the broker must be reasonably related to the total value of goods or facilities provided or services performed by the broker. Simply delivering a loan with a higher interest rate is not a compensable service. The department affirms the 1999 statement of policy’s position on this matter for purposes of RESPA enforcement.
The 1999 statement also said:
 In analyzing whether a particular payment or fee bears a reasonable relationship to the value of the goods or facilities actually furnished or services actually performed, HUD believes that payments must be commensurate with the amount normally charged for similar services, goods or facilities. This analysis requires careful consideration of fees paid in relation to price structures and practices in similar transactions and in similar markets. If the payment or a portion thereof bears no reasonable relationship to the market value of the goods, facilities or services provided, the excess over the market rate may be used as evidence of a compensated referral or an unearned fee in violation of section 8(a) or (b) of RESPA (64 Fed. Reg. 10086).
The 1999 statement of policy also stated:
 The level of services mortgage brokers provide in particular transactions depends on the level of difficulty involved in qualifying applicants for particular loan programs. For example, applicants have differences in credit ratings, employment status, levels of debt, or experience that will translate into various degrees of effort required for processing a loan. Also, the mortgage broker may be required to perform various levels of services under different servicing or processing arrangements with wholesale lenders (64 Fed. Reg. 10081).
In evaluating mortgage broker fees for enforcement purposes, HUD will consider these factors as relevant in assessing the reasonableness of mortgage broker compensation, as well as comparing total compensation for loans of similar size and similar characteristics within similar geographic markets.
Also, while the department continues to believe that comparison to prices in similar markets is generally a key factor in determining whether a mortgage broker’s total compensation is reasonable, it is also true that in less competitive markets comparisons to the prices charged by other similarly situated providers may not, standing alone, provide a useful measure. As a general principle, HUD believes that in evaluating the reasonableness of broker compensation in less competitive markets, consideration of price structures from a wider range of providers may be warranted to reach a meaningful conclusion.
1
Indirect fees from lenders are also known as “back-funded payments,” “overages,” or “servicing-release premiums.”

Part B. Providing Meaningful Information to Borrowers

In addition to addressing the legality of yield-spread premiums in the 1999 statement of policy, HUD emphasized the importance of disclosing broker fees, including yield-spread premiums.
 There is no requirement under existing law that consumers be fully informed of the broker’s services and compensation prior to the GFE. Nevertheless, HUD believes that the broker should provide the consumer with information about the broker’s services and compensation, and agreement by the consumer to the arrangement should occur as early as possible in the process (64 Fed. Reg. 10087).
HUD continues to believe that disclosure is extremely important, and that many of the concerns expressed by borrowers over yield-spread premiums can be addressed by disclosing yield-spread premiums, borrower compensation to the broker, and the terms of the mortgage loan, so that the borrower may evaluate and choose among alternative loan options.
In the 1999 statement of policy, HUD stated:
HUD believes that for the market to work effectively, borrowers should be afforded a meaningful opportunity to select the most appropriate product and determine what price they are willing to pay for the loan based on disclosures which provide clear and understandable information.
 The department reiterates its long-standing view that disclosure alone does not make illegal fees legal under RESPA. On the other hand, while under current law, preapplication disclosure to the consumer is not required, HUD believes that fuller information provided at the earliest possible moment in the shopping process would increase consumer satisfaction and reduce the possibility of misunderstanding (64 Fed. Reg. 10087).
HUD currently requires the disclosure of yield-spread premiums on the good-faith estimate and the HUD-1. The 1999 statement of policy said:
 The department has always indicated that any fees charged in settlement transactions should be clearly disclosed so that the consumer can understand the nature and recipient of the payment. Code-like abbreviations like “YSP to DBG, POC,” for instance, have been noted. [Footnote omitted.] Also the department has seen examples on the GFE and/or the settlement statement where the identity and/or purposes of the fees are not clearly disclosed.
 The department considers unclear and confusing disclosures to be contrary to the statute’s and the regulation’s purposes of making RESPA-covered transactions understandable to the consumer. At a minimum, all fees to the mortgage broker are to be clearly labeled and properly estimated on the GFE. On the settlement statement, the name of the recipient of the fee (in this case, the mortgage broker) is to be clearly labeled and listed, and the fee received from a lender is to be clearly labeled and listed in the interest of clarity (64 Fed. Reg. 10086-10087).
While the disclosure on the GFE and HUD-1 is required, the department is aware and has stated that the current GFE/HUD-1 disclosure framework is often insufficient to adequately inform consumers about yield-spread premiums and other lender-paid fees to brokers. Under the current rules, the GFE need not be provided until after the consumer has applied for a mortgage and may have paid a significant fee, and the HUD-1 is only given at closing. Because of this, HUD has in recent years sought to foster a more consumer-beneficial approach to disclosure regarding yield-spread premiums through successive rulemaking efforts. This history is discussed more fully in the 1999 statement of policy.2
Representatives of the mortgage industry have said that since the 1999 statement of policy, many brokers provide borrowers a disclosure describing the function of mortgage brokers and stating that a mortgage broker may receive a fee in the transaction from the lender. While the 1999 statement of policy commended the National Association of Mortgage Brokers and the Mortgage Bankers Association of America for strongly suggesting such a disclosure to their respective memberships, the statement of policy added:
 Although this statement of policy does not mandate disclosures beyond those currently required by RESPA and Regulation X, the most effective approach to disclosure would allow a prospective borrower to properly evaluate the nature of the services and all costs for a broker transaction, and to agree to such services and costs before applying for a loan. Under such an approach, the broker would make the borrower aware of whether the broker is or is not serving as the consumer’s agent to shop for a loan, and the total compensation to be paid to the mortgage broker, including the amounts of each of the fees making up the compensation (64 Fed. Reg. 10087).
In HUD’s view, meaningful disclosure includes many types of information: what services a mortgage broker will perform, the amount of the broker’s total compensation for performing those services (including any yield-spread premium paid by the lender), and whether or not the broker has an agency or fiduciary relationship with the borrower. The disclosure should also make the borrower aware that he or she may pay higher up-front costs for a mortgage with a lower interest rate, or conversely pay a higher interest rate in return for lower up-front costs, and should identify the specific trade-off between the amount of the increase in the borrower’s monthly payment (and also the increase in the interest rate) and the amount by which up-front costs are reduced. HUD believes that disclosure of this information, and written acknowledgment by the borrower that he or she has received the information, should be provided early in the transaction. Such disclosure facilitates comparison shopping by the borrower, to choose the best combination of up-front costs and mortgage terms from his or her individual standpoint. HUD regards full disclosure and written acknowledgment by the borrower, at the earliest possible time, as a best practice.
Yield-spread premiums are currently required to be listed in the 800 series of the HUD-1 form, listing “Items Payable in Connection with Loan.” This existing practice, however, does not disclose the purpose of the yield-spread premium, which is to lower up-front cost to borrowers. To achieve this end it has been suggested to the department that the yield-spread premium should be reported as a credit to the borrower in the 200 series, among the “Amounts Paid by or in Behalf of Borrowers.” The homebuyer or homeowner could then see that the yield-spread premium is reducing closing costs, and also see the extent of the reduction.
HUD believes that improved early disclosure regarding mortgage broker compensation and the entry of yield-spread premiums as credits to borrowers on the GFE and the HUD-1 settlement statement are both useful and complementary forms of disclosure. The department believes that used together these methods of disclosure offer greater assurance that lender payments to mortgage brokers serve borrowers’ best interests.
While the 1999 policy statement and part A. of this statement only cover certain lender payments to mortgage brokers, as described above, HUD also believes that similar information on the trade-off between lower up-front costs and higher interest rates and monthly payments should be disclosed to borrowers on all mortgage loan originations, not merely those originated by brokers. HUD is aware that while yield-spread premiums are not used in loans originated by lenders, lenders are able to offer loans with low or no up-front costs required at closing by charging higher interest rates and recouping the costs by selling the loans into the secondary market for a price representing the difference between the interest rate on the loan and the par, or market, interest rate. Sale of such a loan achieves the same purpose as the yield-spread premium does on a loan originated by a broker. The department strongly believes that all lenders and brokers should provide the level of consumer disclosure that the purposes of RESPA intend and that fair business practices demand. As indicated in the 1999 statement of policy, HUD emphasizes that fuller information provided as early as possible in the shopping process would increase consumer satisfaction and reduce the possibility of misunderstanding. In the future, full and early disclosures are factors that the department would weigh favorably in exercising its enforcement discretion in cases involving mortgage broker fees. Nevertheless, the department also again makes clear that disclosure alone does not make illegal fees legal under RESPA. The department will scrutinize all relevant information in making enforcement decisions, including whether transactions evidence practices that may be illegal.
2
In both the HUD/Federal Reserve Board report on RESPA/TILA reform (1998) and the HUD/Treasury report on curbing predatory home mortgage lending (2000), the agencies recommended earlier disclosures to facilitate shopping and lower settlement costs.

Part C. Section 8(b) Unearned Fees

A. Background
RESPA was enacted in 1974 to provide consumers “greater and more timely information on the nature of the costs of the [real estate] settlement process” and to protect consumers from “unnecessarily high settlement charges caused by certain abusive practices . . .” (12 USC 2601).
Since RESPA was enacted, HUD has interpreted section 8(b) as prohibiting any person from giving or accepting any unearned fees, i.e., charges or payments for real estate settlement services other than for goods or facilities provided or services performed. Payments that are unearned fees for settlement services occur in, but are not limited to, cases where (1) two or more persons split a fee for settlement services, any portion of which is unearned; or (2) one settlement-service 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 settlement-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 or the services actually performed.
In the first situation, two settlement-service providers split or share a fee charged to a consumer and at least part, if not all, of at least one provider’s share of the fee is unearned. In the second situation, a settlement-service provider charges a fee to a consumer for another provider’s services that is higher than the actual price of such services, and keeps the difference without performing any actual, necessary, and distinct services to justify the additional charge. In the third situation, one settlement-service provider charges a fee to a consumer where no work is done or the fee exceeds the reasonable value of the services performed by that provider, and for this reason the fee or any portion thereof for which services are not performed is unearned.
HUD regards all of these situations as legally indistinguishable, in that they involve payments for settlement services where all or a portion of the fees are unearned and, thus, are violative of the statute. HUD, therefore, specifically interprets section 8(b) as not being limited to situations where at least two persons split or share an unearned fee for the provision to be violated.
As already indicated in this statement of policy, meaningful disclosure of all charges and fees is essential under RESPA. Such disclosures help protect consumers from paying unearned or duplicate fees. However, as noted above, in the 1999 statement of policy the department reiterated “its long-standing view that disclosure alone does not make illegal fees legal under RESPA” (64 Fed. Reg. 10087).
B. HUD’s Guidance and Regulations
HUD guidance and regulations have consistently interpreted section 8 as prohibiting all unearned fees. In 1976, HUD issued a settlement-costs booklet that provided that “[i]t is also illegal to charge or accept a fee or part of a fee where no service has actually been performed” (41 Fed. Reg. 20289 (May 17, 1976)). Between 1976 and 1992, HUD indicated in informal opinions that unearned fees occur where there are excessive fees charged, regardless of the number of settlement-service providers involved.3
In the preamble to HUD’s 1992 final rule revising Regulation X (57 Fed. Reg. 49600 (November 2, 1992)), HUD stated: “Section 8 of RESPA (12 USC 2607) prohibits kickbacks for referral of business incident to or part of a settlement service and also prohibits the splitting of a charge for a settlement service, other than for services actually performed (i.e., no payment of unearned fees)” (57 Fed. Reg. 49600 (November 2, 1992)).
HUD’s regulations, published on November 2, 1992, implement section 8(b). Section 3500.14(c)4 provides:
 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 settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed. 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 this section. The source of the payment does not determine whether or not a service is compensable. Nor may the prohibitions of this part be avoided by creating an arrangement wherein the purchaser of services splits the fee.
24 CFR 3500.14(g)(2) states in part:
The department may investigate high prices to see if they are the result of a referral fee or a split of a fee. If the payment of a thing of value bears no reasonable relationship to the market value of the goods or services provided, then the excess is not for services or goods actually performed or provided. These facts may be used as evidence of a violation of section 8 and may serve as a basis for a RESPA investigation. High prices standing alone are not proof of a RESPA violation.
24 CFR 3500.14(g)(3) provides in part:
 When a person in a position to refer settlement-service business . . . receives a payment for providing additional settlement services as part of a real estate transaction, such payment must be for services that are actual, necessary and distinct from the primary services provided by such person.
In appendix B to the HUD RESPA regulations, HUD provides illustrations of the requirements of RESPA. Comment 3 states in part:
 The payment of a commission or portion of the . . . premium . . . or receipt of a portion of the payment . . . where no substantial services are being performed . . . is a violation of section 8 of RESPA. It makes no difference whether the payment comes from [the settlement-service provider] or the purchaser. The amount of the payment must bear a reasonable relationship to the services rendered. Here [the real estate broker in the example] is being compensated for a referral of business to [the title company].
In 1996, in the preamble to the final rule on the withdrawal of employer/employee and computer loan origination systems exemptions5 (61 Fed. Reg. 29238 (June 7, 1996)), HUD reiterated its interpretation of section 8(b) of RESPA as follows:
 HUD believes that section 8(b) of the statute and the legislative history make clear that no person is allowed to receive “any portion” of charges for settlement services, except for services actually performed. The provisions of section 8(b) could apply in a number of situations: (1) where one settlement-service provider receives an unearned fee from another provider; (2) where one settlement-service provider charges the consumer for third-party services and retains an unearned fee from the payment received; or (3) where one settlement-service provider accepts a portion of a charge (including 100 percent of the charge) for other than services actually performed. The interpretation urged [by the commenters to the proposed rule published on July 21, 1994], that a single settlement-service provider can charge unearned or excessive fees so long as the fees are not shared with another, is an unnecessarily restrictive interpretation of a statute designed to reduce unnecessary costs to consumers. The secretary, charged by statute with interpreting RESPA, interprets section 8(b) to mean that two persons are not required for the provision to be violated (61 Fed. Reg. 29249).
The latest revision to the settlement-costs booklet for consumers, issued in 1997, also provides “[i]t is also illegal for anyone to accept a fee or part of a fee for services if that person has not actually performed settlement services for the fee” (62 Fed. Reg. 31998 (June 11, 1997)).
Further, HUD has provided information to the public and the mortgage industry in the “Frequently Asked Questions” section of its RESPA web site, located at http://www.hud.gov/fha/sfh/res/resindus.html. Question 25 states:
Can a lender collect from the borrower an appraisal fee of $200, listing the fee as such on the HUD-1, yet pay an independent appraiser $175 and collect the $25 difference?
The answer reads:
No, the lender may only collect $175 as the actual charge. It is a violation of section 8(b) for any person to accept a split of a fee where services are not performed.
In 1999, by letter submitted at the request of the Superior Court of California, Los Angeles County, in the case of Brown v. Washington Mutual Bank (case no. BC192874), HUD provided the following response to a specific question posed by the court on lender “markups” of another settlement-service provider’s fees:
 A lender that purchases third-party vendor services for purposes of closing a federally related mortgage loan may not, under RESPA, mark up the third-party vendor fees for purposes of making a profit. HUD has consistently advised that where lenders or others charge consumers marked-up prices for services performed by the third-party providers without performing additional services, such charges constitute “splits of fees” or “unearned fees” in violation of section 8(b) of RESPA.
HUD noted in its letter to the court that the response reflected the department’s long-standing position.
C. Recent Cases
Notwithstanding HUD’s regulations and other guidance, the Court of Appeals for the Seventh Circuit held, in Echevarria v. Chicago Title and Trust Co., 256 F.3d 623 (7th Cir. 2001), that section 8(b) was not violated where a title company, without performing any additional services, charged the plaintiffs more money than was required by the recorder’s office to record a deed and the title company then retained the difference. The court reasoned that plaintiffs “failed to plead facts tending to show that Chicago Title illegally shared fees with the Cook County Recorder. The Cook County Recorder received no more than its regular recording fees and it did not give to or arrange for Chicago Title to receive an unearned portion of these fees. The County Recorder has not engaged in the third-party involvement necessary to state a claim under [RESPA section 8(b)].” Id. at 626. The court in essence concluded that unearned fees must be passed from one settlement-provider to another in order for such fees to violate section 8(b).
Earlier, in Willis v. Quality Mortgage USA, Inc., 5 F. Supp. 2d 1306 (M.D. Ala. 1998), cited by the Seventh Circuit in support of its conclusion, the district court concluded that 24 CFR 3500.14(c), “[w]hen read as a whole,” prohibits payments for which no services are performed “only if those payments are split with another party.” Id. at 1309. The Willis court held that there must be a split of a charge between a settlement-service provider and a third party to establish a violation of section 8(b). The court also concluded that 24 CFR 3500.14(g)(3) only applied when there was a payment from a lender to a broker, or vice versa. The payment from a borrower to a mortgage lender could not be the basis for a violation of 24 CFR 3500.14(g)(3) and section 8(b).
HUD was not a party to the cases and disagrees with these judicial interpretations of section 8(b) which it regards as inconsistent with HUD’s regulations and HUD’s long-standing interpretations of section 8(b).
D. Unearned Fees Under Section 8(b)
This statement of policy reaffirms HUD’s existing, long-standing interpretation of section 8(b) of RESPA. Sections 8(a) and (b) of RESPA contain distinct prohibitions. Section 8(a) prohibits the giving or acceptance of any payment pursuant to an agreement or understanding for the referral of settlement-service business involving a federally related mortgage loan; it is intended to eliminate kickbacks or compensated referral arrangements among settlement-service providers. Section 8(b) prohibits the giving or accepting of any portion, split, or percentage of any charge other than for goods or facilities provided or services performed; it is intended to eliminate unearned fees. Such fees are contrary to the congressional finding when enacting RESPA that consumers need protection from unnecessarily high settlement charges (12 USC 2601(a)).
It is HUD’s position that section 8(b) proscribes the acceptance of any portion or part of a charge other than for services actually performed. Inasmuch as section 8(b)’s proscription against “any portion, split, or percentage” of an unearned charge for settlement services is written in the disjunctive, the prohibition is not limited to a split. In HUD’s view, section 8(b) forbids the paying or accepting of any portion or percentage of a settlement service—including up to 100 percent—that is unearned, whether the entire charge is divided or split among more than one person or entity or is retained by a single person. Simply put, given that section 8(b) proscribes unearned portions or percentages as well as splits, HUD does not regard the provision as restricting only fee splitting among settlement-service providers. Further, since section 8(b) on its face prohibits the giving or accepting of an unearned fee by any person, and 24 CFR 3500.14(c) speaks of a charge by “a person,” it is also incorrect to conclude that the section 8(b) proscription covers only payments or charges among settlement-service providers.6
A settlement-service provider may not levy an additional charge upon a borrower for another settlement-service provider’s services without providing additional services that are bona fide and justify the increased charge. Accordingly, a settlement-service provider may not mark up the cost of another provider’s services without providing additional settlement services; such payment must be for services that are actual, necessary and distinct services provided to justify the charge (24 CFR 3500.14(g)(3)).7 The HUD regulation implementing section 8(b) states: “[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 this section” (24 CFR 3500.14 (c)2).
The regulations also make clear that a charge by a single service provider where little or no services are performed is an unearned fee that is prohibited by the statute (24 CFR 3000.14(c)). A single service provider is also prohibited from charging a duplicative fee. Further, a single service provider cannot serve in two capacities, e.g., a title agent and closing attorney, and be paid twice for the same service. The fee the service provider would be receiving in this case is duplicative under 24 CFR 3000.14(c) and not necessary and distinct under 24 CFR 3000.14(g)(3). Clearly, in all of these instances, the source of the payment—whether from consumers, other settlement-service providers, or other third parties—is not relevant in determining whether the fee is earned or unearned because ultimately, all settlement payments come directly or indirectly from the consumer. See 24 CFR 3500.14(c). Therefore, a single settlement-service provider violates section 8(b) whenever it receives an unearned fee.
A single service provider also may be liable under section 8(b) when it charges a fee that exceeds the reasonable value of goods, facilities, or services provided. HUD’s regulations as noted state: “If the payment of a thing of value bears no relationship to the goods or services provided, then the excess is not for services or goods actually performed or provided” (24 CFR 3500.14(g)(2)). Section 8(c)(2) only allows “the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or services actually performed,” i.e., permitting only that compensation which is reasonably related to the goods or facilities provided or services performed. Compensation that is unreasonable is unearned under section 8(b) and is not bona fide under section 8(c)(2).
The secretary, therefore, interprets section 8(b) of RESPA to prohibit all unearned fees, including, but not limited to, cases where (1) two or more persons split a fee for settlement services, any portion of which is unearned; or (2) one settlement-service 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 or the services actually performed.
3
See e.g., old informal opinion (6), August 16, 1976, and old informal opinion (65), April 4, 1980; Barron and Berenson, Federal Regulation of Real Estate and Mortgage Lending, (4th ed.1998). On November 2, 1992 (57 Fed. Reg. 49600), when HUD issued revisions to its RESPA regulations, it withdrew all of its informal counsel opinions and staff interpretations issued before that date. The 1992 rule provided, however, that courts and administrative agencies could use HUD’s previous opinions to determine the validity of conduct occurring under the previous version of Regulation X. See 24 CFR 3500.4(c).
4
The heading to 24 CFR 3500.14 is titled “Prohibition against kickbacks and unearned fees.” However, the heading of subsection (c) is titled “split of charges,” and the preamble to the November 1992 rule states “[s]ection 8 of RESPA (12 USC 2607) prohibits kickbacks for referral of business incident to or part of a settlement service and also prohibits the splitting of a charge for a settlement service, other than for services actually performed (i.e., no payment of unearned fees)” (57 Fed. Reg. 49600 (November 2, 1992)). The rule headings and preamble text are a generalized description of section 8 that is more developed in the actual regulation text. As discussed in section D of this statement of policy, HUD believes that the actual text of the rules, as amended in 1992, makes clear that section 8(b)’s prohibitions against unearned fees apply even when only one settlement-service provider is involved.
5
This final rule was delayed by legislation, but the department implemented portions of the final rule that were not affected by the legislative delay on November 15, 1996 (61 Fed. Reg. 58472 (November 15, 1996)).
6
HUD is, of course, unlikely to direct any enforcement actions against consumers for the payment of unearned fees, because a consumer’s intent is to make payment for services, not an unearned fee.
7
HUD notes that some lenders have charged an additional fee merely for “reviewing” another settlement-service provider’s services. HUD does not regard such “review” as constituting an actual, necessary, or distinct additional service permissible under HUD’s regulations.
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