Real Estate Settlement Procedures Act (RESPA)

Prior to RESPA

Loss of Objectivity

Before the Act was created, settlement service providers were often referring their clients to other settlement service providers for referral fee income and not necessarily because they were the most affordable or most capable.

Objectivity Through Disclosure

1. RESPA was designed to force full disclosure of all settlement service fees.
2. RESPA prohibited kickbacks, unearned fees or things of value for referral activities.
3. RESPA restricted the splitting of charges.
4. RESPA established fines of up to $10,000 or imprisonment for up to 1 year per violation and liable for treble damages to the consumer.

Structuring Income Opportunities Acceptable to RESPA

1. Single Service Provider (SSP)
2. Multi-Service Provider (MSP)
3. Controlled Business Arrangements (CBA)

Single Service Provider

• Single Service Provider meaning any person who provides a settlement service which is considered actual and necessary to the real estate transaction.
• Person meaning any individual, corporation, partnership, trust, association or other entity.

Multiple Service Provider

• RESPA permits a person who is a settlement service provider to collect additional payments from the consumer as part of a real estate transaction, as long as such payments are for services that are actual, necessary and distinct from their primary service. (Subject to local laws.) #11; As with any settlement service, these payments are negotiable (unless regulated by local laws) and must be disclosed ahead of time.
• Realtor Information Network (RIN) - with the advent of new and emerging technologies, it will be easier for single service providers to provide multiple settlement services with the simple tap of a key stroke on a computer. #11; Computer Loan Origination Systems is one such service that is already available and recognized under RESPA.

Controlled Business Arrangements

• CBA’s can be arranged between all types of settlement service providers. (Subject to local laws.) Income derived from a CBA is limited to a return on equity and not on the value of the referral. (Gross Income minus Operating Expense equals Net Income. Net Income divided by Percent of Equity Ownership equals Return on Investment.)
• A CBA is required to render actual service and not be a shell company just to capture referral fees. Compensation or a thing of value given by a real estate broker to a real estate agent who refers their client to the real estate broker’s CBA would be considered a violation by both parties.
• Payments to bona fide employees will be banned when HUD publishes the next RESPA Final Rule, estimated out sometime in the fall of 1995.
• The person making the referral must provide a CBA Disclosure explaining the nature of the relationship (ownership and financial interest) between the referring party and the service provider as well as an estimate of charge or range of charges. #11;
• Disclosure must be on a separate piece of paper and provided no later than the time of each referral.

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Last modified by EF on May 15, 2006