RESPA Section 8(a) (housed in 12 U.S. Code §2607) states:

“No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.”

While it is on the short side for a statute, like any law, the devil is in the definitions. What do they mean by “refer,” what’s the value of a “thing” and how do they define “settlement service”?

Holly Bunting, partner at Mayer Brown, is the RESPert we asked to give the breakdown of each element of the statute and detail what you need to know to stay compliant.

“I like to break it down into five different elements,” Bunting explained. “And all five of those elements need to be present in a fact pattern in order for there to be a Section 8 violation.”

Those elements are a federally related mortgage loan, settlement service business, a referral, a thing of value, and an agreement or understanding.

• Federally related mortgage loan – “This is really any residential mortgage loan – whether it’s closed-end, open-end, a purchase, a refinance, or home equity loan,” she said.
• Settlement service business – Bunting said these are well defined in the regulations, but a good general rule is a settlement service is anything a consumer pays for in connection with the closing of a mortgage loan. “These can be real estate brokerage services, mortgage origination services, title insurance, appraisals, credit reports – for the most part, whatever is on the list of fees that shows up on a settlement statement.”
• A referral – Another broad term, she said. “Essentially, any conduct that affirmatively influences a consumer’s selection of a particular settlement service provider,” she explained. “It could be written, it could be oral, it could even be the way information about a company is depicted, depending on the facts of the situation.”
• A thing of value – This can be everything from money to free services to sporting event tickets and all-expenses paid trips. According to 12 USC §2602(2), it is any payment advance, funds, loan, service, or other consideration. “Any sort of incentive or consideration that has value would meet this definition,” Bunting said.
• Agreement or understanding – Bunting said this element is easily met because it does not need to be written; it is not even required to have an explicit statement that the parties have an agreement. “It can be an understanding or pattern of conduct from which it is inferred that they are providing an incentive for a referral,” she noted.

When a client comes to a law office looking for advice on whether they have a RESPA issue, the analysis starts with these elements. However, some of these terms are so broad, and the facts to each client so specific, the answer, “It depends,” often crosses a RESPA attorney’s lips.

For example, take a title insurance agency that wants to give a mortgage lender an incentive to send all its title insurance search work that it needs on its loan portfolio to the title agency. In this instance, the search is related to the lender’s servicing activity, not to the closing of the loan, so it’s possible RESPA Section 8(a) would not apply.

However, change one fact of this scenario: the mortgage lender has a real estate-owned portfolio, where the properties have already been foreclosed on, and it is in the process of selling those properties to new consumers. If the mortgage lender refers all the new purchasers to the title insurance agency for a fee or other thing of value, a RESPA red flag pops up.

“In this circumstance, the consumer is going to buy the home from the lender using a brand-new mortgage loan to do so,” Bunting said. “So, incentives in that type of transaction where there is a closing of a federally related mortgage loan would be covered by RESPA.”

Bunting said another example is a real estate broker entering into an arrangement with a pool cleaning service or a moving company in exchange for a cash incentive. In this fact pattern, the settlement service business is the missing element – consumers are not typically paying for movers or pool cleaning services until after they have closed on the purchase of their new home and, thus, not in connection with the closing of the loan. This type of arrangement likely would not fall under RESPA Section 8(a).

RESPA’s prohibition against kickbacks and unearned fees does not end with referral arrangements. Section 8(b), states, “No person shall give, and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.”

What is different between Sections 8(a) and 8(b) is a referral does not have to occur for there to be a violation of 8(b).

Section 8(b) can come up, for example, with technology companies that are not necessarily interacting with the consumer but produce a software platform or technology platform that consumers use to connect to title insurance companies or mortgage lenders. In this situation, the tech company facilitates the consumer’s ability to connect with a title agency and place an order for title insurance, and the title agency pays a fee for each transaction. Though one might say the title agency is sharing part of its revenue from the order with the tech company, the tech company arguably is providing a software integration service. Any payment must be commensurate with the value of the service under RESPA.

“In some ways, Section 8(b) goes hand-in-hand with Section 8(c)(2), which is the exception that permits reasonable payment for services,” Bunting said. “I think that’s one reason you don’t hear about 8(b) as much as 8(a) – because when there is a referral relationship, you’re usually analyzing the arrangement under the 8(c)(2) exception.”

Click for more articles from The ABCs of RESPA: Getting Back to Basics report.