HUD Issues New Affiliated Lender Rule
By: BEAU J. HURTIG
March 2009
The Real Estate Settlement Procedures Act (RESPA) and the Department of Housing and Urban Development’s (HUD) regulations implementing RESPA traditionally permitted residential real estate developers to offer buyer incentives to use preferred title agencies (Title Companies) and affiliated lenders. However, HUD’s publication of a Rule to Simplify and Improve the Process of Obtaining Mortgages and Reduce Consumer Settlement Costs (Final Rule) changed this position. Although the Final Rule’s primary purpose is to require more timely and effective mortgage disclosures, the Final Rule also contains a revision to the definition of “required use,” prohibiting residential real estate developers (Builders) from offering buyer incentives in exchange for using Title Companies (whether or not affiliated) or affiliated lenders.
The Final Rule Amends the Definition of Required Use
The Final Rule amends the definition of “required use” such that only settlement service providers may offer a combination of bona fide settlement services at a discount. This revision affects Builders because HUD does not consider Builders to be settlement service providers. Although the impact of this revision is not immediately apparent, the commentary to the Final Rule clarifies that the revised definition impacts two sections of RESPA related regulations: (i) the affiliated business exemption and (ii) the prohibition on sellers requiring buyers to purchase title insurance from a particular company.
Builder Incentives are Permitted for Direct Purchases
The Final Rule does not alter HUD’s longstanding position that Builders and real estate settlement service providers may offer discounts directly to buyers without violating RESPA.
No Builder Incentives are Permitted for Using Affiliated Businesses
Section 8 of RESPA generally prohibits Builders and lenders from giving or accepting any fee, kickback or thing of value pursuant to any agreement or understanding for the referral of settlement service business involving a federally related mortgage loan. However, an exception to this general rule exists for referrals involving affiliated business arrangements so long as, among other things, Builder does not require the use of any particular provider of settlement services.
The revised definition permits only “settlement service providers,” not Builders, to offer customer discounts for using referred settlement services provided by affiliates under the affiliated business exception. A Builder may offer incentives for buyers who use nonaffiliated lenders, so long as the Builder receives nothing of value from such referrals.
No Builder Incentives are Permitted for Using Title Companies
RESPA contains a broader prohibition on requiring the use of title companies. This prohibition forbids sellers from requiring, directly or indirectly, as a condition to selling the property, that title insurance covering the property be purchased by the buyer from any particular title company. Therefore, the revised definition of required use prohibits Builders from offering customer incentives for the use of any Title Company, whether or not an affiliate.
Additional Information
RESPA’s restrictions described above apply only to transactions involving a federally related mortgage loan. “[A]n all cash sale, a sale where the individual home seller takes back the mortgage, a rental property transaction [and] other business purpose transaction[s]” are not covered. Therefore, Builders could continue to offer incentives for using affiliated lenders or Title Companies in these situations. Finally, at least partially in response to filed litigation, the effective date of the Final Rule’s revised definition of “required use” has been delayed from January 16, 2009 to April 16, 2009.
Takeaway
HUD’s new rule prohibits residential real estate developers from offering buyer incentives in exchange for using Title Companies (whether or not affiliated) or affiliated lenders. The effective date of this rule has been delayed from January 16, 2009 to April 16, 2009. Therefore, lending institutions should carefully review their relationships with any affiliated residential real estate developers to ensure such relationships do not run afoul of RESPA.