[Federal Register Volume 61, Number 111 (Friday, June 7, 1996)]
[Rules and Regulations]
[Pages 29264-29266]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-14332]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 3500
[Docket No. FR-3638-N-05]
Office of the Assistant Secretary for Housing-Federal Housing
Commissioner; Real Estate Settlement Procedures Act (RESPA); Statement
of Policy 1996-3, Rental of Office Space, Lock-outs, and Retaliation
AGENCY: Office of the Assistant Secretary for Housing-Federal Housing
Commissioner, HUD.
ACTION: Statement of Policy 1996-3, Rental of Office Space, Lock-outs,
and Retaliation.
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SUMMARY: This statement sets forth the Department's interpretation of
Section 8 of the Real Estate Settlement Procedures Act (RESPA) and its
implementing regulations with regard to the rental of office space,
lock-outs and retaliation. It is published to give guidance and to
inform interested members of the public of the Department's position on
enforcement of this section of the law.
FOR FURTHER INFORMATION CONTACT: David R. Williamson, Director of the
Office of Consumer and Regulatory Affairs, Room 5241, telephone: (202)
708-4560. For legal enforcement questions, Peter Race, Assistant
General Counsel for Program Compliance, or Rebecca J. Holtz, Attorney,
Room 9253, telephone: (202) 708-4184. (The telephone numbers are not
toll-free.) For hearing- and speech-impaired persons, this number may
be accessed via TTY (text telephone) by calling the Federal Information
Relay Service at 1-800-877-8339. The address for the above-listed
persons is: Department of Housing and Urban Development, 451 Seventh
Street, SW, Washington, DC 20410.
SUPPLEMENTARY INFORMATION:
General Background
Section 8 (a) of the Real Estate Settlement Procedures Act (RESPA)
prohibits any person from giving or accepting any fee, kickback, or
thing of value for the referral of settlement service business
involving a federally related mortgage loan. 12 U.S.C. 2607(a).
Congress specifically stated it intended to eliminate kickbacks and
referral fees that tend to increase unnecessarily the costs of
settlement services. 12 U.S.C. 2601(b)(2).
Since July 1993, the Department has been seeking comments and
advice concerning the final rule of November 2, 1992, implementing
Section 8 of RESPA. On July 21, 1994, the Department published a new
proposed rule on certain Section 8 issues. Simultaneously with the
issuance of this Statement of Policy, HUD is publishing a final rule in
that rulemaking. As part of that rulemaking process, the Department
received comments concerning the application of Section 8 of RESPA to
the rental of office space, lock-outs and retaliation in connection
with real estate brokerage office practices. In addition, the
Department's enforcement officials have received numerous complaints
dealing with these same issues.
Rental of Office Space
In the last few years, the Department has received numerous
complaints alleging that certain settlement service providers,
particularly lenders, are leasing desks or office space in real estate
brokerage offices at higher than market rate in exchange for referrals
of business. In HUD's rulemaking docket, number R-94-1725 (FR-3638),
many commenters argued that HUD should scrutinize this rental practice.
The concern expressed is that real estate brokers charge, and
settlement service providers pay, high rent payments for the desk or
office space to disguise kickbacks to the real estate broker for the
referral of business to the settlement service provider. In this
Statement of Policy, the Department sets forth how it distinguishes
legitimate payments for rentals from payments that are for the referral
of business in violation of Section 8.
Lock-outs
The Department also received comments and complaints alleging that
settlement service providers were being excluded from, or locked-out
of, places of business where they might find
[[Page 29265]]
potential customers. The most common occurrence cited was where a real
estate brokerage company had leased space to a particular provider of
services, and had prevented any other provider from entering its office
space.
As part of the July 21, 1994, rulemaking, a Nebraska lender
commented:
We are experiencing a rapid growth of lender lock-out
relationships wherein real estate companies lease office space
within their sales offices to a particular mortgage company. A part
of the agreement is that other lenders are not allowed in the sales
offices to solicit business. This clearly prevents free competition
in financing to the home buyer.
* * * * *
* * * [I]t is very clear that the [real estate] office managers
are exerting a lot of control to keep all other lenders out. This
would not be done without proper incentive ($$$) * * *.
Several other commenters alleged that real estate office space
arrangements with particular lenders, coupled with limiting or denying
rival lenders access to customers, were being used in their communities
to eliminate competition. These commenters called for special RESPA
rules to ban these practices.
Retaliation
The Department also has received complaints concerning retaliation
practices used to influence consumer referrals. In one complaint,
financial service representatives in a real estate broker's office were
given specific quotas of referrals of home buyers to an affiliated
lender and were threatened with the loss of their jobs if they did not
meet the quotas.
Commenters on the proposed rules also alleged that some employers
were engaging in practices of retaliation or discrimination against
employees and agents who did not refer business to affiliated entities.
Reprisals could range from loss of benefits, such as fewer sales leads,
higher desk fees, less desirable work space, and ultimately, loss of
job. Some commenters requested that the Department issue guidelines or
other regulatory provisions to restrict such retaliatory activities.
The Coalition to Retain Independent Services in Settlement (CRISIS)
called for a rule prohibiting retaliation against employees and agents
who refer business to non-affiliated entities as most consistent with
the language of the RESPA statute. CRISIS suggested strong language to
prohibit negative actions against employees and agents who refer
business to non-affiliated entities, including prohibitions against
more subtle actions, such as loss of work space or increases in desk
fees.
Statement of Policy--1996-3
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),1 hereby issues the following Statement of
Policy.
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\1\ 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 part 3500).
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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 U.S.C. Sec. 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 U.S.C. Sec. 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.'' Id.
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
non-settlement 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 U.S.C. Sec. 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).
[[Page 29266]]
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 U.S.C. 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.
Authority: 12 U.S.C. 2617; 42 U.S.C. 3535(d).
Dated: May 31, 1996.
Nicolas P. Retsinas,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 96-14332 Filed 6-6-96; 8:45 am]
BILLING CODE 4210-27-P
