Real Estate Settlement Procedures Act (RESPA): Strengthening and Clarifying RESPA's “Required Use” Prohibition Advance Notice of Proposed Rulemaking, 31334-31338 [2010-13350]

Agencies

• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Federal Register Volume 75, Number 106 (Thursday, June 3, 2010)]
[Proposed Rules]
[Pages 31334-31338]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-13350]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 3500

[Docket No. FR-5352-A-01]
RIN 2502-A178


Real Estate Settlement Procedures Act (RESPA): Strengthening and 
Clarifying RESPA's ``Required Use'' Prohibition Advance Notice of 
Proposed Rulemaking

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner, HUD.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: Through this Advance Notice of Proposed Rulemaking (ANPR), HUD 
commences the process of initiating rulemaking directed to 
strengthening and clarifying the prohibition against the ``required 
use'' of affiliated

[[Page 31335]]

settlement service providers in residential mortgage transactions under 
section 8 of RESPA. HUD has received complaints that some homebuyers 
are committing to use a builder's affiliated mortgage lender in 
exchange for construction discounts or discounted upgrades, without 
sufficient time to research their contracts or to comparison shop. The 
purpose of this ANPR is to solicit information that can be used to 
inform any future revision or clarification of the regulatory 
definition of the ``required use'' of affiliated settlement service 
providers in residential mortgage transactions.
    With this ANPR, HUD seeks comment from an array of sources with 
experience or knowledge of affiliated business arrangements in 
residential mortgage transactions. HUD also welcomes comment on actions 
in addition or as an alternative to rulemaking that would better 
address concerns with affiliated business arrangements in residential 
mortgage transactions.

DATES: Comment Due Date: September 1, 2010.

ADDRESSES: Interested persons are invited to submit comments regarding 
this ANPR to the Regulations Division, Office of General Counsel, 
Department of Housing and Urban Development, 451 7th Street, SW., Room 
10276, Washington, DC 20410-0500. Communications must refer to the 
above docket number and title. There are two methods for submitting 
public comments. All submissions must refer to the above docket number 
and title.
    1. Submission of Comments by Mail. Comments may be submitted by 
mail to the Regulations Division, Office of General Counsel, Department 
of Housing and Urban Development, 451 7th Street, SW., Room 10276, 
Washington, DC 20410-0500.
    2. Electronic Submission of Comments. Interested persons may submit 
comments electronically through the Federal eRulemaking Portal at 
www.regulations.gov. HUD strongly encourages commenters to submit 
comments electronically. Electronic submission of comments allows the 
commenter maximum time to prepare and submit a comment, ensures timely 
receipt by HUD, and enables HUD to make them immediately available to 
the public. Comments submitted electronically through the 
www.regulations.gov Web site can be viewed by other commenters and 
interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.

    Note: To receive consideration as public comments, comments must 
be submitted through one of the two methods specified above. Again, 
all submissions must refer to the docket number and title of the 
rule.

    No Facsimile Comments. Facsimile (FAX) comments are not acceptable.
    Public Inspection of Public Comments. All properly submitted 
comments and communications submitted to HUD will be available for 
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the 
above address. Due to security measures at the HUD Headquarters 
building, an advance appointment to review the public comments must be 
scheduled by calling the Regulations Division at 202-708-3055 (this is 
not a toll-free number). Individuals with speech or hearing impairments 
may access this number through TTY by calling the Federal Information 
Relay Service at 800-877-8339 (this is not a toll-free number). Copies 
of all comments submitted are available for inspection and downloading 
at https://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Teresa Payne, Deputy Assistant 
Secretary for Regulatory Affairs and Manufactured Housing, Office of 
Housing, Department of Housing and Urban Development, 451 7th Street, 
SW., Room 9162, Washington, DC 20410-8000; telephone number 202-708-
6401 (this is not a toll-free number). Persons with hearing or speech 
impairments may access this number through TTY by calling the Federal 
Information Relay Service at 800-877-8339 (this is a toll-free number).

SUPPLEMENTARY INFORMATION: 

I. Background

    In the late 1960s, Congress became concerned about the excessive 
cost of settlement services for residential mortgage loans. Congress 
found that many homebuyers had very little knowledge about the 
settlement process and that homebuyers often did not shop for, and were 
not involved in, choosing the settlement service providers that they 
would be required to pay at settlement. Instead, in many areas of the 
country, the delivery of settlement services was controlled by a system 
of referrals by those in a position to refer settlement business (such 
as builders, real estate agents, and lawyers), resulting in 
``kickbacks'' by settlement service providers to those who referred 
business to them. In this system, settlement service providers did not 
compete for business by providing a quality service at a reasonable 
cost to homebuyers. Rather, settlement service providers generated 
business by providing the most lucrative kickbacks to those in a 
position to refer business to them.
    Through the adoption of RESPA and subsequent amendments, Congress 
sought to change the way in which homebuyers retained settlement 
service providers for federally related mortgage loans. The term 
``federally related mortgage loan,'' as defined in section 3 of RESPA, 
includes nearly all residential mortgage loans for one- to four-family 
homes. In order to encourage consumers to shop for settlement services, 
and cause settlement service providers to compete for homebuyers' 
business, RESPA requires that the nature and costs of real estate 
settlement services be disclosed in advance to the consumer, and it 
forbids the payment of referral fees, kickbacks, and unearned fees for 
real estate settlement services.\1\
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    \1\ In July 2008, Congress reaffirmed its interest in protecting 
consumers by directing HUD to recommend legislative reforms to RESPA 
that would ``promote more transparent disclosures, allowing 
consumers to better shop and compare mortgage loan terms and 
settlement costs.'' See 12 U.S.C. 1515(b).
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    RESPA defines an ``affiliated business arrangement'' as ``an 
arrangement in which (A) a person who is in a position to refer 
business incident to or a part of a real estate settlement service 
involving a federally related mortgage loan, or an associate of such 
person, has either an affiliate relationship with or a direct or 
beneficial ownership interest of more than 1 percent in a provider of 
settlement services; and (B) either of such persons directly or 
indirectly refers such business to that provider or affirmatively 
influences the selection of that provider.'' (12 U.S.C. 2602(7).) In 
RESPA-covered transactions, referrals to affiliated settlement service 
providers are subject to civil and criminal liability under section 8 
of RESPA (Section 8), because the referrer's return on investment in 
the affiliate can be considered a prohibited kickback or thing of value 
for the referral. (See 12 U.S.C. 2607(a).) However, Section 8(c)(4) 
provides an exemption for affiliate referrals that allows for returns 
on ownership interest if the referrals involve an affiliated business 
arrangement and three other conditions are met. The three other 
conditions are: (1) The referral is accompanied by a disclosure of 
affiliation and estimated charges by the provider to which the consumer 
is referred, (2) the consumer is not ``required to use'' a particular 
settlement service provider; and (3) the arrangement does not involve 
otherwise

[[Page 31336]]

prohibited compensation. (See 12 U.S.C. 2607(c)(4).) Requiring the use 
of an affiliate is thus presumed to involve a violation of Section 8, 
insofar as it violates a condition for exemption from liability under 
Section 8.
    The definition of ``required use'' in HUD's existing RESPA 
regulations reads as follows:

    Required use means a situation in which a person must use a 
particular provider of a settlement service in order to have access 
to some distinct service or property, and the person will pay for 
the settlement service of the particular provider or will pay a 
charge attributable, in whole or in part, to the settlement service. 
However, the offering of a package or (combination of settlement 
services) or the offering of discounts or rebates to consumers for 
the purchase of multiple settlement services does not constitute a 
required use. Any package or discount must be optional to the 
purchaser. The discount must be a true discount below the prices 
that are otherwise generally available, and must not be made up by 
higher costs elsewhere in the settlement process. (24 CFR 3500.2)

    On November 17, 2008 at 73 FR 68204, HUD published a final rule 
amending its RESPA regulations at 24 CFR part 3500 to further the 
purposes of RESPA, including protecting consumers from kickbacks and 
referral fees that tend to unnecessarily increase settlement costs.\2\ 
In support of that rulemaking, HUD had received consumer complaints and 
comments about certain affiliated business practices. These complaints 
and comments included concerns that residential developers and 
homebuilders would offer to reduce the cost of a home (for example, by 
adding free construction upgrades, or discounting the home price) if 
the homebuyer used the developer's affiliated mortgage lender. Buyers 
also complained that, in some instances, because the timing of the 
contract with the builder precluded the buyer from shopping, the 
affiliated lender used by the homebuyer was able to charge settlement 
costs or interest rates that were not competitive with those of 
nonaffiliated lenders. The complaints indicated that these incentivized 
referrals to affiliate lenders may be steering techniques that 
effectively ``require the use'' of the affiliate.
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    \2\ Additional information regarding the RESPA regulatory 
amendments, and specifically changes made by HUD subsequent to its 
RESPA proposed rule of March 14, 2008, published at 73 FR 14030, is 
provided in the preamble to the November 17, 2008, final rule.
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    In order to address concerns about the operation and effect of 
these incentivized affiliate referrals, the November 17, 2008, RESPA 
final rule included a revised definition of ``required use'' that was 
to take effect on January 16, 2009. The revised definition of 
``required use'' in the November 17, 2008, final rule would have 
provided as follows:

    Required use means a situation in which a person's access to 
some distinct service, property, discount, rebate, or other economic 
incentive, or the person's ability to avoid an economic disincentive 
or penalty, is contingent upon the person using or failing to use a 
referred provider of settlement services. In order to qualify for 
the affiliated business exemption under Sec.  3500.15, a settlement 
service provider may offer a combination of bona fide settlement 
services at a total price (net of the value of the associated 
discount, rebate, or other economic incentive) lower than the sum of 
the market prices of the individual settlement services and will not 
be found to have required the use of the settlement service 
providers as long as: (1) The use of any such combination is 
optional to the purchaser; and (2) the lower price for the 
combination is not made up by higher costs elsewhere in the 
settlement process. (See 73 FR 68239-68240)

    As a result of litigation challenging the revised definition,\3\ 
HUD deferred the effective date for the revised definition, and 
subsequently withdrew the revision by final rule published on May 15, 
2009 (74 FR 22822). When HUD withdrew the revised definition, it left 
in place the existing definition of ``required use'' pending new 
rulemaking on the subject. HUD's final rule withdrawing the revised 
definition of ``required use'' noted that public comments received in 
response to the proposed withdrawal had highlighted the potential 
complexity of existing affiliated business arrangement practices and 
the need for further clarity on the application of ``required use'' to 
such practices. The comments also underscored the need for HUD to 
continue to pursue reform in this area in order to protect consumers 
from harmful steering and referral practices.
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    \3\ See National Association of Home Builders, et al. v. Shaun 
Donovan, et al., Civ. Action No. 08-CV-1324, United States District 
Court for the Eastern District of Virginia, Alexandria Division.
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    In withdrawing the definition, HUD stated its intention to pursue 
new rulemaking on the subject of ``required use.'' In the May 15, 2009, 
final rule, HUD also reiterated its commitment to the goals of RESPA 
reform and to addressing referral practices that result in required 
use.

II. This ANPR

    HUD remains committed to furthering RESPA's goal of protecting 
homebuyers against unnecessarily high settlement costs by addressing 
both incentivized affiliate referrals and penalties that could 
adversely affect not only individual borrowers, but also competition in 
the provision of settlement services. HUD also remains committed to 
preserving the benefits of voluntary contracts that involve true 
discounts. In advance of proposing a new rule on this subject, HUD is 
publishing this ANPR to request information on the practices to be 
addressed by this rulemaking.
    HUD requests information from all interested members of the public, 
including individual consumers, consumer advocacy organizations, 
housing counseling agencies, the real estate and mortgage industry, and 
federal, state, and local consumer protection and enforcement agencies. 
In addition to information about individual consumers' experiences, HUD 
requests information that includes empirical data, studies, and 
analyses regarding affiliated business arrangement practices, and that 
responds to the specific questions presented in this ANPR. In 
particular, HUD seeks information that would enable an assessment of 
the benefits and costs of possible regulatory alternatives. For 
instance, have economic incentives to use affiliated lenders 
facilitated inflated appraisals or lowered underwriting standards in 
the lending market? Has required use played any role in creating recent 
situations where borrowers are more likely to be ``underwater?'' 
Commenters are encouraged to provide data that would inform analysis of 
both the magnitude of the required use problem and the potential 
regulatory options to address the problem.
    From individual consumers who have purchased new homes and from 
consumer advocates, HUD seeks information about consumers' experiences 
with lenders referred by builders.
    From state and local consumer protection agencies and state 
attorneys general, HUD seeks comment and information regarding 
complaints received and/or investigations undertaken with respect to 
business arrangements that steer consumers to use affiliated settlement 
businesses.
    To develop the necessary and appropriate protections for consumers 
from detrimental practices that may result from affiliated business 
arrangements, HUD requests further information about the structure, 
scope, frequency, timing, and effects of affiliated practices that 
impair consumers' ability to evaluate the true costs of a mortgage 
transaction, thereby limiting consumer choice and steering

[[Page 31337]]

consumers into unnecessarily high settlement costs.
    HUD invites comment on any aspect of referral arrangements in 
residential mortgage transactions that may assist HUD in developing any 
new or revised protections, but HUD specifically requests information 
on the following questions, and requests that commenters provide as 
detailed and factual information or evidence as possible in responding 
to these questions.
    1. Tailoring ``required use'' to reach abusive incentive schemes, 
but not beneficial discounts or packages. The definition of ``required 
use'' in the November 17, 2008, RESPA final rule, sought to prevent 
detrimental referral practices among affiliates, while preserving 
discounts offered by settlement service providers for packaged 
settlement services.
    Some commenters have suggested that builders' incentive programs 
discourage homebuyers from comparison shopping for the best loan, 
because: (1) The value of some of the incentives offered by builders 
for the use of their affiliated lender (e.g., kitchen upgrades) are 
difficult for consumers to quantify when comparing the loan terms and 
settlement costs of the affiliated lender with those of nonaffiliated 
lenders; and (2) often, in order to get the incentive a builder is 
offering, a new homebuyer must commit to the use of the builder's 
affiliated lender at the time that the contract for the construction of 
the home is executed, which may be many months before settlement will 
occur and long before the typical consumer would begin shopping for a 
lender; and (3) that the builder encourages the buyer to commit to the 
contract before the buyer has time to fully consider alternatives and 
comparison shop.
    To assist in determining whether these claims are correct, HUD 
asks:
    (a) What types of discounts and incentives are tied to the use of 
an affiliated settlement service provider such as a mortgage lender? 
For example, are construction upgrades, and discounts, such as free or 
reduced costs for options such as fireplaces, flooring upgrades, 
kitchen upgrades (such as granite countertops, stainless steel 
appliances), or decks and finished basements frequently offered? Is 
closing cost assistance or interest rate guarantees usually part of the 
incentive package? Are these incentives delivered as coupons for 
services, merchandise, discount deposit bank accounts, etc.?
    (b) In a new home purchase transaction, at what points in time are 
incentives for the use of a builder-affiliated lender discussed with a 
potential homebuyer? Do such discussions occur with sales 
representatives at the initial time consumers inspect homes, and are 
they presented by the sales representative or are they presented only 
in response to a consumer request? Does the issue of incentives also 
arise when the contract for the purchase of the home is signed or does 
it arise at some point later in the process? At what point are 
affiliated-business arrangement disclosures provided to consumers?
    (c) At what point, generally, in a new home purchase transaction, 
are the homebuyers expected to determine whether or not they will use a 
builder-affiliated lender? Is a decision expected of the homebuyer at 
the time that the contract for the purchase of the house is signed or 
at some point later in the process? Are there standard contract 
provisions specifying the package or combination of settlement services 
that are provided? Are homebuyers expected to contact the affiliated 
lender within a certain period of time before or after the contract has 
been signed?
    (d) Is there evidence demonstrating that homebuyers who are offered 
incentives by builders to use builder-affiliated lenders are as likely 
or less likely to engage in comparison shopping for a lender as are 
those homebuyers who are not offered an incentive to use a builder-
affiliated lender? Is there empirical data demonstrating a difference 
in the use of affiliated lenders between first-time homebuyers and 
other homebuyers?
    (e) Is there evidence that buyers using affiliated lenders pay 
higher rates of interest or higher closing costs than those that use 
unaffiliated lenders?
    (f) Is there evidence demonstrating that homebuyers benefit from 
some types of incentives and not from others or by incentives offered 
by some types of business but not others? Incentives could include 
benefits such as discounts on the costs of settlement, payment of 
settlement services, and discounts on upgrades to the house.
    2. Forward Loan Commitments. A forward loan commitment (forward 
commitment), in its simplest definition, is a pledge to provide a loan 
at a future date. It is HUD's understanding that in the homebuilding 
industry, some large-scale homebuilders purchase forward commitments 
from lenders pursuant to which the lenders make an aggregate amount of 
mortgage financing available to the homebuilder's customers under the 
terms of the commitment. Some commenters on the March 14, 2008, RESPA 
proposed rule expressed concern about the effect of a revised 
definition of ``required use'' on the ability of homebuilders to 
purchase forward commitments.
    To better understand forward commitments and their use in mortgage 
loan transactions, HUD seeks comment on the following:
    (a) How are forward commitments purchased and used as described 
above, and are there alternative types, terms, or uses for builder-
purchased forward commitments?
    (b) Is there evidence as to the prevalence of builder-purchased 
forward commitments?
    (c) What is the benefit to homebuyers of forward commitments in 
mortgage loan transactions from affiliated as well as nonaffiliated 
lenders?
    3. Other Issues. A concern raised through comments submitted on the 
March 14, 2008, RESPA proposed rule is that certain incentives are 
built into the cost of the home and are therefore not true discounts. 
Commenters also stated a belief that an affiliated lender has a 
special, potentially improper, interest in financing a house at any 
price set by a seller. In this regard, HUD asks:
    (a) Is there any data that home sellers are providing discounts or 
upgrades to buyers who agree to use affiliated businesses based on 
prices that are different from those offered to buyers who decline such 
offers?
    (b) Is there any evidence that home sellers either include or do 
not include in the listed price of the house the cost of the incentives 
that they offer for the use of an affiliated lender?
    (c) Do homes sold with incentives to the homebuyer appraise at the 
pre- or post-incentive price? Is it possible to isolate the effects of 
standard builder construction upgrades and custom upgrades requested by 
the consumer on the appraised value?
    (d) How do affiliate-originated mortgages perform compared to the 
local average (e.g., in the case of default or the homeowner being 
``under water'' statistics)?
    (e) How do prices of new construction homes financed by affiliated 
lenders compare with prices of new construction homes financed by 
nonaffiliates? That is, is there evidence that builders do not 
negotiate down to or near to incentivized prices in the absence of an 
incentive to use an affiliate?
    (f) Is there data on the extent to which the current affiliated 
business disclosure encourages consumers to comparison shop with 
nonaffiliated service providers before signing contracts? Can the 
affiliated business disclosure be improved to inform consumers of the

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advantages and disadvantages of affiliated lending practices?
    4. State and Local Experience. State and local consumer and 
enforcement agencies, through their investigatory and prosecutorial 
experiences, may be able to contribute valuable information regarding 
practices that steer consumers to overpriced settlement service 
providers, as well as provide information about successful and 
unsuccessful means of preventing such abuse. To these agencies 
especially, HUD asks:
    (a) What has been and continues to be the impact of state and local 
regulatory enforcement in this area?
    (b) What rules and forms of enforcement have proven most effective?
    (c) Is there evidence available regarding specific anticompetitive 
or anticonsumer practices that can be provided by state law 
enforcement?
    (d) Can state laws regulating builder-affiliated business 
arrangements provide an approach for evaluating options?
    5. One-Stop Shopping. In the process of withdrawing the revised 
definition of ``required use'' in the November 17, 2008, RESPA final 
rule, HUD received comments indicating that limiting referrals to 
affiliates adversely affects one-stop shopping options that could 
benefit consumers. Accordingly, HUD asks whether there is any way to 
quantify the benefit to homebuyers of one-stop shopping. Additionally, 
is there any evidence that homebuyers derive greater benefit from one-
stop shopping than from comparison shopping for the best loan terms and 
settlement costs?
    6. Incentives vs. Disincentives or Penalties. HUD requests comments 
on the relationship between incentives to use an affiliated settlement 
service provider and disincentives or penalties for using a 
nonaffiliated settlement service provider, and how incentives and 
disincentives might be treated in the new regulation. To assist in the 
development of distinctions or equivalencies between incentives and 
disincentives, HUD asks for information concerning cases where an 
incentive to use a certain provider would not have the same effect as a 
disincentive for failure to use another provider.
    While HUD specifically seeks comments on the foregoing questions, 
HUD welcomes additional information that will help inform HUD's views 
on this issue.

    Dated: May 27, 2010.
David H. Stevens,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 2010-13350 Filed 6-2-10; 8:45 am]
BILLING CODE 4210-67-P