18.2 RESPA Coverage, Referral Payments and Fee Splits

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Statutory Scope and Federally Related Mortgage Loans

RESPA and Regulation X apply to federally related mortgage loans secured by a first or subordinate lien on 1-to-4 family residential real property (12 CFR § 1024.2(b)). Covered properties include individual single-family homes, condominiums, cooperative housing units, manufactured homes, and 2-to-4 unit residential buildings.

Statutory and Regulatory Exemptions (12 CFR § 1024.5(b))

Compliance officers must distinguish covered residential mortgage transactions from transactions expressly excluded from RESPA:

• Business, Commercial, or Agricultural Purpose Loans: Any loan extended primarily for a business, commercial, or agricultural purpose—as defined under Truth in Lending Act Regulation Z (12 CFR § 1026.3(a))—is completely exempt from RESPA, regardless of whether the loan is secured by residential real estate.
• Acreage: The old 25-acre exemption was removed; acreage alone is not a current RESPA exemption.
• Temporary Financing: Genuine temporary construction, bridge or swing financing, subject to § 1024.5’s exceptions, including construction financing used as permanent financing or to finance transfer to the first user; loans financing construction for sale to the first user are not automatically exempt.
• Vacant Land: Loans secured by vacant or unimproved real property, provided that none of the loan proceeds will be used to construct a 1-to-4 family residential dwelling within two years of loan settlement.
• Loan Assumptions and Secondary Market Sales: Assumptions of existing mortgages without lender approval, and bona fide secondary market sales of whole loans or mortgage-backed securities.

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Section 8(a): Prohibitions on Kickbacks and Referral Fees (12 CFR § 1024.14(b))

Under 12 CFR § 1024.14(b), "No person shall give and no person shall accept any fee, kickback, or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a settlement service involving a federally related mortgage loan shall be referred to any person."

The Three Elements of a Section 8(a) Violation

A completed violation of Section 8(a) requires three cumulative legal elements:

1. An Agreement or Understanding: May be verbal, written, or implied by an established course of dealing or pattern of conduct. A formal contract is not required; an unwritten understanding that loan referrals will be rewarded with gifts, dinners, or subsidized office space satisfies this element.
2. A Referral: Any oral, written, or electronic action directed to a person that has the effect of affirmatively influencing the selection by any person of a provider of a settlement service.
3. A Thing of Value: Defined under 12 CFR § 1024.14(d) with expansive statutory breadth.

Broad Statutory Definition of "Thing of Value" (§ 1024.14(d))

A thing of value is not limited to cash payments. It encompasses virtually any financial benefit, including:

• Direct cash payments, commissions, fees, or profit splits;
• Discounts, salary advances, or gift cards;
• Tickets to sporting events, concerts, or theatrical performances;
• Sponsored vacations, trips, golf outings, or lavish meals;
• Desk space, office leases, or facility rentals paid at above-fair-market-value rates;
• Free or subsidized administrative, clerical, or marketing services provided to a referring party;
• Reductions in interest rates, loan origination fees, or closing costs conditioned on referrals;
• Leads or customer contact lists provided without fair market value compensation.

Settlement Services Defined (12 CFR § 1024.2)

Settlement services encompass any service provided in connection with a real estate settlement, including title searches, title examinations, title insurance commitments and policies, property surveys, attorney services, credit reports, property appraisals, home inspections, mortgage loan origination and processing, underwriting, mortgage brokering, loan document preparation, escrow and closing management, hazard insurance, and flood certification.

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Section 8(b): Splitting Charges and Unearned Fees (12 CFR § 1024.14(c))

Under 12 CFR § 1024.14(c), "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 settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed."

Prohibition on Markups and Unearned Charges

Section 8(b) outlaws the practice of splitting settlement fees with third parties who perform no actual settlement services. For example, if a settlement agent charges a consumer $200 for a title search conducted by a third-party title abstractor who only billed $75, and splits the remaining $125 with a referring real estate broker, both the settlement agent and the broker violate Section 8(b).

The Supreme Court's Freeman v. Quicken Loans Precedent

In Freeman v. Quicken Loans, Inc., 566 U.S. 624 (2012), the Supreme Court ruled that Section 8(b) is not a general price-control statute and requires a fee split between two or more persons. An undivided unearned fee (e.g., a single lender charging a $500 document preparation fee without performing separate work, but keeping the entire fee without splitting it) does not violate RESPA Section 8(b). However, the CFPB and federal prudential regulators routinely prosecute unilateral fee markups and phantom settlement fees under Dodd-Frank Section 1036 UDAAP authority as unfair or deceptive practices.

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Section 8(c): Permissible Payments and Safe Harbors (12 CFR § 1024.14(g))

Section 8(c) outlines statutory safe harbors where payments between settlement service providers are legally permissible:

1. Bona Fide Compensation: Payments of bona fide salary, compensation, or other payments for goods or facilities actually furnished or services actually performed;
2. Attorney Fees: Payments to an attorney for services actually rendered in connection with loan closing;
3. Title Agent Compensation: Payments by a title company to its duly appointed agent for services actually performed in the issuance of a title insurance policy;
4. Lender Agent Compensation: Payments by a lender to its agent for services actually performed in loan origination;
5. Cooperative Brokerage Arrangements: Cooperative brokerage and referral arrangements between licensed real estate brokers (e.g., traditional broker-to-broker referral commissions).