Home Financing Ninja

RESPA Section 9: How do You Spell V-I-O-L-A-T-I-O-N and the Required Use Rule

Thanks to Dr Gary Lacefield, President of Risk Mitigation.  Risk Mitigation offers RESPA training and compliance programs for industry banks and realtors.  You can hire him and his staff by visiting Risk Mitigation on the web.  Read more about Dr Gary Lacefield at HomeFinancingNinja.com

Overview: How the Required Use Rule, RESPA, Section 9 is commonly and illegally used by builders and real estate brokerages.

THE PROBLEM: In the builder and large real estate brokerage world, it is common knowledge and a very sore spot between mortgage bankers vs brokers not affiliated with larger real estate brokerage and builder, that incentives are offered to the end user consumer.

THE QUESTIONABLE PRACTICE: These incentives are usually builder upgrades, closing cost concessions, furniture and electronics (such as expensive plasma 3-D TV) included in your new home purchase, or A combination of all the proceeding, by agreeing to use a preferred title or mortgage company.  Whether the mortgage or title company is builder controlled (CBA) or Affiliated Business Arrangement (ABA) situation.

LEGAL OR ILLEGAL: What do you think

The Answer:  This is a RESPA VIOLATION of RESPA Section 9, So Says the Respa Violation Expert, Dr Gary Lacefield of Risk Mitigation, Arlington, Texas.  This is the so-called "required use rule".

EXPLANATION:  A builder cannot offer incentives to encourage you to buy their homes, if those incentives require the use of their CBA or ABA mortgage and title companies.  The end level consumer buying a home is free to choose their own title company and mortgage company and still receive the same incentives originally offered by the builder.

FYI TANGENT: This is the same with the larger brokerages and the larger banks who pay desk rent.  Requiring agents to have to use the "in house" lender is completely illegal.  Especially if you, the broker, are up charging the space for that preferred lender. 

Let me say that again.  A broker is not allowed to upcharge rent to lenders.  If you are paying $50 a square foot to lease or maintain a building, then that same price must be passed along to everyone in the office.

FURTHER INFORMATION: The Required Use Rule was attempted by the Bush Administration in 2008.  However, the NAHB sued HUD (and won) in Dec 2008.  Bickering and bantering between DOJ, HUD, and the NAHB occured in 2009 and early 2010.  In Jun 2010, according to Dr Lacefield, HUD made what is called a Final Rule (I had to look up the definition of a final rule, number ten from the top).  Without having to go through Congress and all that stuff, HUD essentially said to the NAHB that the required use rule is illegal and will no longer be tolerated.  The Required Use Rule Final Rule was put on the Federal Register in Jun 2010 and will be effective 120 days from then.

LET'S Talk about that TV Offered:  Was it included on the HUD 1 (Settlement) Statement?  Guess what, it should have been (and better be from now on).  Did you entice someone to buy a home from you with the promise of an included something (gizmo, wizmo, widget or wadget) if they used your mortgage/title company?  It has to be put on the HUD. A Common RESPA VIOLATION of the Required Use Rule, Section 9, RESPA

PENALTIES: Penalties of RESPA VIOLATIONS of the REQUIRED USE RULE is $10,000 per violation and up to 1 year in jail (prison).  Further more, the offender can be required to pay triple the amount of the settlement service in question.

ANTI TRUST Implications: Repeated RESPA VIOLATIONS can be considered anti trust and (in my opinion) possibly fall under the RICO statutes of Federal Law.  (ie, penalties get much more painful)

Report RESPA Violations to the RESPA Hotline 202-708-4560.

In my next installment, I will talk about RESPA Violations in the Lender/Realtor Training Relationship.  In the meantime, while you wait, go visit Dr Lacefield and make sure that your company is completely RESPA Complaint