• Regulatory Advocacy Reports
• Comment Calls
• Comment Letters
• Final Rule Analyses
• NCUA Board Meetings
• Regulatory Advocacy Podcasts
• Additional Resources
• Regulatory Advocacy Home

CUNA Regulatory Comment Call

July 7, 2010

Clarification of RESPA’s “Required Use” Provisions

EXECUTIVE SUMMARY

• The Department of Housing and Urban Development (HUD) has initiated the rulemaking process that is intended to clarify the current prohibition against the “required use” of affiliated settlement service providers for residential mortgage transactions under the Real Estate Settlement Procedures Act (RESPA). This is intended to address practices in which certain homebuyers commit to using a home builder’s affiliated mortgage lender in exchange for construction discounts or discounted upgrades without sufficient opportunity to review the transaction or comparison shop among other lenders.
• As the first step in this rulemaking process, HUD has issued an advance notice of proposed rulemaking (ANPR) in which the agency is soliciting comments and information on this issue. After reviewing this information, HUD may then issue a specific proposed rule to clarify these “required use” provisions.
• Comments in response to the ANPR are due on or before September 1, 2010. Please submit your comments to CUNA by August 20, 2010.

Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Deputy General Counsel Mary Dunn at mdunn@cuna.coop and to Senior Assistant General Counsel Jeff Bloch at jbloch@cuna.coop; or mail them to Mary and Jeff in c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, DC 20004-2601. You may also contact us at 800-356-9655, ext. 6732, if you have questions or would like a copy of the ANPR. You may also access a copy of the ANPR here.

BACKGROUND

Under RESPA, referrals to affiliated settlement service providers are generally prohibited on the basis that the referrers’ return on investment in the affiliate would be considered a kickback or otherwise a thing of value in exchange for the referral, which is prohibited under Section 8 of RESPA. However, a referral will be permitted if the following conditions are met:

• The referral is accompanied by a disclosure of the affiliation and estimated charges by the provider to which the consumer is referred;
• The consumer is not specifically “required to use” a particular settlement service provider; and
• The arrangement does not otherwise involve prohibited compensation.

Under current RESPA rules, the “required to use” condition is not violated if the consumer is offered discounts or rebates for the purchase of settlement services from the affiliate, as long as it is optional for the consumer to use the affiliate and the discount is truly a discount below the prices that are otherwise available. Also, the discounted prices cannot be made up by charging higher costs elsewhere in the settlement process.

BRIEF DESCRIPTION OF THE ANPR

In 2008, HUD issued a final rule that amended the Good Faith Estimate form, the HUD-1 and HUD-1A settlement statements, and made other changes to the RESPA rules. The final rule also clarified that the provisions regarding the “required use” of affiliated settlement service providers, specifically by indicating that these provisions cover incentives as well as disincentives when providers impose a penalty or other type of economic disincentive if the consumer uses a nonaffiliated provider.

HUD clarified these provisions out of concern that consumers have essentially been required to use these affiliated providers because the timing of the contract precluded the buyer from shopping for settlement service providers, the costs and interest rates offered were not competitive, and it has been difficult to quantify certain of the discounts offered. However, litigation arose that challenged these provisions of the final rule and, as a result, HUD withdrew these provisions.

HUD has now issued the ANPR as the first step in reviewing these provisions and possibly issuing a new proposal to address these concerns. The purpose of the ANPR is to collect information as part of the process of developing the new proposal.

• Have the economic incentives to use affiliated lenders facilitated inflated appraisals or lowered underwriting standards in the lending market? Based on current conditions, are borrowers more likely to be “underwater” on their mortgages as a result? Has consumer choice been limited as a result of these practices and have consumers been steered into unnecessarily high settlement costs? How and why has this been the case?
  
  

  ---

  
  
  

  ---

  
  
  

  ---

  
  
  

  ---

  
  
  

  ---

  
  
  
• Do you believe that the offered home upgrades, settlement discounts, and guaranteed interest rates are illusory? If so, how? Do consumers benefit from certain of these incentives, but not from others? Do consumers who use affiliated service providers pay higher costs and interest rates? Do consumers have adequate time to shop for settlement services from other providers after the purchase contract is signed?
  
  

  ---

  
  
  

  ---

  
  
  

  ---

  
  
  

  ---

  
  
  

  ---

  
  
  
• Do consumers who are offered incentives in these situations less likely to comparison shop for these services? Is there a difference in using affiliated service providers between first-time homebuyers and other homebuyers?
  
  

  ---

  
  
  

  ---

  
  
  

  ---

  
  
  

  ---

  
  
  

  ---

  
  
  
• Are the discounts and upgrades offered to buyers based on prices that are different from those offered to buyers who decline these offers? Are the incentives added to the price of the home somehow? Do the homes appraise at the pre or post-incentive price? Is it possible to measure the effects of the provided upgrades on the appraised value?
  
  

  ---

  
  
  

  ---

  
  
  

  ---

  
  
  

  ---

  
  
  

  ---

  
  
  
• How do affiliated-originated mortgages perform, as compared to the local average, with regard to defaults or the borrower being “underwater?” How do prices of new homes financed by affiliated lenders compare to prices financed by nonaffiliates? That is, do lenders not negotiate down to the incentivized price in absence of an incentive to use an affiliate?
  
  

  ---

  
  
  

  ---

  
  
  

  ---

  
  
  

  ---

  
  
  

  ---

  
  
  
• Does the current affiliated business disclosure encourage consumers to comparison shop? How can these disclosures be improved to inform consumers of the advantages and disadvantages of these affiliated practices?
  
  

  ---

  
  
  

  ---

  
  
  

  ---

  
  
  

  ---

  
  
  

  ---

  
  
  
• To what extent do you believe there are benefits to the “one-stop” shopping approach that occurs when consumers are offered the services of affiliated providers? Can these be quantified and do they compare with being able to shop for the best terms and costs? How can the incentives and disincentives currently being offered by affiliates be addressed in a new rule and to what extent does an incentive to use an affiliated provider compare or contrast with a disincentive or penalty for the consumer using a nonaffiliated provider?
  
  

  ---

  
  
  

  ---

  
  
  

  ---

  
  
  

  ---

  
  
  

  ---

  
  
  
• Other comments?
  
  

  ---

  
  
  

  ---

  
  
  

  ---

  
  
  

  ---

  
  
  

  ---