Assure Compliance with HUD-First Five Points
More tips on RESPA law, guidelines and violations for real estate agents and loan originators from former HUD investigator and RESPA expert, Dr. Gary Lacefield.
This week, Dr. Lacefield reviews the first five points of a ten point test to determine if your operation is legal or in danger of being cited by HUD as a sham company and fined accordingly.
View the RESPANewsUpdate.com video here. This educational video and the RESPANewsUpdate.com website were created by WebCasting.com, based in Dallas, Texas. This video is provided for free, compliments of Premier Mortgage Funding, Inc and Century 21 Mike Bowman, Inc.
For more about Dr. Lacefield, his training and compliance programs and CDs, please visit RiskMitigation.net or GoGetRealEstate.com/Get/GLacefield.
Assure Compliance with HUD 10 Point Test
Developed by HUD, this 10 point test is a good starting point to see if your operation is legal. You’ll want to share this information with your company
Under RESPA, HUD considers whether the entity receiving referrals of business (regardless of legal structure) is a bona fide provider of settlement services. When determining whether such an entity is a bona fide provider of settlement services or is merely a sham arrangement used as a conduit for referral fee payments, HUD balances a number of factors in determining whether a violation exists and whether an enforcement action under Section 8 is appropriate.
HUD developed the following questions in a partial effort to determine whether or not the entity is a bona fide settlement service provider. A response to any one question by itself may not be determinative of a sham controlled business arrangement. HUD will consider the following factors and will weigh them in light of the specific facts in determining whether an entity is a bona fide provider:
(1) Does the new entity have sufficient initial capital and net worth, typical in the industry, to conduct the settlement service business for which it was created? Or is it undercapitalized to do the work it purports to provide? It is simply not a question of if the new entity meets the states minimum requirement to incorporate or conduct business, but in HUD’s eyes, is the business viable. Basically, do the parties involved in the venture have risk. If both of the parties do not have any risk associated with the venture, then it will not pass the first test.
(2) Is the new entity staffed with its own employees to perform the services it provides? Or does the new entity have “loaned” employees of one of the parent providers? The new company may have shared employees such as clerical or administrative staff, however, does the new company have its own employees that conduct the business of the company and are compensated from the proceeds of the company. Are they paid by the new entity or simply paid from one of the original companies.
(3) Does the new entity manage its own business affairs? Or is an entity that helped create the new entity running the new entity for the parent provider making the referrals? Basically, does the new company have its own management, its own bank accounts, conduct its own accounting and bookkeeping, maintain its own set of books, conduct its own hiring and firing. Or does it rely solely on one of the parent companies.
(4) Does the new entity have an office for business which is separate from one of the parent providers? If the new entity is located at the same business address as one of the parent providers, does the new entity pay a general market value rent for the facilities actually furnished? Basically, HUD will review to see if the space that it occupies is separate and distinct from the parent companies. HUD will look at the rental agreement and determine if it is based on market value and is reasonable for the business conducted.
(5) Is the new entity providing substantial services, i.e., the essential functions of the real estate settlement service, for which the entity receives a fee? Does it incur the risks and receive the rewards of any comparable enterprise operating in the market place? HUD will review the policies practices and procedures of the parent companies as well as the new entity to ensure that the services provided by the new entity are necessary and needed for the settlement service process; that the services are not duplicative of any service provided and charged by the parent or any other company retained by the parent in the transactions; that the risks (such as indemnification, re-purchase, lawsuits, etc) are relative to the rewards of the enterprise. Specifically, is one of the parent companies absorbing all of the risk while the new entity simply is a conduit for splitting referral fees.
Watch RESPA News Update next week for the final 5 parts of a test that could keep your company, and you, out of trouble with the RESPA Police.