Assure Compliance with HUD-Last 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 last 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-Last Five Points
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.
Last week we discussed the first five points of HUD’s test which were developed in a partial effort to determine whether or not the entity is a bona fide settlement service provider. Remember, that the lack of an affirmative response to any one question by itself may not be determinative of a sham controlled business arrangement. HUD will consider the following five factors and will weigh them in light of the specific facts in determining whether an entity is a bona fide provider:
(6) Does the new entity perform all of the substantial services itself? Or does it contract out part of the work? If so, how much of the work is contracted out? If all or most of the work is contracted out, then HUD may consider that the new company really serves no purpose. The question that the parent companies would be faced to answer would be “Why could not one of the parent companies simply contract out the same work instead of having to create this new entity?” It would certainly appear as if the primary purpose of the new entity would be for the referral of business not to provide specific services.
(7) If the new entity contracts out some of its essential functions, does it contract services from an independent third party? Or are the services contracted from a parent, affiliated provider or an entity that helped create the controlled entity? If the new entity contracts out work to a parent, affiliated provider or an entity that helped create it, does the new entity provide any functions that are of value to the settlement process? HUD will review the services provided to see if the services are being performed by one of the parent companies, and if the parent company is providing the services, what is the need for the new entity.
(8) If the new entity contracts out work to another party, is the party performing any contracted services receiving a payment for services or facilities provided that bears a reasonable relationship to the value of the services or goods received? Or is the contractor providing services or goods at a charge such that the new entity is receiving a “thing of value” for referring settlement service business to the party performing the service? HUD will review the services and payments to ensure that the services provided are reasonable, needed, and duplicative of services already provided and that the fees paid for these services are reasonable based upon the service provided and market and industry standards.
(9) Is the new entity actively competing in the market place for business? Does the new entity receive or attempt to obtain business from settlement service providers other than one of the settlement service providers that created the new entity? If the new entity is established to truly conduct business, what efforts does the new entity make to market itself and attempt to acquire new business that is not affiliated owned and controlled by one of the parent companies. If the new entity does not make an effort to secure new business, then it may be an indicator to HUD that the sole purpose of the entity was to funnel referral payments to the parent companies.
(10) Is the new entity sending business exclusively to one of the settlement service providers that created it (such as the title application for a title policy to a title insurance underwriter or a loan package to a lender)? Or does the new entity send business to a number of entities, which may include one of the providers that created it?
Even if an entity is a bona fide provider of settlement services, that finding does not end the inquiry. Questions may still exist as to whether the entity complies with the three conditions of the controlled business arrangement exception. 12 U.S.C. Sec. 2607(c)(4)(A-C). Issues may arise concerning whether the consumer received a written disclosure concerning the nature of the relationship and an estimate of the controlled entity’s charges at the time of the referral. 12 U.S.C. Sec. 2607(c)(4)(A); 24 CFR 3500.15(b)(1). Other issues may arise concerning whether the referring party is requiring the consumer to use the controlled entity. 12 U.S.C. Sec. 2607(c)(4)(B); 24 CFR 3500.15(b)(2).