[Federal Register Volume 75, Number 106 (Thursday, June 3, 2010)]
[Proposed Rules]
[Pages 31334-31338]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-13350]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 3500
[Docket No. FR-5352-A-01]
RIN 2502-A178
Real Estate Settlement Procedures Act (RESPA): Strengthening and
Clarifying RESPA's ``Required Use'' Prohibition Advance Notice of
Proposed Rulemaking
AGENCY: Office of the Assistant Secretary for Housing--Federal Housing
Commissioner, HUD.
ACTION: Advance notice of proposed rulemaking.
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SUMMARY: Through this Advance Notice of Proposed Rulemaking (ANPR), HUD
commences the process of initiating rulemaking directed to
strengthening and clarifying the prohibition against the ``required
use'' of affiliated
[[Page 31335]]
settlement service providers in residential mortgage transactions under
section 8 of RESPA. HUD has received complaints that some homebuyers
are committing to use a builder's affiliated mortgage lender in
exchange for construction discounts or discounted upgrades, without
sufficient time to research their contracts or to comparison shop. The
purpose of this ANPR is to solicit information that can be used to
inform any future revision or clarification of the regulatory
definition of the ``required use'' of affiliated settlement service
providers in residential mortgage transactions.
With this ANPR, HUD seeks comment from an array of sources with
experience or knowledge of affiliated business arrangements in
residential mortgage transactions. HUD also welcomes comment on actions
in addition or as an alternative to rulemaking that would better
address concerns with affiliated business arrangements in residential
mortgage transactions.
DATES: Comment Due Date: September 1, 2010.
ADDRESSES: Interested persons are invited to submit comments regarding
this ANPR to the Regulations Division, Office of General Counsel,
Department of Housing and Urban Development, 451 7th Street, SW., Room
10276, Washington, DC 20410-0500. Communications must refer to the
above docket number and title. There are two methods for submitting
public comments. All submissions must refer to the above docket number
and title.
1. Submission of Comments by Mail. Comments may be submitted by
mail to the Regulations Division, Office of General Counsel, Department
of Housing and Urban Development, 451 7th Street, SW., Room 10276,
Washington, DC 20410-0500.
2. Electronic Submission of Comments. Interested persons may submit
comments electronically through the Federal eRulemaking Portal at
www.regulations.gov. HUD strongly encourages commenters to submit
comments electronically. Electronic submission of comments allows the
commenter maximum time to prepare and submit a comment, ensures timely
receipt by HUD, and enables HUD to make them immediately available to
the public. Comments submitted electronically through the
www.regulations.gov Web site can be viewed by other commenters and
interested members of the public. Commenters should follow the
instructions provided on that site to submit comments electronically.
Note: To receive consideration as public comments, comments must
be submitted through one of the two methods specified above. Again,
all submissions must refer to the docket number and title of the
rule.
No Facsimile Comments. Facsimile (FAX) comments are not acceptable.
Public Inspection of Public Comments. All properly submitted
comments and communications submitted to HUD will be available for
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the
above address. Due to security measures at the HUD Headquarters
building, an advance appointment to review the public comments must be
scheduled by calling the Regulations Division at 202-708-3055 (this is
not a toll-free number). Individuals with speech or hearing impairments
may access this number through TTY by calling the Federal Information
Relay Service at 800-877-8339 (this is not a toll-free number). Copies
of all comments submitted are available for inspection and downloading
at http://www.regulations.gov.
FOR FURTHER INFORMATION CONTACT: Teresa Payne, Deputy Assistant
Secretary for Regulatory Affairs and Manufactured Housing, Office of
Housing, Department of Housing and Urban Development, 451 7th Street,
SW., Room 9162, Washington, DC 20410-8000; telephone number 202-708-
6401 (this is not a toll-free number). Persons with hearing or speech
impairments may access this number through TTY by calling the Federal
Information Relay Service at 800-877-8339 (this is a toll-free number).
SUPPLEMENTARY INFORMATION:
I. Background
In the late 1960s, Congress became concerned about the excessive
cost of settlement services for residential mortgage loans. Congress
found that many homebuyers had very little knowledge about the
settlement process and that homebuyers often did not shop for, and were
not involved in, choosing the settlement service providers that they
would be required to pay at settlement. Instead, in many areas of the
country, the delivery of settlement services was controlled by a system
of referrals by those in a position to refer settlement business (such
as builders, real estate agents, and lawyers), resulting in
``kickbacks'' by settlement service providers to those who referred
business to them. In this system, settlement service providers did not
compete for business by providing a quality service at a reasonable
cost to homebuyers. Rather, settlement service providers generated
business by providing the most lucrative kickbacks to those in a
position to refer business to them.
Through the adoption of RESPA and subsequent amendments, Congress
sought to change the way in which homebuyers retained settlement
service providers for federally related mortgage loans. The term
``federally related mortgage loan,'' as defined in section 3 of RESPA,
includes nearly all residential mortgage loans for one- to four-family
homes. In order to encourage consumers to shop for settlement services,
and cause settlement service providers to compete for homebuyers'
business, RESPA requires that the nature and costs of real estate
settlement services be disclosed in advance to the consumer, and it
forbids the payment of referral fees, kickbacks, and unearned fees for
real estate settlement services.\1\
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\1\ In July 2008, Congress reaffirmed its interest in protecting
consumers by directing HUD to recommend legislative reforms to RESPA
that would ``promote more transparent disclosures, allowing
consumers to better shop and compare mortgage loan terms and
settlement costs.'' See 12 U.S.C. 1515(b).
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RESPA defines an ``affiliated business arrangement'' as ``an
arrangement in which (A) a person who is in a position to refer
business incident to or a part of a real estate settlement service
involving a federally related mortgage loan, or an associate of such
person, has either an affiliate relationship with or a direct or
beneficial ownership interest of more than 1 percent in a provider of
settlement services; and (B) either of such persons directly or
indirectly refers such business to that provider or affirmatively
influences the selection of that provider.'' (12 U.S.C. 2602(7).) In
RESPA-covered transactions, referrals to affiliated settlement service
providers are subject to civil and criminal liability under section 8
of RESPA (Section 8), because the referrer's return on investment in
the affiliate can be considered a prohibited kickback or thing of value
for the referral. (See 12 U.S.C. 2607(a).) However, Section 8(c)(4)
provides an exemption for affiliate referrals that allows for returns
on ownership interest if the referrals involve an affiliated business
arrangement and three other conditions are met. The three other
conditions are: (1) The referral is accompanied by a disclosure of
affiliation and estimated charges by the provider to which the consumer
is referred, (2) the consumer is not ``required to use'' a particular
settlement service provider; and (3) the arrangement does not involve
otherwise
[[Page 31336]]
prohibited compensation. (See 12 U.S.C. 2607(c)(4).) Requiring the use
of an affiliate is thus presumed to involve a violation of Section 8,
insofar as it violates a condition for exemption from liability under
Section 8.
The definition of ``required use'' in HUD's existing RESPA
regulations reads as follows:
Required use means a situation in which a person must use a
particular provider of a settlement service in order to have access
to some distinct service or property, and the person will pay for
the settlement service of the particular provider or will pay a
charge attributable, in whole or in part, to the settlement service.
However, the offering of a package or (combination of settlement
services) or the offering of discounts or rebates to consumers for
the purchase of multiple settlement services does not constitute a
required use. Any package or discount must be optional to the
purchaser. The discount must be a true discount below the prices
that are otherwise generally available, and must not be made up by
higher costs elsewhere in the settlement process. (24 CFR 3500.2)
On November 17, 2008 at 73 FR 68204, HUD published a final rule
amending its RESPA regulations at 24 CFR part 3500 to further the
purposes of RESPA, including protecting consumers from kickbacks and
referral fees that tend to unnecessarily increase settlement costs.\2\
In support of that rulemaking, HUD had received consumer complaints and
comments about certain affiliated business practices. These complaints
and comments included concerns that residential developers and
homebuilders would offer to reduce the cost of a home (for example, by
adding free construction upgrades, or discounting the home price) if
the homebuyer used the developer's affiliated mortgage lender. Buyers
also complained that, in some instances, because the timing of the
contract with the builder precluded the buyer from shopping, the
affiliated lender used by the homebuyer was able to charge settlement
costs or interest rates that were not competitive with those of
nonaffiliated lenders. The complaints indicated that these incentivized
referrals to affiliate lenders may be steering techniques that
effectively ``require the use'' of the affiliate.
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\2\ Additional information regarding the RESPA regulatory
amendments, and specifically changes made by HUD subsequent to its
RESPA proposed rule of March 14, 2008, published at 73 FR 14030, is
provided in the preamble to the November 17, 2008, final rule.
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In order to address concerns about the operation and effect of
these incentivized affiliate referrals, the November 17, 2008, RESPA
final rule included a revised definition of ``required use'' that was
to take effect on January 16, 2009. The revised definition of
``required use'' in the November 17, 2008, final rule would have
provided as follows:
Required use means a situation in which a person's access to
some distinct service, property, discount, rebate, or other economic
incentive, or the person's ability to avoid an economic disincentive
or penalty, is contingent upon the person using or failing to use a
referred provider of settlement services. In order to qualify for
the affiliated business exemption under Sec. 3500.15, a settlement
service provider may offer a combination of bona fide settlement
services at a total price (net of the value of the associated
discount, rebate, or other economic incentive) lower than the sum of
the market prices of the individual settlement services and will not
be found to have required the use of the settlement service
providers as long as: (1) The use of any such combination is
optional to the purchaser; and (2) the lower price for the
combination is not made up by higher costs elsewhere in the
settlement process. (See 73 FR 68239-68240)
As a result of litigation challenging the revised definition,\3\
HUD deferred the effective date for the revised definition, and
subsequently withdrew the revision by final rule published on May 15,
2009 (74 FR 22822). When HUD withdrew the revised definition, it left
in place the existing definition of ``required use'' pending new
rulemaking on the subject. HUD's final rule withdrawing the revised
definition of ``required use'' noted that public comments received in
response to the proposed withdrawal had highlighted the potential
complexity of existing affiliated business arrangement practices and
the need for further clarity on the application of ``required use'' to
such practices. The comments also underscored the need for HUD to
continue to pursue reform in this area in order to protect consumers
from harmful steering and referral practices.
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\3\ See National Association of Home Builders, et al. v. Shaun
Donovan, et al., Civ. Action No. 08-CV-1324, United States District
Court for the Eastern District of Virginia, Alexandria Division.
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In withdrawing the definition, HUD stated its intention to pursue
new rulemaking on the subject of ``required use.'' In the May 15, 2009,
final rule, HUD also reiterated its commitment to the goals of RESPA
reform and to addressing referral practices that result in required
use.
II. This ANPR
HUD remains committed to furthering RESPA's goal of protecting
homebuyers against unnecessarily high settlement costs by addressing
both incentivized affiliate referrals and penalties that could
adversely affect not only individual borrowers, but also competition in
the provision of settlement services. HUD also remains committed to
preserving the benefits of voluntary contracts that involve true
discounts. In advance of proposing a new rule on this subject, HUD is
publishing this ANPR to request information on the practices to be
addressed by this rulemaking.
HUD requests information from all interested members of the public,
including individual consumers, consumer advocacy organizations,
housing counseling agencies, the real estate and mortgage industry, and
federal, state, and local consumer protection and enforcement agencies.
In addition to information about individual consumers' experiences, HUD
requests information that includes empirical data, studies, and
analyses regarding affiliated business arrangement practices, and that
responds to the specific questions presented in this ANPR. In
particular, HUD seeks information that would enable an assessment of
the benefits and costs of possible regulatory alternatives. For
instance, have economic incentives to use affiliated lenders
facilitated inflated appraisals or lowered underwriting standards in
the lending market? Has required use played any role in creating recent
situations where borrowers are more likely to be ``underwater?''
Commenters are encouraged to provide data that would inform analysis of
both the magnitude of the required use problem and the potential
regulatory options to address the problem.
From individual consumers who have purchased new homes and from
consumer advocates, HUD seeks information about consumers' experiences
with lenders referred by builders.
From state and local consumer protection agencies and state
attorneys general, HUD seeks comment and information regarding
complaints received and/or investigations undertaken with respect to
business arrangements that steer consumers to use affiliated settlement
businesses.
To develop the necessary and appropriate protections for consumers
from detrimental practices that may result from affiliated business
arrangements, HUD requests further information about the structure,
scope, frequency, timing, and effects of affiliated practices that
impair consumers' ability to evaluate the true costs of a mortgage
transaction, thereby limiting consumer choice and steering
[[Page 31337]]
consumers into unnecessarily high settlement costs.
HUD invites comment on any aspect of referral arrangements in
residential mortgage transactions that may assist HUD in developing any
new or revised protections, but HUD specifically requests information
on the following questions, and requests that commenters provide as
detailed and factual information or evidence as possible in responding
to these questions.
1. Tailoring ``required use'' to reach abusive incentive schemes,
but not beneficial discounts or packages. The definition of ``required
use'' in the November 17, 2008, RESPA final rule, sought to prevent
detrimental referral practices among affiliates, while preserving
discounts offered by settlement service providers for packaged
settlement services.
Some commenters have suggested that builders' incentive programs
discourage homebuyers from comparison shopping for the best loan,
because: (1) The value of some of the incentives offered by builders
for the use of their affiliated lender (e.g., kitchen upgrades) are
difficult for consumers to quantify when comparing the loan terms and
settlement costs of the affiliated lender with those of nonaffiliated
lenders; and (2) often, in order to get the incentive a builder is
offering, a new homebuyer must commit to the use of the builder's
affiliated lender at the time that the contract for the construction of
the home is executed, which may be many months before settlement will
occur and long before the typical consumer would begin shopping for a
lender; and (3) that the builder encourages the buyer to commit to the
contract before the buyer has time to fully consider alternatives and
comparison shop.
To assist in determining whether these claims are correct, HUD
asks:
(a) What types of discounts and incentives are tied to the use of
an affiliated settlement service provider such as a mortgage lender?
For example, are construction upgrades, and discounts, such as free or
reduced costs for options such as fireplaces, flooring upgrades,
kitchen upgrades (such as granite countertops, stainless steel
appliances), or decks and finished basements frequently offered? Is
closing cost assistance or interest rate guarantees usually part of the
incentive package? Are these incentives delivered as coupons for
services, merchandise, discount deposit bank accounts, etc.?
(b) In a new home purchase transaction, at what points in time are
incentives for the use of a builder-affiliated lender discussed with a
potential homebuyer? Do such discussions occur with sales
representatives at the initial time consumers inspect homes, and are
they presented by the sales representative or are they presented only
in response to a consumer request? Does the issue of incentives also
arise when the contract for the purchase of the home is signed or does
it arise at some point later in the process? At what point are
affiliated-business arrangement disclosures provided to consumers?
(c) At what point, generally, in a new home purchase transaction,
are the homebuyers expected to determine whether or not they will use a
builder-affiliated lender? Is a decision expected of the homebuyer at
the time that the contract for the purchase of the house is signed or
at some point later in the process? Are there standard contract
provisions specifying the package or combination of settlement services
that are provided? Are homebuyers expected to contact the affiliated
lender within a certain period of time before or after the contract has
been signed?
(d) Is there evidence demonstrating that homebuyers who are offered
incentives by builders to use builder-affiliated lenders are as likely
or less likely to engage in comparison shopping for a lender as are
those homebuyers who are not offered an incentive to use a builder-
affiliated lender? Is there empirical data demonstrating a difference
in the use of affiliated lenders between first-time homebuyers and
other homebuyers?
(e) Is there evidence that buyers using affiliated lenders pay
higher rates of interest or higher closing costs than those that use
unaffiliated lenders?
(f) Is there evidence demonstrating that homebuyers benefit from
some types of incentives and not from others or by incentives offered
by some types of business but not others? Incentives could include
benefits such as discounts on the costs of settlement, payment of
settlement services, and discounts on upgrades to the house.
2. Forward Loan Commitments. A forward loan commitment (forward
commitment), in its simplest definition, is a pledge to provide a loan
at a future date. It is HUD's understanding that in the homebuilding
industry, some large-scale homebuilders purchase forward commitments
from lenders pursuant to which the lenders make an aggregate amount of
mortgage financing available to the homebuilder's customers under the
terms of the commitment. Some commenters on the March 14, 2008, RESPA
proposed rule expressed concern about the effect of a revised
definition of ``required use'' on the ability of homebuilders to
purchase forward commitments.
To better understand forward commitments and their use in mortgage
loan transactions, HUD seeks comment on the following:
(a) How are forward commitments purchased and used as described
above, and are there alternative types, terms, or uses for builder-
purchased forward commitments?
(b) Is there evidence as to the prevalence of builder-purchased
forward commitments?
(c) What is the benefit to homebuyers of forward commitments in
mortgage loan transactions from affiliated as well as nonaffiliated
lenders?
3. Other Issues. A concern raised through comments submitted on the
March 14, 2008, RESPA proposed rule is that certain incentives are
built into the cost of the home and are therefore not true discounts.
Commenters also stated a belief that an affiliated lender has a
special, potentially improper, interest in financing a house at any
price set by a seller. In this regard, HUD asks:
(a) Is there any data that home sellers are providing discounts or
upgrades to buyers who agree to use affiliated businesses based on
prices that are different from those offered to buyers who decline such
offers?
(b) Is there any evidence that home sellers either include or do
not include in the listed price of the house the cost of the incentives
that they offer for the use of an affiliated lender?
(c) Do homes sold with incentives to the homebuyer appraise at the
pre- or post-incentive price? Is it possible to isolate the effects of
standard builder construction upgrades and custom upgrades requested by
the consumer on the appraised value?
(d) How do affiliate-originated mortgages perform compared to the
local average (e.g., in the case of default or the homeowner being
``under water'' statistics)?
(e) How do prices of new construction homes financed by affiliated
lenders compare with prices of new construction homes financed by
nonaffiliates? That is, is there evidence that builders do not
negotiate down to or near to incentivized prices in the absence of an
incentive to use an affiliate?
(f) Is there data on the extent to which the current affiliated
business disclosure encourages consumers to comparison shop with
nonaffiliated service providers before signing contracts? Can the
affiliated business disclosure be improved to inform consumers of the
[[Page 31338]]
advantages and disadvantages of affiliated lending practices?
4. State and Local Experience. State and local consumer and
enforcement agencies, through their investigatory and prosecutorial
experiences, may be able to contribute valuable information regarding
practices that steer consumers to overpriced settlement service
providers, as well as provide information about successful and
unsuccessful means of preventing such abuse. To these agencies
especially, HUD asks:
(a) What has been and continues to be the impact of state and local
regulatory enforcement in this area?
(b) What rules and forms of enforcement have proven most effective?
(c) Is there evidence available regarding specific anticompetitive
or anticonsumer practices that can be provided by state law
enforcement?
(d) Can state laws regulating builder-affiliated business
arrangements provide an approach for evaluating options?
5. One-Stop Shopping. In the process of withdrawing the revised
definition of ``required use'' in the November 17, 2008, RESPA final
rule, HUD received comments indicating that limiting referrals to
affiliates adversely affects one-stop shopping options that could
benefit consumers. Accordingly, HUD asks whether there is any way to
quantify the benefit to homebuyers of one-stop shopping. Additionally,
is there any evidence that homebuyers derive greater benefit from one-
stop shopping than from comparison shopping for the best loan terms and
settlement costs?
6. Incentives vs. Disincentives or Penalties. HUD requests comments
on the relationship between incentives to use an affiliated settlement
service provider and disincentives or penalties for using a
nonaffiliated settlement service provider, and how incentives and
disincentives might be treated in the new regulation. To assist in the
development of distinctions or equivalencies between incentives and
disincentives, HUD asks for information concerning cases where an
incentive to use a certain provider would not have the same effect as a
disincentive for failure to use another provider.
While HUD specifically seeks comments on the foregoing questions,
HUD welcomes additional information that will help inform HUD's views
on this issue.
Dated: May 27, 2010.
David H. Stevens,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 2010-13350 Filed 6-2-10; 8:45 am]
BILLING CODE 4210-67-P