Here is a scenario bouncing around in my mind. Complicating this problem, imagine this scenario occuring two days prior to closing. What would an attorney think?[photopress:j0402451.jpg,thumb,alignright]
The facts:
A buyer who happens to be a real estate managing Broker-owner is purchasing new construction from a builder. The buyer (Broker) asks for a discounted escrow fee because buyer (Broker) has a history of referring business (sellers or buyers) to escrow company handling this closing. The escrow company refuses to discount buyer escrow fee. The seller (builder) receives an estimated HUD-1 Settlement Statement which shows an escrow fee based upon each party paying an equal 1/2 of the total escrow fee, in full compliance with the local Northwest Multiple Listing Service (NWMLS) Purchase and Sale Agreement (PSA). After reviewing the settlement statement, the builder-seller calls the escrow company and requires escrow company to reduce the escrow fee because it is “tradition” or the seller (builder) will refuse to close. Learning of this, the buyer wants the same fee as the seller. To comply with the law, the escrow company must comply with the terms of the purchase and sale agreement, in addition to complying with RESPA. Locally, the Northwest Multiple Listing Service Form 21 Section ‘H’, line 56, provides that:
Seller and buyer shall each pay one-half of the escrow fee unless the sale is FHA or VA financed, in which case it shall be paid according to FHA or VA regulations.
Escrow raises this issue and asks parties for clarification because the purchase and sale agreement in question has no other addenda indicating disclosure of builder-seller receiving a discounted escrow fee. Once again, the seller (builder) immediately requests escrow to discount escrow fee or they refuse to close and further escalates the issue by threatening to move the transaction.
This problem raises a few issues.
- Is the Broker/buyer in clear violation of RESPA regarding potential kickbacks?
- In this case,there is no builder addendum indicating or disclosing to buyer/Broker that the builder will be receiving a discount. Builders routinely receive significant discounts on escrow fees, particularly if closing through a title company. Many builder generated addendums address the discounted escrow fee.
- Under the terms of the purchase and sale agreement, is the builder potentially in breach of contract by refusing to close? For example, if the buyer, who happens to be a real estate broker, (never mind asking for a discount equal to the builders perceived “traditional” escrow rate) stood firm by indicating each party shall pay an equal escrow fee as provided in the PSA, would the builder be in breach of contract?
- Does the buyer and seller understand the purchase and sale agreement terms?
- How does HUD treat the situation where builders receive discounts in title or escrow fees?
- Do you think this scenario is plausible?
All you Perry Mason’s, looking forward to your comments…..
Interesting scenario. I’ll be curious to see the attorney comments as well. I would think that the builder receiving a discount would need to have this be disclosed as it is in many builder addendums. If this guy missed putting one in his documents then he should have to suck it up and pay the standard (non-discounted) fee. Most of those are written by attorneys so hopefully it wasn’t his/builder attorney that missed it. Alternately, the broker/buyer cannot ask for a discount for the prior, and potential future, business that broker/buyer gives to the escrow firm. Rules around this issue are very clear and do not allow it.
Reba-
You have me thinking….during our last audit with the Dept. of Financial Insitutions (4 days of fun), they specifically look for cases where fees are different and you had better have a good explanation if there are different fees in a sale.
Although it is nearly impossible to not run into a new construction sale in escrow, I wonder how other escrow firms perceive giving a discount to a builder who has never closed a prior transaction with the escrow firm? How would HUD treat that? This has no relationship to the scenario I pose, but I wonder. In other words, what warrants a “volume discount.” One prior sale? Three? Fifty? In the scenario above and to a situation where an escrow firm has never closed a transaction with the builder, I can’t imagine an escrow co. giving both parties the “builder discount.” It would put us authentic independants out of business very quickly.
In the scenario I present, if I were an LPO closing the transaction in our state, and the builder (remember this is TWO DAYS days prior to closing) put the squeeze on me to reduce the fee or they would move the deal, I would go “all in” as you hear in the world of poker. I would bet a Dick’s milkshake they would fold. With the scenario presented, if the buyer (broker) understood the strong position they were in, the broker should have drawn a line in the sand and said to the builder, “close, or you’ll have more issues than paying an extra couple hundred bucks or so.” The RESPA violation is another matter.
The potential of a suit for specific performance would likely be high BUT the broker/buyer would have to proceed with his end of the transaction to be in the right position to do so. If he chose not to sign and proceed toward closing then he’d be in a bad position of his own. I AM NOT AN ATTORNEY – but I’m basing this commentary on a prior transaction I worked on with a client where we had a seller backing out of a deal because of problems she was having with her agent. I called my attorney and she let us know that unless we continued forward as though nothing was wrong we’d (my clients) lose our position for a suit for specific performance. I had kept all the notes on the transaction to show my clients had performed to the letter on the contract and that this was completely a seller and listing agent issue causing the sale to falter. As a footnote – I got my clients into that house albeit 3 weeks after the original closing date. I turned in the other agent to her broker on several counts of ethics, agency and legal violations. It’s situations like this one that have me making the commentary I do about lack of professionalism in the industry. Every problem that happened on the seller’s side could have been averted if the agent hadn’t had her own best interests ahead of her client.
Tim, I don’t see the RESPA violation. Buyer/real estate broker is asking for a discounted escrow fee on his or her own transation. Well, demanding it at the last minute.
Are you pondering the situation of a real estate broker receiving something of value (reduction in fees on his or her own transaction) in exchange for a promise of not pulling the escrow to another firm?
I believe, but I am not certain, that all real estate agents, brokers, loan originators, etc. ALWAYS ask 🙂 for discounts from vendors on their personal transactions. Threatening to not give future business to that vendor because one does not receive a discount on personal real estate transactions sounds imprudent but not a RESPA violation.
As always, an attorney well-versed in state and federal RESPA case law could give you a legal answer.
100% RESPA violation, period. Case closed. Those who disagree have not actually read RESPA or refuse to comprehend the English language.
I agree Diane.
Jillayne: “I believe, but I am not certain, that all real estate agents, brokers, loan originators, etc. ALWAYS ask for discounts from vendors on their personal transactions.”
Diane’s comment caused me to look back into this comment string on Tim’s post. I can tell you that I have not, but I have seen a transaction where my client was a lender who received a discount, I noticed it on the HUD 1 because the escrow fee was not equal. I contacted escrow and all felt the “discount” only applied to one side. I insisted that the buyer and seller share equally in the discounted fee, as the contract called for it to be split 50/50.
Escrow disagreed and said the fee WAS split 50/50 and then the discount applied only to one side.
Another reason I disagree with the practice of the buyer not seeing the seller’s side of the closing numbers, to verify that seller is paying their half.
RESPA is a very complex piece of federal legislation with many state interpretations and federal cases to review. I am always open to learning; with that said, Diane, can you please say more about what you see and give a citation to RESPA for RCG readers?
Tim, what part of your Perry Mason case do you believe is a RESPA violation?
Jillayne,
I have had the benefit of speaking at length with a CAR attorney about RESPA some years back.
It would be easy to say that a Lender can’t “provide anything” to agents. But that is not RESPA’s position. According to RESPA, lenders, title companies, etc.. can give agents a million dollar party, as long as they are promoting “future” business and not thanking for “current or past” business. According to RESPA, businesses can spend unlimited amounts of money to promote their business. They can’t spend a penny promoting the agent’s business, or thanking the agent for business sent their way.
I like this example I saw on a HUD website once that says it all for me.
A Lender or Title Company can give you a thousand pens with THEIR company name on it. They can’t give you even one pen with YOUR name on it.
Back to the “million dollar party”, a lender couldn’t invite only agents from XYZ office who have used them in the past, to that party. They would have to invite every agent from that office. Same as the practice of giving calendars, etc. Title comes in with enough Calendars for EVERY agent and not just 5 for the agents who use them.
The reason for the expense is what determines violaton of RESPA or not, and not the expense in and of itself. Hard to clearly define a Law where “intent” of the party spending the money, is the key.
I’d be happy to talk RESPA. Here’s a link to the act:
http://www.fdic.gov/regulations/laws/rules/6500-2530.html
I have been in the business for 30 years. Prior to entering the title business in 1991, I was a mortgage lender. I managed wholesale and retail underwriting for two large regional lenders during my lending career. I was responsible for 100s of millions of dollar of originations each year and that responsibility included saleability and regulatory compliance.
Trust me on this. When you hear that there are many interpretations of RESPA, what you are really being told is that someone wants to ignore the actual meaning of the words. They want to parse each phrase and spin and skew the meaning to suit their marketing plan.
The spirit of RESPA is anti-kickback. The lawmakers who wrote the original bill absolutely intended to stop the giving of something of value to someone in a position to refer business.
Controlled business arrangements have somewhat clouded the original intent.
The case Tim raises, however, isn’t related in any way to controlled business arrangements. It’s a kickback, plain and simple. Giving a discount to a builder or a Realtor – anyone who is in a position to refer future business – is giving something of value. It’s unlawful on transactions that fall under RESPA. It may also be unlawful under your state regulations.
RESPA definition of “thing of value”:
“the term “thing of value” includes any payment, advance, funds, loan, service, or other consideration;”
Prohibition against kickbacks:
“(a) No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.
(b) No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed. ”
The discount itself is a portion of a charge. You may not give that portion nor may you receive that portion.
Thank you very much for the chance to chat about RESPA. Though people tell you it is complicated. It really is not. You simply have to believe the words you are reading. 😉
“The discount itself is a portion of a charge. You may not give that portion nor may you receive that portion.:”
I do not believe the charge is carved in stone, and all principals to a transaction can negotiate fees. So when the agent is the buyer or seller and a principal in the transaction, they have the “consumer right” to negotiate any and all charges.
Let’s say that person was not an agent. There is no law against saying “I want the fee to be $600 and not $1,000” whether the person is licensed or not.
I do not agree that a “discount” is the same as “a kickback” at face value.
If you had an email or letter from the agent saying “I want a 50% discount ‘because I’ve given you a lot of business’ in the past”, that would be a violation because of the “I’ve given you a lot of business” part. That would be a violation even if they were asking for $5.00 off. It’s the why and not the what, that is a RESPA violation.
“A buyer who happens to be a real estate managing Broker-owner is purchasing new construction from a builder. The buyer (Broker) asks for a discounted escrow fee because buyer (Broker) has a history of referring business (sellers or buyers) to escrow company handling this closing.”
Stick to the facts of the case first of all. Secondly, anyone with a brain in their head understands that the broker and the builder want special treatment because they refer business.
The days of the wink and a nod are over. HUD compliance teams and class action attorneys are reading the words in RESPA and believing they have meaning. Settlement service providers who choose to remain blinded by faith in hokey RESPA discussions of days gone by are placing themselves in harms way.
It’s a new world and compliance crosshairs are on each and every one of us.
Diane,
I must politely disagree with you. RESPA is very complex. Once it was passed, there were many unanswered questions that were answered one by one, by a patchwork of state court cases.
I prefer to use the HUD website for research since it contains links to the numerous interpretations released since 1974.
http://www.hud.gov/offices/hsg/sfh/res/respa_hm.cfm
In Tim’s example, a broker/buyer is asking for a discount AFTER the transaction was already placed with Tim’s escrow firm. the real estate broker/buyer did not ask for a discount prior to placing the deal with Tim, or condition placing the deal with Tim upon receiving the reduced fee.
RESPA says that if an item of value is exchanged for a specific transaction, this is considered a kickback.
An escrow company’s pen is not an item of value; it is a regular and customary promotional item. In contrast, superbowl tickets in exchange for a specific transaction(s) are not allowed under RESPA.
Let’s look at it from another angle. Let’s say that the buyer and the builder successfully came to an agreement on a reduced escrow fee for both sides. It was on the purchase and sales agreement or on an addendum. Tim’s escrow company could then look at the agreed upon fee and decide to close the transaction or pass due to the low fee. Using your argument, both of these folks would then be violating RESPA. I don’t think so. They both came to an agreed upon fee. If they want to, they could shop their deal around and find an escrow company to close it.
The real estate broker owner is purchasing his or her own property. Just like any buyer, this person can attempt to negotiate fees from settlement service providers.
From my experience, real estate agents and brokers always self righteously demand low or no fees from all their settlement service providers on all their personal real estate transactions.
Tim’s case here has a secondary layer of complexity. A deep RESPA analysis by an attorney would be necessary to come to a better conclusion.
“From my experience, real estate agents and brokers always self righteously demand low or no fees from all their settlement service providers on all their personal real estate transactions.”
Jillayne: A real estate agent or broker is in a position to refer business. It is understood that their demand for low or no fees is based upon their power to refer or not to refer. It is absolute coercion, lacking in moral or ethical standards and flies in the face of the spirit and the language of RESPA.
On what moral basis does a real estate agent or broker think they can steal the services of a hard working escrow agent?
I am not trying to be impolite and if you think I was, I apologize. I do believe in speaking forthrightly. Too many indepth attorney opinions have lead many to heavy fines, class action suits, and cease and desist orders.
RESPA is not hard to understand if you want to understand it.
“In Tim’s example, a broker/buyer is asking for a discount AFTER the transaction was already placed with Tim’s escrow firm.” – Jillayne
I didn’t say this was a transaction placed at our particular firm. This is a scenario, but situations similar in spirit like this occur very frequently to escrow firms all across the country. Regarding the RESPA problem, the broker specifically asks for a discount BECAUSE they send business,period. IMO, this is what triggers the violation. It is moot whether the conversation occurs prior to, during or after a transaction. I would consider this action to be asking for a kickback whether the item of value is a decrease in escrow fee or a ticket to a Seahawk game, or dinner etc..
I highly doubt that HUD would treat this any differently that if a broker said, hey Tim, I’ve sent you business before so I want you to pay for a nice spread at a brokers open or get me tickets to the Celtic Women concert coming up this May in Seattle. The key is that the broker wants something of value in exchange for sending business. I would say that reducing the escrow fee (by 70% if you use our fee structure) to meet the builder expected rate would clearly be of value. The reason title companies can absorb this builder rate goes without saying.
In this scenario, the layer of complexity definitely is ratcheted up because the buyer/broker and seller/builder do not bring up the escrow fee until about two days prior to closing. The purchase and sale agreement is clear in that the escrow fee must be slit 50/50, unless otherwise agreed to via disclosures or addenda and agreed to by the service provider. In this case, no disclosures and no addenda indicated otherwise.
-Tim
Jillayne, the issue of how agents famously guard and defend their fee structure and yet ask and receive reduced fees for personal transactions at title companies or other service providers is something that only they can answer. I always get a kick out of agents and LO’s stating, “oh, their fees are so high or xyz is only charging this, can you beat their fees.”
I really get a kick out of LO’s who max out their borrower closing cost/fees on a refi and ask escrow to drop their fee to get the borrower under the threshold. If anyone would like to see Lynlee or me throw a file across a room, just say those magic words and you’ll see how aerodynamic a 1″ file is. Actually we don’t throw files, but we do have this cool little urn that says “ashes of difficult clients.”
🙂
Diane, I understand RESPA.
Please consider adding a smiley face next to your comments if you are trying to be sarcastic or joke when you offer comments such as:
“RESPA is not hard to understand if you want to understand it.”
“Those who disagree have not actually read RESPA or refuse to comprehend the English language.”
I read into this that you don’t think I (and any other reader) understand RESPA and that you believe you do, which comes across loud and clear. I can handle forthright comments. The above comments may come across as arrogant and demeaning to a reader and maybe you weren’t planning to come across that way?
The only people allowed to talk this way on RCG are attorneys 🙂 (Joke.)
When agents ask for fee reductions on their own deals, they are not thinking like an agent, they’re thinking like a consumer. The reduced fee request in Tim’s scenario came after the transaction was placed with an escrow firm, not beforehand.
Your example from comment #10 is referring to an escrow company giving a portion of the escrow company’s fee back to the real estate agent for referring the consumer to the escrow firm.
In Tim’s scenario, the fee reduction benefits the homebuyer, which is allowable under RESPA provided everything shows up on the HUD 1.
In Tim’s scenario the real estate agent is wearing two hats.
I maintain that this is a long stretch to call this a CLEAR CUT violation. If you and Tim need a legal answer, run this whole scenario by an attorney well-versed in RESPA, get his or her answer in writing, and save the written letter for when you’re asked to reduce fees.
Tim,
Consider sending your case study in to the Washington Assoc of Realtors legal hotline. Attorney Annie Fitzsimmons will answer the quetion in her weekly email and then the answer will go out to all WAR members statewide. You can then save her answer and produce a copy when asked to reduce fees in the future.
Thanks for posting a very cool case study.
😉
Smiling beforehand so everyone knows I love a good discussion.
I do not need a legal opinion. I understand RESPA. I do not ask settlement service providers to give me a break. Some have offered without my asking and I refuse to accept reduced fees on my own transactions.
“When agents ask for fee reductions on their own deals, they are not thinking like an agent, they’re thinking like a consumer. The reduced fee request in Tim’s scenario came after the transaction was placed with an escrow firm, not beforehand.
Your example from comment #10 is referring to an escrow company giving a portion of the escrow company’s fee back to the real estate agent for referring the consumer to the escrow firm.
In Tim’s scenario, the fee reduction benefits the homebuyer, which is allowable under RESPA provided everything shows up on the HUD 1.
In Tim’s scenario the real estate agent is wearing two hats.”
You cannot as a settlement service provider wear two hats in a transaction. In my comment I specifically 😉 meant the savings to the agent in his own deal – that portion – is a thing of value and constitutes a kickback. 😉
RESPA holds both the giver and the receiver responsible. Each must choose whether to participate. In today’s regulatory climate, I suggest avoiding the appearance of impropriety. 😉
Aren’t you all in Washington? Without considering RESPA, isn’t your state limitation on things of value set at $25?
I truly do not mean to sound demeaning but attorneys and trade associations have done a crap job of advising their clients and members when it comes to RESPA and related compliance issues.
Tim – You have a hot topic here. Thanks for a good show. 😉
Hi Diane,
Thanks for the smileys! I’m smiling again! The reason why trade associations don’t jump up to sponsor RESPA classes are:
the American Land Title Assoc ALTA is not known at least in WA state as a trade group with any agenda remotely close to the word “education.” They use to do an escrow seminar once a year but this was mostly in order to keep their own costs down as business owners. ALTA in Wa state does not want to spend time and money educating their competitors.
Realtors don’t attend stand-alone RESPA classes because if they had a choice, they would rather attend something else, since most legal classes are very dry. The only way they will come is if it’s a required class OR if there is a local recent legal case in which a real estate agent got nailed.
Real estate BROKERs who own Affiliated Businesses (also known as controlled business arrangements) have a financial incentive to NOT HAVE THEIR AGENTS LEARN ABOUT RESPA. Because when the agents learn more about the affiliated business arrangement rules, they are less likely to refer business to the broker’s affiliated title/escrow/lending company….although we all know that in a public forum, they would argue that the opposite is true.
RESPA has not traditionally been a well-attended seminar. Trade associations need to cover costs and earn money on their sponsored classes.
In WA state, the Dept of Licensing included RESPA as one of the required topics within the agent’s CORE class, which must be taken by all agents each renewal.
Loan originators and real estate agents often don’t think about the appearance of impropriety since RESPA enforcement though stepped up nationwide, seems/feels distant to a local, street-level practitioner.
In WA state, the $25 rule applies to title insurance companies. Real estate agents might have a similar rule regarding an amount they can spend on consumers.
Very interesting. Thank you, Jillayne. 😉
You’re welcome.Thanks for joining us on RCG for a spirited Respa dialogue. I visted your blog over the weekend and love to read your insights on the current state of the title/xo industry.
My pleasure. Rain City Guide is a wonderful resource. BTW – Tim’s largely responsible for my blogging. I ran across his site last fall. It was an inspiration.
Hey all
I want to make a single comment as a practical matter. My office was raided by postal inspectors and hud police in June of 2000. They took hundred of files with them looking for pricing patterns and disparities. My situation would have been even more bleak than it was, if that’s even possible, had I discounted or inflated prices in individual files. Thankfully, I did not.
Jillayne – thank you for the wonderful and diplomatic comment. You’ve got a special way with the written word.
The Washington State Department of Financial Institutions audit escrow offices such as ours (DFI does not audit title companies–insurance commission handles that) for pricing disparities too. We have to have a good explanation if there is a disparity. I don’t know if they report findings to HUD or not. I doubt it, but I’ll inquire tomorrow.
I would really like to know how the local HUD office treats builder discounts.