RESPA for dummies

Matthew Blake: Hello, and welcome to the “Houses in Motion” podcast. My name is Matthew Blake, real estate reporter with HousingWire. Joining me today is Holly Spencer Bunting. She is a lawyer at Mayer Brown in Washington, DC. Holly, welcome to the show.

Holly Bunting: Thank you. I’m glad to be here.

Matthew Blake: And the reason I have Holly on is that I wrote a story along with my colleague, Maria Volkova, out now in HousingWire about a business practice called the mortgage joint venture. The mortgage joint venture is a business created by a mortgage company and a real estate company that originates mortgages. Why do joint ventures matter? They matter because a lot of real estate companies feel like they have to partner with a mortgage company in order to make money. However, joint ventures and the whole practice of real estate companies or any company being able to combine mortgage and other housing services comes with it a raft of regulations. Holly is going to talk about that. But first, Holly, why don’t you talk about yourself and how you became a RESPA compliance attorney?

Holly Bunting: Yeah. Sure. So, I’m Holly Bunting. Thanks for having me. I’m partnering with Mayer Brown’s Washington DC office and I was one of those kids that always wanted to be a lawyer. And college really confirmed that for me. I was a political science major as many attorneys are, but in my senior year, I took a course called federal regulation and as part of that course, it required us to pick a consumer product and then basically pull apart the regulatory structure and figure out how that consumer product was regulated. And I found that process to be just a really interesting puzzle. And so, I then moved on to law school. I chose to go to school in Washington, DC, which, of course, is no better place to really get a handle on and understand what federal regulation looks like. And I was really lucky to be able to focus on that as a law student. I wrote a comment for the law review on the switch of Claritin from prescription to over-the-counter and how that regulatory structure changed based on that. So it was something I was always really interested in and then found my way into residential mortgages from the regulatory compliance perspective.

Matthew Blake: And have you always sort of worked on the perspective of like helping out the companies in terms of regulation or have you sort of been on the government side as well?

Holly Bunting: I’ve always been in private practice. So my clients have always been, you know, mortgage lenders, real estate brokers, title insurance agencies, companies that are all providing services relative to the residential mortgage loan.

Matthew Blake: And what kind of…before we kind of launched into the big issues we’re talking about today, one question I’m curious about since I know that the life of a lawyer involves a lot of meeting clients sometimes, perhaps not your job, but sometimes appearing in court. How has your job changed in the last year and a half? I’m just curious. How has COVID sort of changed your day-to-day?

Holly Bunting: Right. Well, I’m working from a different location that’s the main difference. But I mean, one thing that I think is pretty consistent with being a federal regulatory attorney is that we have to keep abreast of all of the changes happening at the federal government perspective and that’s often a reaction to what’s happening in real life. So, of course, you know, once COVID hit, the national emergency was declared. Both Congress and various agencies moved quickly to put, you know, new controls or requirements in place to provide relief to consumers impacted by COVID-19. And, you know, part of our job is to track that to make sure we understand what’s happening, help our clients analyze what those changes look like, how it’s gonna impact their business if there’s new processes or practices they need to put into place to make sure they comply. And that’s exactly what we did after the national emergency was declared. That’s really no different than what I do on a day-to-day basis from a federal regulatory compliance perspective. So, you know, if there’s something changing in the marketplace or there are new priorities being set at the federal government level, that, of course, trickles down to direct impacts on our clients. And so, that’s a really important part of what we do on a day-to-day basis, is make sure we understand what’s happening at the federal regulatory level and then help our clients apply that to their businesses.

Matthew Blake: Interesting. Yeah. And in terms of your clients, like generally, are they residential mortgage companies? Is that who they are?

Holly Bunting: They are. That’s a large part of it. Because I am a RESPA attorney and that applies to residential mortgage lending, a lot of my clients are residential mortgage lenders, real estate brokerage companies, home builders, title insurance agencies, title companies. But then there’s also a fair number of technology support providers who are providing technology products to those various companies that provide services. And then as more and more FinTech companies are entering real estate, residential real estate space, I’ve been fortunate to work with a lot of them as well in developing their products in the consumer financial services market.

Matthew Blake: Let’s get into RESPA. You mentioned RESPA. I believe the RESPA stands for the Real Estate Settlement Procedures Act.

Holly Bunting: You’ve got it.

Matthew Blake: Okay. And it was developed…it became law in the early 1970s when there were a lot of laws being developed to protect consumers. And so, if I were a Martian descending on the earth, what should I know about the Real Estate Settlement Procedures Act, why it was created, and how it’s changed over time?

Holly Bunting: So, RESPA is important law as it relates to a consumer and their mortgage loan. So there are various protections in place under RESPA as it relates to the, you know, purchase of a home or the refinance of a mortgage loan. There’s also protections for the servicing of a mortgage loan. So once a consumer has that loan, they’re making their monthly payments, there are requirements under RESPA that apply at that point as well. So the purpose of the statute is very much consumer protection. Everything from consumer disclosures, you know, there are particular disclosures a consumer receives as part of obtaining a mortgage loan, you know, if they have an escrow account on their mortgage loan, there are particular disclosures required then. If they have trouble making a mortgage payment, there are particular requirements required to help avoid foreclosure.

But then there’s also Section 8 of RESPA which really is the section that’s applicable to joint ventures. At its heart, Section 8 of RESPA is an anti-kickback provision. And the whole idea is that the concern in the ’70s was that the price of services that consumers were paying in order to get a mortgage loan were going up and the reason they were going up is because of these kickbacks that were happening behind the scenes. So the idea is to eliminate those entirely and Congress when it included the anti-kickback provisions in Section 8 there are criminal penalties associated with those provisions. So it’s a statute that is incredibly serious and one that is taken very serious by our clients.

But, again, sort of going back to the heart of Section 8, you know, if you’re a consumer looking to buy a home, you’ve hired a real estate agent to help you do that, that’s usually the first person that you’re gonna come into contact with as part of that process. Your real estate agent likely has relationships with mortgage lenders, with closing attorneys, or settlement agents and so they’re gonna make referrals to those various companies to help you get your mortgage financing set up, to make sure you know who’s gonna close your loan. And Section 8 of RESPA prohibits the real estate agent as well as the mortgage company and settlement agent from paying any referral fees or providing any incentives whatsoever for the referral of that customer for mortgage business or for settlement business. And so, that’s, you know, there’s so many moving pieces to a residential mortgage loan transactions, there are so many companies that are providing services in connection with that transaction. All of them are impacted by that prohibition. But it’s not just the real estate agent, the statute is worded very broadly to prohibit any person. So, you know, technically if you were to refer your friend to the real estate agent you used last year to purchase a home, you are not supposed to receive a thing of value for having made that referral. So it really weaves its way into the variety of business relationships that exist when a consumer is getting a residential mortgage loan.

Matthew Blake: So much to go over there. One broad question about what is okay and not okay. Realogy is a real estate brokerage and Guaranteed Rate is a mortgage company. Together they have this joint venture, Guaranteed Rate Affinity, where it is almost 50-50, the profits that they split. And in this joint venture, sometimes Guaranteed Rate Affinity will originate a mortgage after receiving a referral from the Realogy agent. So, in that situation, it’s okay for Guaranteed Rate Affinity to collect the profits and then distribute them between the companies, Realogy and Guaranteed Rate, if you follow me. But even though that overall distribution is okay, it’s not okay if a Realogy agent gets an individual payment. So how is that figured out and how is that delineated legally?

Holly Bunting: Yeah. That’s a good question. So, there are certain exceptions under the law where payments are permissible in these referral relationships. So we’ve talked about the primary prohibition, but there’s a specific exception for affiliated business arrangements. And that essentially permits, in your example, a real estate brokerage company and a mortgage company to join forces and create a separate mortgage company. Let’s just say they both own 50-50 of that entity. Based on the exception in the law, they can receive 50% of the profit distributions from that entity. And it’s 50% because they each own 50%. But if the ownership were 60-40, then the profit distributions would need to be split 60-40 based on that ownership interest. So, it’s that specific exemption in the statute that allows the owners of these joint venture mortgage companies to receive their profit distributions from that business without violating Section 8 of RESPA.

Matthew Blake: Interesting. And so, why do you think Congress decided that it was good to create this exception? Why do you think that the joint venture does not perhaps hurt consumers or misinform consumers the way of quid pro quo arrangement might?

Holly Bunting: Right. So one of the important things about the requirements for joint ventures under the statute is that they must receive a disclosure. So they have to be told upfront at the time a referral is made that there is an affiliate relationship and that consumer cannot be required to use that affiliate. So if they’re referred to it, they’re provided disclosure, but they cannot be required to use it. So I think that there was a balance that was happening. I think companies were recognizing that when Congress prohibited anything of value and in return for the referral of business that stretched to profit distributions. And to the extent that businesses were creating ancillary subsidiaries that could help provide services to their customers, they were handcuffed in that respect because up until that amendment in the early ’90s, those profit distributions would have been considered a violation of the statute.

So, I think that it was a balance from Congress’s perspective to, you know, permit small businesses to form other businesses that they thought were beneficial to their customers. But at the same time, Congress recognized the need to balance from a consumer protection standpoint, making sure consumers understood that business relationship and the fact that if they obtained services from the affiliate, that that’s gonna financially benefit the party that referred them but then also make sure consumers understood that they had a choice. That they could not be required to use those affiliates just because there was an ownership interest between the parties.

Matthew Blake: Interesting. So this law, the rest of the law created in the early 1970s gets changed in the early 1990s to allow for these affiliated business arrangements. What did we see then? Did we see like a flowering of affiliated business arrangements, joint ventures? How has the law played out in the last 30 years?

Holly Bunting: Yeah. It’s really interesting. So there were indeed a flurry of joint ventures or affiliated businesses that were created after that amendment to the law. And essentially what happened is folks created separate entities but they didn’t put, you know, very many bones in place in terms of holding and standing that entity up. It was often a shell entity with the necessary documents but it wasn’t really operating like a standalone separate entity. So quickly after those amendments were made in the early ’90s in 1996, HUD, which was responsible for enforcing RESPA at the time, they issued a policy statement where they talked about this concern that companies were forming affiliated businesses as shams as a way to take advantage of the exception and to send profits back to referral partners but the entities weren’t really doing anything.

And so, part of HUD’s policy statement was to set out a number of factors that HUD said it would consider when it looked at an affiliated business arrangement to determine whether or not it was, in fact, a bonafide entity or was just a sham set up to send profit distributions back as referral fees. And so, that included things like, does the entity have sufficient capital when it’s being set up? Does it have its own employees? Do those employees perform the substantial services of the entity that’s been created? So if it’s a mortgage banker, joint venture mortgage banker, does it have loan officers and processors and underwriters that are doing those services? Does it have its separate office? Does the joint venture market itself to the general public or is it just existing to serve the referrals that come in from an owner? Does it subcontract services, or again, perform them themselves? Does it send business back to its owners or does it otherwise, you know, send business to other service providers in that particular industry?

So there were a number of factors that, you know, there was no magic solution, you know, you got to have 5 of 10 or you got out of 8 of 10. The regulators basically said, “These are the things we’re gonna consider. Your entity needs to be set up as a bonafide entity that operates like an independent standalone business. And if you do that, plus provide the disclosure, don’t require to use, and then ensure that profits are distributed strictly based on ownership, then that is the formula for a compliant joint venture. So that really turned the tide in terms of what these businesses looked like. And, you know, all of a sudden, with minimal effort and expense that have been used previously to establish these separate entities as affiliated businesses now, you know, those who were interested in forming these businesses were really looking at the expense and the effort and the resources needed to create a separately operating bonafide business.

Matthew Blake: In terms of what regulatory actions or enforcement there has been like, have we seen over time much of a crackdown against “sham joint ventures?”

Holly Bunting: Definitely. So, HUD really ramped up its enforcement resources and the early 2000s. And at that point, we really started to see a flurry of enforcement action at HUD as it related to Section 8 issues. And that included, you know, several settlement agreements related to affiliated business arrangements. And those often focused on those factors from the policy statement, you know, with allegations of it had very little initial capital, or it didn’t have its own employees. Instead, the owner in the business was just doing all of the work of the separate entity. So that was often the focus when HUD looked at joint ventures from an enforcement perspective. When the CFPB took over for RESPA after Dodd-Frank was passed in 2010, there were several early RESPA enforcement cases from the CFPB as well, some of which included affiliated business arrangement cases.

And we saw the same thing, allegations of entities that were not set up to operate like bonafide independent businesses, didn’t have employees, you know, various structures that caused the CFPB to question whether or not they were being operated legitimately. And so that, of course, has been a common theme. There was also enforcement from the CFPB related to the affiliated business disclosure and instances where owners of affiliated businesses were not providing that disclosure to let consumers know that there was that business relationship. And so there’s been enforcement from that perspective as well. And even some required use. Now that I sort of think about all of the various ones, there also have been enforcement as it relates to required use. And the issues there were that our real estate brokerage company was preprinting their sales contract forms with the name of their affiliated title entity. And the regulators questioned whether or not that was effectively requiring consumers to use that affiliate.

So there’s been a range of facts from a joint venture affiliated business perspective that have resulted in enforcement actions. The last RESPA consent order was in 2017, or I should say RESPA Section 8 Consent Order. There’s been others for other reasons, but at least as it relates to section eight of RESPA was 2017, and that was the consent order related to providing that disclosure to consumers. That happened right before former director Cordray left the agency. And since then, we haven’t seen any public consent orders as it relates to Section 8. So we’re sort of in a holding pattern at this point to see what the change in administration, whether affiliated business arrangements might become the priority of the new director at the CFPB.

Matthew Blake: And so before we get to the Biden administration, kind of what you see them perhaps doing in this realm, one thing I wanted to mention is that a big focus right now for my reporting and my kind of trying to understand real estate and how real estate intersects with the rest of housing and the rest of the American economy is that a lot of companies like Rocket Mortgage, Better Mortgage, Compass, the real estate brokerage in New York City, this list goes on and on. These companies are kind of promoting themselves as like one-stop shops by which I mean, you know, if I wanted to buy a home, to pick an example, go to Compass, I could have a Compass real estate agent find a home for me. I’m in the home. Great. I need to get a mortgage, Compass can help me with that. They can get a loan officer, even, you know, pretty soon they’re starting a joint venture with Guaranteed Rate that they can direct me to. I need to prove I’m the owner of the home. Great. Compass can get somebody in the world of title to do what the people in title do, and then they could get it even in a mortgage insurer, perhaps down the line. So basically, like every sort of service that I need in order to become a homeowner, Compass, or Rocket, or Better, EXP, or Keller Williams can do. This move toward companies becoming one-stop shops, and obviously, this isn’t like reinventing the wheel. This has happened at various points in history before, but it seems pretty concentrated right now. Like where does RESPA come into this? Like how does RESPA perhaps interrupt some of these desires by companies to be everything?

Holly Bunting: So one of the… I think, the primary considerations there is the fact that there can’t be required use, right? So if a consumer comes in to, you know, one of these brokerages that has these various affiliated businesses, they can be required to use them. Interestingly, the definition of required use under RESPA acknowledges, however, that a consumer can be provided an incentive to encourage their use of these affiliated businesses as long as it’s, in fact, a true discount and as long as the prices for services are not being raised otherwise in the transaction to cover that incentive or that discount that’s being offered to the consumer. So there’s, you know, right there in the statute and that definition, there is a framework for how affiliated businesses can encourage their customers to use the other companies and the family. There are state law considerations too but that’s not what you asked about, but I think that is how these kinds of businesses are often successful because they can provide these incentives from a RESPA perspective.

It also, I think, you know, as real estate becomes more of an online function and technology really powers how consumers are shopping for services, I think this idea of convenience and efficiency also, I think, is becoming more important to certain consumers and that’s something that these affiliated, you know, families of companies can offer to their customers as well. On the other hand, there’s plenty of consumers that, you know, want to shop for everything. I think that’s probably a small percentage compared to the consumers as a whole, but there are plenty of consumers who, you know, want to take a look at their options and will, in fact, shop for the various settlement services. And so, you know, from those perspectives affiliated, you know, families of companies like the examples that you gave, I think are harder to reach those kinds of consumers because they are really looking to get into the weeds and to shop for their services.

So RESPA, you know, again, you can’t require a consumer to use the various affiliates. You can encourage them by offering various incentives, but at the end of the day, you know, companies and these affiliated families, I think, have to prove the legitimacy of one-stop-shop being the best option for a consumer, right? So whether it be, you know, customer service or if they’re able to offer better pricing as a result of the efficiencies that are gained from the family of companies understanding how their various products work together, you know, those are certainly benefits to this one-stop-shop concept, but it ultimately comes down to being able to demonstrate to the consumer that that is, in fact, the case.

Matthew Blake: So in terms of the discounts, just to make sure, because I think this might be an interesting point to listeners. So let’s say I’m watching a basketball game and it says “Download the Rocket app and see if you’re pre-qualified for a mortgage.” So I download the Rocket app, I’m pre-qualified for a mortgage. I’m really excited. I reach out to Rocket, Rocket is like, “If you use a Rocket real estate agent, you will pay less than if you use a Coldwell Banker real estate agent.” That’s legal?

Holly Bunting: It is. And the way that that often comes up is, and again, setting aside state law considerations because that really sort of gets into the details of what exactly can happen from a legal perspective. But in your example, the mortgage company could say to the customer, if you use our affiliated real estate agent or if you use our affiliated, you know, closing agency, escrow company, we’ll give you $5,000 credit towards closing costs. That is an example that’s often used to encourage consumers to do business with all of those affiliated companies. And those kinds of incentives are okay under RESPA.

Matthew Blake: Okay. So with all that in mind, what do you see the Biden administration doing in terms of RESPA enforcement? I think, yeah, you are the person when I talk to you on the phone a few weeks ago that first told me, you know, no RESPA actions in the Trump administration. Is this going to change?

Holly Bunting: So I don’t think it’s gonna change in the short term. You know, based on the priorities that both President Biden and the CFPB have identified, I think there’s a real focus on continuing to help consumers impacted by COVID-19, both renters and homeowners that have struggled as a result of the pandemic. There’s a definite focus on equity, fair lending for housing, and equal distribution of financial services, I think that is a huge priority. Certainly, with technology, data privacy is always an issue. And so, I think those are the types of issues that we’ll see as the initial focus. It doesn’t mean that Section 8 of RESPA is not still an issue that’s being investigated. The CFPB, you know, on their website, makes it really easy for both consumers and competitors or other businesses out in the marketplace to provide complaints or submit information to the CFPB to the extent that they’re trying to report a wrongdoing.

And so I think that the current CFPB under the Biden administration has not been shy about the fact that it will prioritize enforcement. So to the extent that there are issues, you know, being brought to their attention that have a RESPA element to them, I think there’ll be interested in them. I think it’s just…at this point, it remains to be seen whether that’s something that they will, you know, jump on right away or something that may become a part of their focus as time goes on. One thing that I do think is interesting when we think about, you know, fair lending for housing as priorities expressed by the Biden administration and the CFPB is that in the context of joint ventures, obviously mortgage company, joint venture mortgage companies have fair lending issues to get to deal with as part of their general operation of business. But informing those joint ventures, you know, to the extent that they’re being formed in an area of the country that may not service minority homeowners or other homeowner…or excuse me, other consumers in protected classes, that type of service and in a localized geographic market where the fair lending numbers of that particular entity aren’t necessarily that good, that could cause the CFPB to look into the operation of that business more broadly. And if that joint venture mortgage company that may have a fair lending issue on its hands is not set up to operate compliantly under RESPA, it may find themselves in the middle of a REPSA review at the same time. So anytime there are joint venture mortgage companies who have these other regulatory issues to deal with, RESPA compliance, I think, is always lurking behind the scenes and is important for the overall structure and operation of the business.

Matthew Blake: Yeah. That’s helpful. So one very last question I had for you, this has been very helpful, but I just wanted to touch upon something you had mentioned earlier where I was talking about these one-stop shops and you were saying how it’s kind of up to these companies to like make the right technology, make the right system in place in order to make this beneficial for the consumer and legally compliant. Do you see… because there is this idea that you go on to Rocket, you go on to Zillow, you can kind of do everything online, you know, the paperwork of the past, some of the headaches of the past, maybe taken care of. Is there anything that needs to change or be updated in the regulatory framework, you think, for like the world of today in which people or companies are pushing and maybe consumers are pushing too, arguably, to like have everything done on an app or online?

Holly Bunting: Definitely. And I think that’s a perfect question, particularly in the world of affiliate businesses because just as an example, you have to provide that affiliated business disclosure. The regulations tell you it needs to be on a separate sheet of paper and it gives you a format for what that disclosure should say and while the regulations acknowledged that you can provide that disclosure electronically, you have to do so in compliance with the E-Sign Act, which is a separate statute that requires you first to provide another set of disclosures to the consumer then get their consent to receive the disclosure electronically and then you can provide that affiliated business disclosure. That does not work in today’s markets where, you know, companies have apps that make the process so convenient and efficient or even just online advertising, for instance. You know, companies obviously want to advertise the family of companies, but it’s really, really difficult to make sure those companies can provide that disclosure in compliance with RESPA.

And so you want consumers to have the ease of technology but you also want them to receive the disclosures that they’re required to receive in a way that makes sense for them and doesn’t just destroy the consumer experience online altogether. So I think that would be an incredibly helpful change to the system. And then, I mean, I think just the general recognition that business doesn’t happen face to face the way that it used to. And so much of RESPA is definitely structured based on that assumption that customers are sitting across the table from their real estate agent or their loan officer, and that’s just not the way it works either. So I think just overall recognition of how technology plays into the process of getting a residential mortgage loan and updating the regulatory framework would be incredibly useful both to consumers and to the service providers.

Matthew Blake: Is there anything on the horizon in terms of updates?

Holly Bunting: Not from a RESPA perspective that I’m aware of. I mean, the last time RESPA was amended, it… Well, there were some amendments that occurred in 2010 with the Dodd-Frank Act but they weren’t sort of wholesale amendments that really changed the way that the statute works. So I think that certainly at the CFPB level, you know, they have groups that are focused on innovation and technology and how that impacts the delivery of financial services to consumers. And so I think that’s the right place for these kinds of conversations to start so that the regulators have a really solid understanding of how the 1970 statute with 1990 regulations doesn’t always work in the modern-day. And so I’m hopeful. I mean, I’m hopeful that those kinds of conversations will be on the horizon, but I don’t think, again, it’s a priority at this moment.

Matthew Blake: Yeah. Well, thank you very much for this crash course in RESPA law, enforcement history. I found it very interesting and I think our listeners will too. It intersects real estate mortgage title, everything in the housing economy. Holly Bunning, thank you so much for your time and appearing on “Houses in Motion.”

Holly Bunting: My pleasure. Thanks for having me.