RESPA and ‘required use’

Shortly after being sworn in earlier this week, President Barack Obama issued a stay on all pending regulations of the Bush Administration. It is unclear at the moment what impact this may have on the changes to RESPA. Some of the changes went into effect on January 16, but this proposed change to the definition of “required use” and the changes to the Good Faith Estimate and the HUD-1 Settlement sheet are not in effect. We will continue to monitor this as it develops.

On March 14, 2008, the Department of Housing and Urban Development (“HUD”), published a Proposed Rule that would enact an overhaul of the rules and regulations interpreting the Real Estate Settlement and Procedures Act (“RESPA”), 12 U.S.C. §2601 et seq. The Proposed Rule was so provocative that it instigated a vociferous response from many industry and consumer advocate groups. The outcry was such that Congress urged HUD to extend the public comment period an additional 60 days beyond that which was published, but HUD only agreed to a 30 day extension. At the end of the day, HUD received over 12,000 comments spanning the spectrum of supporting the changes to forecasting further collapse within the real estate industry. On November 17, 2008, HUD published its Final Rule implementing many of the changes it had originally published, although there were some modifications responding to the public comments.  On January 1, 2010, we will see a completely new Good Faith Estimate and HUD-1 Settlement Sheet. In the meantime, the remaining changes are (or were) scheduled to take effect on Monday, January 16, 2009.

The scope of the changes is too far-reaching to thoroughly cover in one article. One of the more controversial changes is worth immediate attention because if it stands, it will completely change common practice within the new home construction industry (remember, RESPA only applies to 1-4 family dwellings). It has become a common practice, nationwide, for builders to offer discounts to their clients when using a builder-affiliated mortgage and/or title company. NO MORE!! The definition of “required use” is changing to separate builders and builder-offered incentives from settlement services. HUD’s theory is that consumers should be allowed to shop for loans and settlement services that are most advantageous to the consumer, “free from influence of deceptive referral arrangements.” Fed. Reg., Vol. 73, No. 222, p. 68234 (Nov. 17, 2008). The new definition of “required use” is thus:

[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. 

Id. at 68239; 24 C.F.R. §3500.2. There was a lot of industry commentary addressing this proposed change, the most positive of which sought additional changes to allow builders to continue providing “bona fide” discounts. The Mortgage Bankers Association (“MBA”) argued that the new definition would “eliminate the ability of builders and others to offer legitimate consumer discounts.” Id. at 68235.  The American Bankers Association (“ABA”) argued that HUD’s decision was based on anecdotal evidence that some companies were abusing incentives, and that there was no empirical evidence to support HUD’s conclusions. Id. The National Association of Home Builders (“NAHB”) stated: “Home builders in general do not increase the selling price of homes to offset these incentives…” Id. 

The new rule does not prohibit offering discounts or other things of value to consumers. It does limit, however, who can offer the discount or incentive to “settlement service” providers. ”Settlement services” include title searches, title examinations, issuing title insurance commitments and policies; “settlement services” include closings that are conducted by settlement agents; “settlement services” include services offered by real estate brokers and agents.  24 C.F.R. §3500.2. Settlement services likely do not include services offered by builders. There are other criteria to be met before offering a discount or incentive to consumers appropriate under the regulations, but that is a topic for a different article.

On December 24, 2009, the National Home Builders Association (“NHBA”), along with several other industry groups, filed suit against HUD in the United States District Court for the Eastern District of Virginia, seeking an injunction against implementation of the new definition of “required use”, and a declaration by the court that this new rule is arbitrary and capricious in that it singles out homebuilders expressly for the purpose of ease for enforcing RESPA. In truth, the arguments set forth by NHBA are far more complicated than expressed here; but include:

(1)               HUD has approved these homebuilder-affiliated incentive programs for more than 16 years;

(2)               The revised definition completely changes the law and enforcing RESPA, even though the statutory language of RESPA has not changed;

(3)               RESPA is not an anti-trust statute, so HUD should not implement changes to address what it perceives to be “anti-competitive” or “tying” practices;

(4)                 RESPA is not a market-protection statute; it is a consumer-protection statute.

What is important to understand is that HUD agreed to delay implementing the new “required use” definition until April 16, 2009. In the interim, those who are challenging the new definition will present their arguments to the court as to why HUD should be stopped, and HUD will argue why this change is appropriate. We will endeavor to keep abreast of these developments; stay tuned to the PAR website and the Just Listed blog for updates!

No related posts.

 Print This Article

Tags: required, RESPA, use

This entry was posted on Wednesday, January 21st, 2009 at 3:45 pm and is filed under Legal Issues. You can follow any responses to this entry through the RSS 2.0 feed.