[Federal Register Volume 61, Number 111 (Friday, June 7, 1996)]
[Rules and Regulations]
[Pages 29255-29258]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-14330]
-----------------------------------------------------------------------
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 3500
[Docket No. FR-3638-N-03]
Office of the Assistant Secretary for Housing-Federal Housing
Commissioner; Real Estate Settlement Procedures Act (RESPA); Statement
of Policy 1996-1, Regarding Computer Loan Origination Systems (CLOs)
AGENCY: Office of the Assistant Secretary for Housing-Federal Housing
Commissioner, HUD.
ACTION: Statement of Policy 1996-1: Computer Loan Origination Systems
(CLOs).
-----------------------------------------------------------------------
SUMMARY: This Statement of Policy sets forth the Department's
interpretation of Section 8 of the Real Estate Settlement Procedures
Act (RESPA) and its implementing regulations with regard to the
applicability of RESPA to payments for services from certain computer
systems, frequently called CLOs, used by settlement service providers
in connection with the origination of mortgage loans or the provision
of other settlement services covered by RESPA. This statement explains
the statutory and regulatory framework for HUD's treatment of payments
to CLOs.
In reading this policy statement, the reader should be aware that
HUD's RESPA rule was recently streamlined through a separate
rulemaking. 61 FR 13232 (Mar. 26, 1996). This streamlining caused
several provisions of the RESPA rule to be renumbered. Except as is
otherwise indicated in the context of the policy statement, this policy
statement refers to provisions by their current section number,
incorporating all revisions to date as a result of the streamlining and
today's rulemaking, published elsewhere in the Federal Register.
FOR FURTHER INFORMATION CONTACT: David Williamson, Director, Office of
Consumer and Regulatory Affairs, Room 5241, telephone (202) 708-4560;
or, for legal questions, Kenneth Markison, Assistant General Counsel
for GSE/RESPA, or Grant E. Mitchell, Senior Attorney for RESPA, Room
9262, telephone (202) 708-1550. (The telephone numbers are not toll-
free.) For hearing- and speech-impaired persons, this number may be
accessed via TTY (text telephone) by calling the Federal Information
Relay Service at 1-800-877-8339. The address for the above-listed
persons is: Department of Housing and Urban Development, 451 Seventh
Street, SW, Washington, DC 20410.
SUPPLEMENTARY INFORMATION: Individuals and firms have developed and are
developing various systems that employ computer technology to assist
consumers in finding a lender, selecting a mortgage product,
originating a mortgage, or choosing among other settlement service
providers and products. These systems are sometimes called computer
loan origination systems (hereafter ``CLOs''), although other
terminology may be used, such as computer loan information systems.
These systems differ in the way they interact with consumers, in the
way they collect and display information on mortgage options, in the
range of choices of products and services they provide to consumers,
and in the extent to which they share work with other providers in the
settlement service process. HUD expects product diversity to increase
as technology evolves and new telecommunication options become
available.
The following exemption was set forth in the November 2, 1992 final
rule, effective December 2, 1992: Section 8 of RESPA does not prohibit
* * * any payment by a borrower for computer loan origination services,
so long as the disclosure set forth in Appendix E of this part is
provided to the borrower. 24 CFR 3500.14(g)(2)(iii).
This exemption from Section 8 was for ``any payment by a borrower
for computer loan origination services,'' as long as certain
disclosures were provided. This rule did not address payments made by
lenders, thus leaving such payments subject to Section 8 scrutiny.
Although the term ``CLO exemption'' is frequently used, including in
the preamble of the 1992 final rule, the exemption was not for the CLO
itself, but only for payments made for CLO services by borrowers. The
1992 final rule did not speak to other issues; notably it did not
define a CLO or explain how RESPA applies to payments by lenders to
CLOs for CLO services. The November 2, 1992 rule also withdrew all
previous informal legal opinions, including those stating the
Department's views on various CLO issues.
In response to numerous expressions of concern about the new
exemption and other aspects of the revised regulations, HUD requested
public comments in a Federal Register Notice on July 6, 1993, and held
public hearings on August 6, 1993.
On July 21, 1994, HUD issued proposed regulations that would repeal
the general CLO exemption for borrower payments and, in its place,
establish an exemption for borrower payments to certain ``qualified
CLOs'', that is, CLOs having characteristics that HUD considered
beneficial to consumers. The proposed exemption would apply only to
payments by borrowers, but HUD did solicit public comments on whether
to provide a similar exemption for payments by lenders to qualified
CLOs. Under the proposed rule, payments by borrowers to CLO systems
that did not qualify for the exemption were subject to scrutiny under
section 8 of RESPA. HUD also invited those with active CLOs or those
developing CLOs to demonstrate their systems at a Technology
Demonstration Fair on September 30, 1994. Twenty-one CLO operators
accepted the invitation and participated in this all-day demonstration
in Washington, D.C.
The public comments in response to the proposed rule raised a
number of specific questions about the proposed exemption for payments
to qualified CLOs, and generally displayed skepticism or uncertainty
about the usefulness of the proposal. Concerned that the comments did
not adequately address all the issues, HUD held two informal meetings
with industry and consumer groups to seek additional individual input
on the likely future development of CLOs. These meetings were held on
August 11, 1995, and September 21, 1995. While HUD learned many things
from the public comments and the meetings with industry and consumer
groups, one message seemed to predominate. All parties wanted clearer
guidance from HUD on how RESPA's disclosure and anti-kickback
provisions apply to borrower and lender payments for CLO services.
Both the 1992 and the proposed 1994 exemptions for borrower
payments to CLOs were offered because of concern that uncertainty about
how RESPA applied to payments to CLOs might be impeding the development
or use of potentially beneficial technology. However, by limiting the
exemptions to borrower payments, in both cases, HUD did not address the
primary issue of how RESPA's anti-kickback provisions applied to lender
payments to CLOs.
Many participants in the informal meetings urged that it was
impossible to
[[Page 29256]]
create a useful safe harbor or exemption for ``qualified CLOs'',
because changes in technology and in its use in the market would
repeatedly make that safe harbor obsolete. CLO service providers would
take their chances of running afoul of RESPA, rather than develop
systems to meet the ``qualified CLO'' criteria. More helpful, many
participants argued, would be if HUD explained clearly how RESPA's
anti-kickback prohibitions and disclosure requirements applied to
various sorts of CLO payments.
After considering the public comments and informal meetings, HUD
has decided: (1) To eliminate the exemption for borrower payments to
CLOs and the associated disclosure; (2) to abandon the idea of
establishing a similar or broader exemption for qualified CLOs; and (3)
to issue this policy statement to help those developing and using CLOs
to understand better how RESPA applies to their activities.
HUD does not think it is useful to continue a modest exemption or
to develop a separate and elaborate regulatory structure for a still
emerging industry. However, clarification of certain matters in the
form of a policy statement would be useful to the industry and
consumers. The effect of this action is to subject payments to CLOs to
the same RESPA provisions as payments for any other service; however,
HUD is providing specific guidance on how HUD will apply these
provisions in the CLO context.
Today HUD is simultaneously issuing a revision to the 1992 rule.
The preamble to this new final rule contains a fuller discussion of the
decision- making process leading from the November 2, 1992 rule to the
withdrawal of the exemption and the issuance of this guidance.
To the extent this guidance interprets rules that become effective
120 days from the date of this publication, then this guidance will be
applicable as of the effective date of such rules.
Statement of Policy--1996-1
To give guidance to interested members of the public on the
application of RESPA and its implementing regulations to these issues,
the Secretary, pursuant to Section 19(a) of RESPA (12 U.S.C. 2617(a))
and 24 CFR 3500.4(a)(1)(ii), hereby issues the following statement of
policy.
For purposes of this statement of policy, a CLO is a computer
system that is used by or on behalf of a consumer to facilitate a
consumer's choice among alternative products or settlement service
providers in connection with a particular RESPA-covered real estate
transaction. Such a computer system: (1) may provide information
concerning products or services; (2) may pre-qualify a prospective
borrower; (3) may provide consumers with an opportunity to select
ancillary settlement services; (4) may provide prospective borrowers
with information regarding the rates and terms of loan products for a
particular property in order for the borrower to choose a loan product;
(5) may collect and transmit information concerning the borrower, the
property, and other information on a mortgage loan application for
evaluation by a lender or lenders; (6) may provide loan origination,
processing, and underwriting services, including but not limited to,
the taking of loan applications, obtaining verifications and
appraisals, and communicating with the borrower and lender; and (7) may
make a funding decision.
This definition is not meant to be restrictive or exhaustive; it
merely attempts to describe existing practices of service providers.
With the use of technology evolving so rapidly, however, it is
difficult for the Department to provide guidance on future unspecified
practices in the abstract.
This statement of policy provides guidance on how RESPA applies to
service providers and interprets existing law. It does not add any new
restrictions on business practices.
Section 3 of RESPA defines ``settlement services'' to include:
[A]ny service provided in connection with a real estate
settlement including, but not limited to * * * the origination of a
federally related mortgage loan (including, but not limited to, the
taking of loan applications, loan processing, and the underwriting
and funding of loans), and the handling of the processing, and
closing or settlement. 12 U.S.C. 2602(3).
The regulations define a ``settlement service'' to mean ``any
service provided in connection with a prospective or actual
settlement.'' 24 CFR 3500.2. This definition specifically includes the
providing of any services related to the origination, processing, or
funding of a federally-related mortgage loan. 24 CFR 3500.2. To the
extent that a CLO performs ``settlement services'', it is a settlement
service provider. Conversely, if a CLO does not perform settlement
services, it is not a settlement service provider.
NOTHING IN THIS POLICY STATEMENT SHOULD BE READ AS A HUD
ENDORSEMENT OF ANY CHARGE TO CONSUMERS OR AS A REQUIREMENT FOR ANY
CHARGE TO CONSUMERS.
1. Payments by Consumers to CLOs
CLOs that provide services to consumers may charge consumers for
services performed. 12 U.S.C. 2607(c)(2). RESPA requires that all
charges for settlement services be reported on the Good Faith Estimate
and the HUD-1 or HUD-1A; however, the regulations do not address the
exact timing of the payment. 12 U.S.C. 2603(a) and 2604(c). Similarly,
any payment for CLO services that is paid outside of closing must be so
identified on the HUD-1 or HUD-1A settlement statement. 24 CFR 3500,
App. A, General Instructions. In addition, settlement service providers
whose products are made available on CLOs may reimburse consumers for
any fee charged them by the CLO.
2. Payments by Settlement Service Providers to CLOs
Section 8(a) of RESPA prohibits payments for the referral of a
consumer to a settlement service provider; however, Section 8(c)(2)
permits payments for goods or facilities actually furnished or for
services actually performed. 12 U.S.C. 2607(c)(2).
The definition used in this policy statement encompasses various
types of CLOs. Regardless of the type of CLO, compensable goods,
facilities, or services must be provided by the CLO in return for
payments by settlement service providers. Any such payment must bear a
reasonable relationship to the value of the goods, facilities, or
services provided. 24 CFR 3500.14(g)(2). A charge for which no or
nominal services are performed or for which duplicative fees are
charged is an unearned fee. 24 CFR 3500.14(c). For example, if a CLO
lists only one settlement service provider and only presents basic
information to the consumer on the provider's products, then there
would appear to be no or nominal compensable services provided by the
CLO to either the settlement service provider or the consumer, only a
referral; and any payment by the settlement service provider for the
CLO listing could be considered a referral fee in violation of section
8 of RESPA. Note, however, that a new provision of HUD's RESPA rules at
24 CFR 3500.14(g)(1)(ix), discussed at Section 4 below, allows
employees who do not perform settlement services to market settlement
services or products of an affiliated entity and to receive employer
payments for these referrals. A company may not pay any other company
for the
[[Page 29257]]
referral of settlement service business. 24 CFR 3500.14(b).
RESPA places no restrictions on the pricing structure of CLOs as
long as the payments are not referral fees and are reasonably related
to the value of the services provided. However, the value of a referral
is not to be taken into account in determining whether the payment
exceeds the reasonable value of the goods, facilities, or services. 24
CFR 3500.14(g)(2). If these requirements are met, CLOs may charge
settlement service providers a fixed or periodic fee or a fee for each
closed transaction arising from the use of the CLO. However, if a CLO
charges different fees to different settlement service providers in
similar situations, an incentive may exist for the CLO to steer the
consumer to the settlement service provider paying the highest fees.
HUD may scrutinize these circumstances to determine if the
differentials constitute referral fees.1
---------------------------------------------------------------------------
\1\ Depending upon the circumstances of the referrals and the
design of the CLO system, this steering of consumers may violate the
Fair Housing Act, as may selective marketing of CLO systems.
---------------------------------------------------------------------------
Settlement service providers may pay CLOs a reasonable fee for
services provided by the CLO to the settlement service provider, such
as, having information about the provider's products made available to
consumers for comparison with the products of other settlement service
providers. If a CLO elects to act as a mortgage broker, as that term is
defined in 24 CFR 3500.2, then all RESPA rules related to compensation
of mortgage brokerage services apply to the CLO. On December 13, 1995,
HUD convened a negotiated rulemaking that could result in changes to
these RESPA rules. CLOs should review carefully any changes in the
regulations applicable to mortgage brokers and others that result from
this rulemaking.
3. CLOs in a Controlled Business Context
When a CLO is used in a controlled business arrangement, the RESPA
regulations relating to controlled business arrangements apply. Section
3(7) of RESPA (12 U.S.C. 2602(7)) defines a controlled business
arrangement in terms of an affiliate relationship or a direct or
beneficial ownership. The regulations provide definitions of affiliate
relationship, beneficial ownership, and direct ownership. 24 CFR
3500.15(c). Separate entities are a necessary component of the
controlled business arrangement definitions. For example, if a real
estate brokerage firm uses a CLO within its own business structure and
there is no separate affiliated business entity involved, then the CLO
is not being used in a controlled business arrangement with the real
estate brokerage firm.
A controlled business arrangement does not violate RESPA if three
conditions are met. 12 U.S.C. 2607(c)(4)(A)-(C). Section 3500.15(b) of
the regulations elaborates on the three requirements. First, when
consumers are referred from one business entity to an affiliated
business entity, a written disclosure of the affiliate relationship
must be provided. For example, if a real estate firm has an affiliate
relationship with a company providing CLO services and an agent of the
real estate firm refers a customer to the CLO company, then the real
estate agent must provide the required disclosure to the customer at
the time of the referral. Similarly, if the CLO company has an
affiliate relationship with one of the settlement service providers
listed on the CLO, then the CLO operator must provide the customer with
the required disclosure before the consumer uses the CLO. Second there
can be no required use, i.e., the referring entity cannot require the
consumer to use the CLO and the CLO cannot require the consumer to use
an affiliated company listed on the CLO. Thirdly, the only thing of
value that is received by one business entity from other business
entities in the controlled business arrangement, other than payments
permitted under 24 CFR 3500.14(g) for services actually performed, is a
return on an ownership interest or franchise relationship.
4. Payments of Commissions or Bonuses to Employees
CLOs are subject to the same RESPA provisions regarding employee
compensation as any service provider. For example, a settlement service
provider listed on the CLO may not pay a CLO employee a referral fee or
commission if the consumer selects that settlement service provider. 24
CFR 3500.14(b). Employees of a CLO may receive a bona fide salary or
compensation from the CLO--their employer. 24 CFR 3500.14(g)(1)(iv).
Compensation from CLOs to their employees may include commissions for
transactions closed on the system. 24 CFR 3500.14(g)(1)(vii). However,
if a CLO pays commissions for transactions closed with some settlement
service providers but not for transactions closed with other settlement
service providers, HUD may scrutinize these payments to determine if
the commissions constitute referral fees or are exempt under other
provisions (see below).
HUD established two new exemptions related to compensation of
employees in a final rule published today and effective 120 days from
their publication. The first exemption (24 CFR 3500.14(g)(1)(viii))
allows an employer to pay managerial employees who do not routinely
deal with the public bonuses related to the referral of settlement
service business to a business entity in a controlled business
arrangement. The CLO employee who routinely deals with customers is not
considered a managerial employee within the meaning of 24 CFR 3500.2. A
CLO may have managerial employees within the meaning of 24 CFR 3500.2,
such as a district manager who oversees several CLO operators who work
in different locations. Such a managerial employee may receive bonuses
based on criteria related to the performance of a business entity in an
affiliate relationship, such as profitability, capture rate, or other
thresholds. However, the amount of such bonus may not be calculated as
a multiple of the number or value of referrals of settlement services
business to a business entity in a controlled business arrangement. 24
CFR 3500.14(g)(1)(viii).
The second exemption (24 CFR 3500.14(g)(1)(ix)) allows employer
payments to their own bona fide employees for referrals of business to
affiliated entities if the employee does not perform settlement
services in any transaction and provides the consumer with a written
disclosure in the format of the Controlled Business Arrangement
Disclosure Statement. Employer payments to a CLO employee who does not
perform settlement services may qualify for this exemption. This
exemption permits employer payments to employees who do not perform
settlement services for referrals to affiliates. Under this exemption,
the employee may market a settlement service or product of an
affiliated entity, including collecting and conveying information and
taking an application or order for the services of an affiliated
entity. Marketing also may include incidental communications with the
consumer after the application or order, such as providing the consumer
with information about the status of an application or order; marketing
may not include serving as the ongoing point of contact for
coordinating the delivery and provision of settlement services. Under
the exemption, a CLO employee who takes an application and collects
information for an affiliate but performs no other settlement services,
may receive a payment from his or her
[[Page 29258]]
employer for a referral to an affiliated entity.
5. Neutral Display of Information on Settlement Service Providers and
Their Products
Section 8(a) of RESPA prohibits compensated referrals. HUD may
scrutinize non-neutral displays of information on settlement service
providers and their products because favoring one settlement service
provider over others may be affirmatively influencing the selection of
a settlement service provider which could constitute a referral under
RESPA. 24 CFR 3500.14(f). An agreement or understanding for the
referral of business incident to or part of a settlement service may be
established by a practice, pattern, or course of conduct. 24 CFR
3500.14(e). For example, if one lender always appears at the top of any
listing of mortgage products and there is no real difference in
interest rates and charges between the products of that lender and
other lenders on a particular listing, then this may be a non-neutral
presentation of information which affirmatively influences the
selection of a settlement service provider. Furthermore, if there is an
affiliate relationship between the CLO and a favored settlement service
provider, the non-neutral presentation of information under certain
circumstances could constitute a required use in violation of
3500.15(b)(2). This guidance on neutral displays should not be read to
discourage CLOs from assisting consumers in determining which products
are most advantageous to them. For example, if a CLO consistently ranks
lenders and their mortgage products on the basis of some factor
relevant to the borrower's choice of product, such as APR calculated to
include all charges and to account for the expected tenure of the
buyer, HUD would consider this practice as a neutral display of
information.
Authority: 12 U.S.C. 2617; 42 U.S.C. 3535(d).
Dated: May 31, 1996.
Nicolas P. Retsinas,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 96-14330 Filed 6-6-96; 8:45 am]
BILLING CODE 4210-27-P