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Builders Beware — You Could Be a RESPA Target
 Home builders and their affiliates need to ensure that their operations comply with the Real Estate Settlement Procedures Act (RESPA) to avoid harsh penalties — including triple damages, fines and even imprisonment, warns Phillip Schulman, Esq., a partner in the Washington, D.C. office of Kirkpatrick & Lockhart Nicholson Graham LLP.
Builders need to be most concerned that they don’t violate Section 8 of RESPA, which prohibits giving or receiving anything of value in exchange for the referral of settlement service business, including any service in connection with the sale of a house.
Schulman says that the Department of Housing and Urban Development has targeted builders for their activities under RESPA:
- In December 2005, HUD announced settlement agreements totaling $226,000 with nine home builders in Memphis, Tenn. for investing in and operating joint venture title insurance agencies that HUD alleged did not constitute bona fide settlement service providers under RESPA.
- In March 2005, HUD announced a separate settlement with some 40 home builders in the Tulsa, Okla. area for redistributing the profits of a joint venture title company to other home builders based on the total sales price of the real estate contracts the builders referred to the joint venture company.
“As these settlements demonstrate HUD’s willingness to target and investigate home builders, it is imperative that home builders be aware of those activities that are permitted and not permitted under RESPA,” says Schulman.
Although RESPA prohibits fees in exchange for the referral of business, the statute permits builders to make payments to promote their businesses, as well as receive promotions from others, says Schulman, and thus:
- A home builder could jointly advertise its services with a mortgage lender, as long as the builder pays a share of the advertising costs in proportion to its prominence in the advertisement.
- A builder could also receive free promotional materials from a title insurance agency, such as notepads and pens, which reflect the agency’s name.
- The president of a home building company could attend a dinner with the president of a mortgage company and have his or her dinner paid for, as long as business opportunities are discussed over the course of the meal and the dinners don’t occur regularly.
“Ultimately, each of these activities promotes the business of the builder, lender or title agency, which RESPA does not consider to be the giving or receiving of a thing of value in return for the referral of business,” says Schulman.
On the other hand, cautions Schulman, RESPA prohibits home builders from receiving rewards of prizes that can be tied to the referral of business:
- A home builder is not permitted to receive tickets or luxury suites for sporting events from a mortgage lender and cannot play a round of golf when a title agency pays for the builder’s green fees.
- A home builder is prohibited from participating in a “get-away” weekend for builders when the cost of the trip is covered by a home owner’s insurance company.
“HUD has specifically targeted these types of gifts and prizes in the past,” says Schulman, “and home builders should ensure they are not accepting ‘things of value’ from other settlement service providers who are seeking the builder’s referrals.”
Although RESPA prohibits a range of payments and activities among builders and other settlement service providers, Schulman says, “the statute also contains a number of exceptions that permit payments for actual services provided and affiliated business arrangements, to name a few.” These exceptions provide home builders with valuable opportunities to earn ancillary income in connection with their business, and will be discussed by Schulman in an upcoming article in Nation’s Building News.
Phillip Schulman has a national practice specializing in a range of matters related to real estate finance, mortgage banking and consumer financing. He can be reached by e-mail, or call him at 202-778-9027.
This feature is solely for educational and informational purposes. Nothing on this page should be construed as policy, an endorsement, warranty or guaranty by the National Association of Home Builders of the featured product or the product manufacturer. The National Association of Home Builders expressly disclaims any responsibility for any damages arising from the use, application or reliance on any information contained on this page.
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