Register: June 7, 1996 (Volume 61, Number 111)]
the Federal Register Online via GPO Access [wais.access.gpo.gov]
OF HOUSING AND URBAN DEVELOPMENT
CFR Part 3500
of the Assistant Secretary for Housing-Federal Housing
Real Estate Settlement Procedures Act (RESPA);
Statement of Policy 1996-3, Rental of Office Space, Lock-outs, and
Office of the Assistant Secretary for Housing-Federal Housing Commissioner,
Statement of Policy 1996-3, Rental of Office Space, Lock-outs, and
This statement 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 rental of office space, lock-outs and retaliation. It is published
to give guidance and to inform interested members of the public
of the Department's position on enforcement of this section of the
FURTHER INFORMATION CONTACT: David R. Williamson, Director of the
Office of Consumer and Regulatory Affairs, Room 5241, telephone:
(202) 708-4560. For legal enforcement questions, Peter Race, Assistant
General Counsel for Program Compliance, or Rebecca J. Holtz, Attorney,
Room 9253, telephone: (202) 708-4184. (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.
Section 8 (a) of the Real Estate Settlement Procedures Act (RESPA)
prohibits any person from giving or accepting any fee, kickback,
or thing of value for the referral of settlement service business
involving a federally related mortgage loan. 12 U.S.C. 2607(a).
Congress specifically stated it intended to eliminate kickbacks
and referral fees that tend to increase unnecessarily the costs
of settlement services. 12 U.S.C. 2601(b)(2).
Since July 1993, the Department has been seeking comments and advice
concerning the final rule of November 2, 1992, implementing Section
8 of RESPA. On July 21, 1994, the Department published
a new proposed rule on certain Section 8 issues. Simultaneously
with the issuance of this Statement of Policy, HUD is publishing
a final rule in that rulemaking. As part of that rulemaking process,
the Department received comments concerning the application of Section
8 of RESPA to the rental of office space, lock-outs
and retaliation in connection with real estate brokerage office
practices. In addition, the Department's enforcement officials have
received numerous complaints dealing with these same issues.
of Office Space
In the last few years, the Department has received numerous complaints
alleging that certain settlement service providers, particularly
lenders, are leasing desks or office space in real estate brokerage
offices at higher than market rate in exchange for referrals of
business. In HUD's rulemaking docket, number R-94-1725 (FR-3638),
many commenters argued that HUD should scrutinize this rental practice.
The concern expressed is that real estate brokers charge, and settlement
service providers pay, high rent payments for the desk or office
space to disguise kickbacks to the real estate broker for the referral
of business to the settlement service provider. In this Statement
of Policy, the Department sets forth how it distinguishes legitimate
payments for rentals from payments that are for the referral of
business in violation of Section 8.
The Department also received comments and complaints alleging that
settlement service providers were being excluded from, or locked-out
of, places of business where they might find
customers. The most common occurrence cited was where a real estate
brokerage company had leased space to a particular provider of services,
and had prevented any other provider from entering its office space.
As part of the July 21, 1994, rulemaking, a Nebraska lender commented:
We are experiencing a rapid growth of lender lock-out relationships
wherein real estate companies lease office space within their sales
offices to a particular mortgage company. A part of the agreement
is that other lenders are not allowed in the sales offices to solicit
business. This clearly prevents free competition in financing to
the home buyer.
* * * *
* * * [I]t is very clear that the [real estate] office managers
are exerting a lot of control to keep all other lenders out. This
would not be done without proper incentive ($$$) * * *.
Several other commenters alleged that real estate office space arrangements
with particular lenders, coupled with limiting or denying rival
lenders access to customers, were being used in their communities
to eliminate competition. These commenters called for special RESPA
rules to ban these practices.
The Department also has received complaints concerning retaliation
practices used to influence consumer referrals. In one complaint,
financial service representatives in a real estate broker's office
were given specific quotas of referrals of home buyers to an affiliated
lender and were threatened with the loss of their jobs if they did
not meet the quotas.
Commenters on the proposed rules also alleged that some employers
were engaging in practices of retaliation or discrimination against
employees and agents who did not refer business to affiliated entities.
Reprisals could range from loss of benefits, such as fewer sales
leads, higher desk fees, less desirable work space, and ultimately,
loss of job. Some commenters requested that the Department issue
guidelines or other regulatory provisions to restrict such retaliatory
The Coalition to Retain Independent Services in Settlement (CRISIS)
called for a rule prohibiting retaliation against employees and
agents who refer business to non-affiliated entities as most consistent
with the language of the RESPA statute. CRISIS
suggested strong language to prohibit negative actions against employees
and agents who refer business to non-affiliated entities, including
prohibitions against more subtle actions, such as loss of work space
or increases in desk fees.
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
and 24 CFR 3500.4(a)(1)(ii),<SUP>1 hereby issues the following
Statement of Policy.
\1\ All citations in this Statement of Policy refer to recently
streamlined regulations published on March 26,
1996 (61 FR 13232), in the Federal Register (to be codified at 24
CFR part 3500).
of Office Space
Section 8 of RESPA prohibits a person from giving
or from accepting any fee, kickback or thing of value pursuant to
an agreement that business incident to a settlement service involving
a federally related mortgage loan shall be referred to any person.
12 U.S.C. Sec. 2607(a). An example of a thing of value is a rental
payment that is higher than that ordinarily paid for the facilities.
The statute, however, permits payments for goods or facilities actually
furnished or for services actually performed. 12 U.S.C. Sec. 2607(c)(2).
Thus, when faced with a complaint that a settlement service provider
is paying a high rent for referrals of settlement service business,
HUD analyzes whether the rental payment is bona fide or is really
a disguised referral fee.
HUD's regulations implement the statutory provisions
at 24 CFR 3500.14 and give greater guidance to this analysis. Section
3500.14(g)(2) of the regulations provides that
the Department may investigate high prices to see if they are the
result of a referral fee or a split of a fee. It states: ``If the
payment bears no reasonable relationship to the market value of
the goods or services provided, then the excess is not for services
or goods actually performed or provided * * *. The value of a referral
(i.e., the value of any additional business obtained thereby) is
not to be taken into account in determining whether the payment
exceeds the reasonable value of such goods, facilities or services.''
Thus, under existing regulations, when faced with
a complaint that a person is renting space from a person who is
referring business to that person, HUD examines the facts to determine
whether the rental payment bears a reasonable relationship to the
market value of the rental space provided or is a disguised referral
fee. The market value of the rental space may include an appropriate
proportion of the cost for office services actually provided to
the tenant, such as secretarial services, utilities, telephone and
other office equipment. In some situations, a market price rental
payment from the highest bidding settlement service provider could
reflect payments for referrals of business to that settlement service
provider from the person whose space is being rented. Thus, to distinguish
between rental payments that may include a payment for referrals
of settlement service business and a payment for the facility actually
provided, HUD interprets the existing regulations
to require a ``general market value'' standard as the basis for
the analysis, rather than a market rate among settlement service
In a rental situation, the general market value is the rent that
a non-settlement service provider would pay for the same amount
of space and services in the same or a comparable building. A general
market value standard allows payments for facilities and services
actually furnished, but does not take into account any value for
the referrals that might be reflected in the rental payment. A general
market standard is not only consistent with the existing regulations,
it furthers the statute's purpose. Congress specifically stated
that it intended to protect consumers from unnecessarily high settlement
charges caused by abusive practices. 12 U.S.C. Sec. 2601. Some settlement
service providers might be willing to pay a higher rent than the
general market value to reflect the value of referrals of settlement
service business. The cost of an above-general-market-rate rental
payment could likely be passed on to the consumer in higher settlement
costs. If referrals of settlement service business are taking place
in a given rental situation, and the rental payment is above the
general market value, then it becomes difficult to distinguish any
increase in rental payment over the general market from a referral
HUD, therefore, interprets Section 8 of RESPA and
its implementing regulations to allow payments
for the rental of desk space or office space. However, if a settlement
service provider rents space from a person who is referring settlement
service business to the provider, then HUD will examine whether
the rental payments are reasonably related to the general market
value of the facilities and services actually furnished. If the
rental payments exceed the general market value of the space provided,
then HUD will consider the excess amount to be for the referral
of business in violation of Section 8(a).
As an additional consideration, HUD will examine whether the rent
is calculated, in whole or in part, on a multiple of the number
or value of the referrals made. If the rental payment is conditioned
on the number or value of the referrals made, then HUD will consider
the rental payment to be for the referral of business in violation
of Section 8(a).
In its RESPA enforcement work, HUD has also encountered
``bogus'' rental arrangements that are really agreements for the
payment of referral fees. For example, one case involved a title
insurance company that paid a ``rental fee'' to a real estate broker
for the ``per use rental'' of a conference room for closings. The
title insurance company paid a $100 fee for each transaction. This
``rental fee'' was greater than the general market value for the
use of the space. In addition, the facts revealed that the room
was rarely actually used for closings. In this case, HUD examined
whether a ``facility'' was actually furnished at a general market
rate. HUD concluded that this was a sham rental arrangement; the
``rent'' was really a disguised referral fee in violation of Section
A lock-out situation arises where a settlement service provider
prevents other providers from marketing their services within a
setting under that provider's control. A situation involving a rental
of desk or office space to a particular settlement service provider
could lead to other, competing, settlement service providers being
``locked-out'' from access to the referrers of business or from
reaching the consumer. The existence of a lock-out situation could,
therefore, give rise to a question of whether a rental payment is
bona fide. A lock out situation without other factors, however,
does not give rise to a RESPA violation.
The RESPA statute does not provide HUD with authority
to regulate access to the offices of settlement service providers
or to require a company to assist another company in its marketing
activity. This interpretation of RESPA does not
bear on whether State consumer, antitrust or other laws apply to
lock-out situations. Of course, Section 8 still applies to any payments
made to a referrer of business by a settlement service provider
who is not ``locked out'' of the referrer's office and receives
referrals of settlement service business from that office.
Section 8 of RESPA expressly prohibits giving positive
incentives, ``things of value,'' for the referral of settlement
service business. 12 U.S.C. 2607(a). The Act is silent as to disincentives.
If HUD were to find that Section 8 also prohibited disincentives
for failure to make referrals, HUD would find itself being called
upon to resolve numerous employment disputes under RESPA.
HUD does not believe that Congress intended that RESPA
reach these matters. Retaliatory actions against employees are more
appropriately governed by State labor, contract, and other laws.
However, the Department will continue to examine for possible violations
of Section 8 whether payments or other positive incentives are given
employees or agents to make referrals to other settlement service
New RESPA regulations are being
issued simultaneously with this Statement of Policy. With regard
to this area, the public should note the new exemptions for payments
to employees in 24 CFR 3500.14.
Authority: 12 U.S.C. 2617; 42 U.S.C. 3535(d).
Dated: May 31, 1996.
Secretary for Housing-Federal Housing Commissioner.
Doc. 96-14332 Filed 6-6-96; 8:45 am]