Passed into law by the U.S. Congress in 1974, the Real Estate Settlement Procedures Act (RESPA) was intended to shield homebuyers from the predatory practices of settlement service providers such as lenders, realtors, and title insurers. Owing to their vulnerable position at the closing table, homebuyers were historically ripe for exploitation by such companies, many of which used bait-and-switch and kickback schemes in order to line their pockets.
At present, with the residential real estate market in shambles nationwide — and with an ongoing crisis in the mortgage and credit industries — the concern of the day is with the skyrocketing number of foreclosures as well as the increasing volume of unsold new home inventory. The significance of RESPA would seem to take a backseat (and certainly in relation to other statutes such as the Interstate Land Sales Full Disclosure Act and the securities laws) in a climate where so few closings are even happening.
In the coming year, however, rules recently issued by the U.S. Department of Housing and Urban Development (HUD) could re-ignite the importance of RESPA. The new rules, which are slated to take effect on January 16, 2009, essentially make it a violation of RESPA’s prohibition against unearned fees and kickbacks (found in 12 U.S.C. ss. 2607, 2608 ) for developers and homebuilders to offer incentives to buyers for using affiliated mortgage companies and title companies. Such incentives have been a longstanding practice of many developers and builders, which will have to adjust to the new regulatory landscape. Brief summaries of the new rules can be found online at Builder magazine and on the Greenberg Traurig website.
In the long run, the new rules will likely prove to be a good idea, insofar as they will heighten the regulatory impact of RESPA and HUD at the micro level in stamping out predatory and deceitful practices, and hopefully helping to restore credibility to a mortgage industry which has certainly been taking more than its fair share of its hits lately. If the U.S. housing market is to make a full recovery, restoring public faith in the mortgage industry will be a crucial element.
In the short run, however, the amendments may mean trouble for unwary and/or desperate developers and builders. Offering incentives have become a key means for developers of new projects to induce buyers to come to the closing table, and this includes offering price discounts where the buyer uses an affiliated lender. As the Greenberg Traurig bulletin notes, the definition of “affiliate” under RESPA is broad, and might even encompass scenarios in which a developer has a marketing agreement with a lender. For those that run afoul of RESPA, the consequences can be dire, as the statute provides for criminal penalties in addition to treble damages and payment of attorneys’ fees in the civil context.
One result of the new RESPA rules could be fostering even more litigation related to real estate. If the economic recession continues or even worsens, buyers who close on new homes in 2009 and beyond may find themselves in unfavorable mortgage arrangements as they see their property values dip. With foreclosure on the horizon, filing a lawsuit under RESPA may be an attractive means of gaining same leverage over the lender and possibly recovering damages.
This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.
Mr. Beck has a law degree from Harvard Law School, and practices law in the courts of South Florida. His law firm, Beck & Lee Business Trial Lawyers in Miami, is dedicated to the practice of business and real estate litigation, as well as pursuing the rights and remedies of consumers and investors. A significant portion of Mr. Beck’s practice is devoted to issues arising under purchase contracts for real estate, including condominiums, condo-hotels, single-family homes, and commercial property. He can be reached at 305-789-0072 or email@example.com