A proposed clarification of the Real Estate Settlement Procedures Act published last week by the Department of Housing and Urban Development could make lenders subject to retroactive enforcement for accepting referral fees, kickbacks or other unearned fees on mortgage transactions.

In proposed amendments to Regulation X the agency is taking the position that because the Housing and Community Development Act of 1992 merely confirms HUD's long-held enforcement position of viewing the activities of lenders and brokers as "covered settlement services"--rather than setting out an entirely new policy on this issue--the law's language concerning the nonretroactivity of the amendment therefore does not affect the agency's pending enforcement efforts.

The HUD's position is based on the fact that the laws "settlement service" clarification was aimed at overturning a 1984 decision by the U.S. Court of Appeals for the 6th Circuit in Cincinnati, which held that the making of a mortgage loan was not a "settlement service."

To win industry approval, the law stated that it was effective "upon enactment." which was Oct. 28, 1992.

The new proposal takes a different view, however, arguing that HUD can continue enforcement initiatives against lenders who allegedly accepted unearned fees, even if those activities predated the 1992 law.

The regulation was published for comment by HUD May 13; comments are due by July 12. It is primarily aimed at implementing a provision of the 1992 law bringing junior and subordinate liens, such as home equity loans, under Respa.

Robert Chamness, an expert on consumer lending issues who is now executive vice president and general counsel of SFI ProServices Inc. in Portland, Ore., says the provision to include subordinate lien loans "dramatically expands Respa's disclosure and liability rules."

"In particular, institutions should be concerned about the effect of expanded coverage and compliance burdens under existing rules concerning the good faith estimate, the settlement statement, special information booklet, servicing transfer and administration requirements, escrow requirements and civil and criminal liability provisions," he said.

The proposal seeks recommendations on the most efficient forms and format for displaying the disclosures sought by Respa and contains a suggested HUD settlement statement for use in refinancing and junior lien transactions.

Chamness also said that in general terms the proposal addresses such issues as agricultural credit, business credit and dealer paper. "These are all important areas that have to be resolved." he said.

The proposal requests comment on whether the "farm loan" exemption should be reinstated if the total acreage involved in the financing transaction exceeds 25 acres, whether or not a residential property is involved. This exemption was deleted in the November 1992 rule.

Regarding commercial credit transactions, the proposal seeks comment on the potential tests that should be used for exempting commercial credit from coverage of Respa. At the moment, all commercial credit deals are covered based on whether a lien was placed on residential real estate, rather than on the loan purpose.

Chamness suggests one approach might be to adopt the "business purpose" test in the Federal Reserve Board's Regulation Z. which excludes loans from coverage if they are made to corporations and other business entities rather than natural persons. "HUD might also consider exempting residential real estate which indirectly secures an otherwise qualifying commercial mortgage, such as a mortgage given as security for the guarantee of a loan, a mortgage securing a note which is used for collateral for other loans, or where the real estate is not the primary collateral for a loan." he says.

The regulation "also took an important step" in defining what is meant by a "refinancing" under Respa, he said. "That is an area we know to be troublesome from years of experience under other consumer laws, especially whenever there are note or security instrument modifications without a total redoing of the original security agreement.

Although Respa's original statutory language was broad enough to cover refinancings that were first liens on residential real property, HUD had, through past rules, exempted most refinancings from Respa coverage. The 1992 law mandates that refinancings be covered.

The proposal says that changes in a loan's interest rate, term or periodic payments. including extending the terms of a balloon note, are not considered to be refinancings if a transaction involves no charges, or only nominal charges--less than 1/4 of 1% of the loan amount--and does not involve a transfer of title.

Chamness said that the only issue remaining dealing with refinancings involves whether the no- or low-cost threshold in the regulation. which is roughly one-quarter of one point, "is sufficient in the context of conversion options and other modification agreements." His concerns are whether the 25 basis point exclusion is broad enough, and whether additional instances of higher fees should also be excluded.

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