HUD is proposing to do away with a Respa exemption that allows real estate firms to pay employees referral fees, but mortgage lenders contend the departments proposal has a fatal flaw because of an exception to the rule that would allow other restricted compensations. Under HUDs proposalwhich is outlined in a proposed rule obtained by Mortgage Marketplaceno employee of a company may be paid referral fees, even for referrals to an affiliated company. HUD said the exemption was too expansive and compromised the statutes purpose of protecting the consumer from being referred for settlement services based on financial gain. Although lenders approved of this provision, they werent as warm toward another part of the same provisionnamely an employer-employee exception that would allow some bonuses and compensation to be paid to employees on a restricted basis. The exemption, lenders believe, could still be used to channel business toward certain institutions real estate agents and brokers may have relationships with, something that may obstruct the meaningfulness of the very rule HUD proposes changing. Specifically, the proposed rule would allow for the payment of bonuses and compensation to managerial employees in controlled businesses for such purposes as the generation of business among affiliates if it: Is not tied on a one-on-one basis, or calculated as a multiple of the number or value of any referrals; and Is extended only to employees who do not deal with the public. Theyve said they want to close the window [on employer- employee referral fees], said Brian Chappelle, an MBA regulatory counsel. But then theyve said they dont want to close that window completely. Chappelle said the trouble with the proposal is it doesnt define what constitutes a managerial employee. Who do they mean? A sales manager? A real estate officer? A broker?, he said. Were glad that theyve said no one-on-one compensationtheyve taken a step in the right direction, but they need to clarify this [provision]. The MBA said it plans to ask for that clarification. David Shirk, chairman of the National Association of Mortgage Brokers Respa Committee, said the provision seemed to be counterproductive to the intent of the rule. Shirk, who is also senior vice president of Frontier Investment, in Eugene, Ore., said another problem is that while the rule would prevent employees who come in contact with business affiliates from receiving referral fees, it would still allow managers responsible for delivering such products to receive a fee. They may not be able to do any manipulation themselves, he said. But they could be effective in getting their employees to. The capacity is certainly there. As expected, HUD also proposed changes for rules on computerized loan originations, including the much-anticipated clarifying definition. Stressing concern over inhibiting the growth of CLOs, the department determined keeping the exemption for borrower-paid service fees was justified, which will allow originators to continue collecting fees under certain conditions. The rule, which also drew heavy criticism from the lending industry, would be modified to limit the exemption only to payments for access to qualified CLO systems that provide meaningful information and services to consumers. More specifically, HUD said a qualified CLO system must display loan products from numerous lenders offering various loan products, and the factors for selecting lenders must be fair and legitimate. Information on loan products must also be displayed in a lender-neutral manner. And while not calling for a specific number of listed lenders, HUD said it was contemplating a minimum of 20 on a qualified system. The proposed rule is being reviewed by the House Banking Housing Subcommittee. It is expected to be published in the Federal Register in July, and a 60-day comment period will follow. HUD also took action on two other issues in its proposed rule, the pre-emption of state laws in conflict with Respa, and the adequacy of the controlled business disclosure statement. HUDs proposals on those issues are: Controlled Business Disclosure Form. Changes to the controlled business disclosure will be minimal because HUD believes the elimination of the employer-employee exemption removes the strongest concerns regarding the information in the disclosure. HUD did, however, accept two modifications, including: A borrower-acknowledgment box will be added to the controlled business disclosure format; and A rule that disclosure be given at a time to be relevant to the consumerat the time of referral, no earlier than three days prior, or, if the lender requires the use of a particular provider, at the time of the loan application. Pre-emption of State Laws. The department decided not to take action on pre-emption of state laws that conflict with Respa. HUD said it was unnecessary to specify written standards for state law pre-emptions, apparently siding with state attorneys general com-menters who believed setting out comprehensive and informative pre-emption standards would present an almost insurmountable task.
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