RESPA and Captive Reinsurance AgreementsUnder a captive reinsurance agreement, a title underwriter or private mortgage insurer pays part of the insurance premium to a reinsurance company that is owned by another company (for title underwriters, the reinsurance company would be owned by a home builder, real estate broker, or mortgage lender; for private mortgage insurers, the reinsurance company would be owned by a mortgage lender).
Captive title reinsurance agreements are currently undergoing federal and state regulatory scrutiny under RESPA and state laws. HUD and state regulators look to see whether the payment of the premium is commensurate with the risk assumed by the ‘captive’ reinsurance company or whether it is an illegal kickback paid to get referrals of business.
Captive Reinsurance Companies Cayman Islands No Taxes?
http://www.caymannational.com/pubs/CNC_Sept_2004.pdfRespro Good Information
http://www.respro.org/index.aspx?sectionid=99The Real Estate and Settlement Procedures Act (RESPA)
a. In General The Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. §§ 1261 et seq. is a consumer protection statute, first passed in 1974.
RESPA was enacted in order to:
(1) help consumers become better shoppers for settlement services and
(2) eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services.
To accomplish these ends, RESPA requires that borrowers receive disclosures at various times. In addition, RESPA prohibits certain practices that increase the cost of settlement services. It also prohibits home sellers from requiring home buyers to purchase title insurance from a particular company.
What transactions are covered and not covered under RESPA?
Transactions which involve a "federally related mortgage loan" fall under RESPA and must comply with those rules. As a practical matter, "federally related mortgage loans" include virtually all loans which are secured by a lien on residential property, regardless of lien position. Examples include a refinance, equity lines of credit, reverse mortgages, and home improvement loans. [For a full definition of "federally related mortgage loan," see 12 U.S.C. § 2602(1) and 24 C.F.R. 3500.2].
What is a "title company"?
Under RESPA, the term "‘title company’ means any institution which is qualified to issue title insurance, directly or through its agents, and also refers to any duly authorized agent of a title company." 12 U.S.C. § 2602(4).
What Are "Settlement Services"?
RESPA defines "settlement services" broadly. The term "includes any service provided in connection with a real estate settlement including, but not limited to, the following: title searches, title examinations, the provision of title certificates, title insurance, services rendered by an attorney, the preparation of documents, property surveys, the rendering of credit reports or appraisals, pest and fungus inspections, services rendered by a real estate agent or broker, the origination of a federally related mortgage loan (including, but not limited to, the taking of loan applications, loan processing, and the underwriting and funding of loans), and the handling of the processing, and closing or settlement." 12 U.S.C. § 2602(3).
b. RESPA Disclosures
(1) Disclosure At The Time Of Loan Application: Good Faith Estimate of Settlement Costs.
When borrowers apply for a mortgage loan, RESPA requires mortgage brokers and/or lenders to give the borrowers:
A Good Faith Estimate (GFE) of settlement costs, which lists the charges the buyer is likely to pay at settlement. This is only an estimate and the actual charges may differ. If a lender requires the borrower to use a particular settlement provider, then the lender must disclose this requirement on the GFE.
A Mortgage Servicing Disclosure Statement, which discloses to the borrower whether the lender intends to service the loan or transfer it to another lender. This Statement also provides information about complaint resolution.
Unless the borrower’s loan application is turned down within three days, a lender must mail these documents to the borrowers if they did not receive them at the time of their application.
Disclosures Before Settlement (Closing) Occurs
(a) Disclosure of Controlled/Affiliated Business Arrangements Whenever a settlement service provider involved in a RESPA-covered transaction refers the borrower to a provider with whom the referring party has an ownership or other beneficial interest, a Controlled Business Arrangement (CBA) Disclosure is required. 12 U.S.C. § 2607(c)(4).
The referring party must give the CBA Disclosure to the borrower at or prior to the time of referral. The Disclosure must describe the business arrangement that exists between the two providers and give the borrower an estimate of the second provider's charges.
Except in cases where a lender refers a borrower to an attorney, credit reporting agency or real estate appraiser to represent the lender's interest in the transaction, the referring party may not require the consumer to use the particular provider being referred.
(b) HUD-1 Settlement Statement
RESPA permits the borrower to request a copy of the HUD-1 Statement one day before the actual settlement.
The settlement agent must then provide the borrowers with a completed HUD-1 Settlement Statement based on information known to the agent at that time.
Disclosure After Settlement: Annual Escrow Statement Loan servicers must deliver to borrowers an Annual Escrow Statement once a year which summarizes all escrow account payments during the past year. If the loan servicer sells or assigns the servicing right to a borrower’s loan to another loan servicer, the loan servicer must notify the borrower of the same in accordance with the statute.
c. RESPA’s Prohibition Against "Kickbacks" and Unearned Fees.
RESPA prohibits anyone from giving or accepting a fee, kickback or any "thing of value" in exchange for referrals of settlement service business involving a "federally related mortgage loan." 12 U.S.C. § 2607(a).
In addition, RESPA prohibits fee splitting and receiving unearned fees for settlement services not actually performed. 12 U.S.C. § 2607(b).
(a) "Thing of Value" The term "thing of value" includes any payment, advance, funds, loan, service, or other consideration. 12 U.S.C. § 2602(2).
(b) "Payment" While prohibiting kickbacks, fee splitting, and unearned fees, RESPA does not prohibit:
the payment of a fee to attorneys at law for services actually rendered; or
the payment of a fee by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance; or
the payment of a fee by a lender to its duly appointed agent for services actually performed in the making of a loan; or
the payment of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed; or the payment to a Controlled Business Arrangement provided:
* the CBA Disclosure is made; and
* the borrower is not required to use any particular provider of settlement services;and
* the only thing of value that is received from the arrangement, other than the payments permitted, is a return on the ownership interest or franchise relationship. 12 U.S.C. § 2607(c).
Examples: Appendix B to Part 3500 of 24 C.F.R. XX contains several illustrations which provide additional guidance on the meaning and coverage of RESPA’s prohibition against kickbacks and unearned fees.
1. Facts: A, a provider of settlement services, provides settlement services at abnormally low rates or at no charge at all to B, a builder, in connection with a subdivision being developed by B. B agrees to refer purchasers of the completed homes in the subdivision to A for the purchase of settlement services in connection with the sale of individual lots by B. Comments: The rendering of services by A to B at little or no charge constitutes a thing of value given by A to B in return for the referral of settlement services business and both A and B are in violation of section 8 of RESPA.
2. Facts: B, a lender, encourages persons who receive federally-related mortgage loans from it to employ A, an attorney, to perform title searches and related settlement services in connection with their transaction. B and A have an understanding that in return for the referral of this business A provides legal services to B or B's officers or employees at abnormally low rates or for no charge. Comments: Both A and B are in violation of section 8 of RESPA. Similarly, if an attorney gives a portion of his or her fees to another attorney, a lender, a real estate broker or any other provider of settlement services, who had referred prospective clients to the attorney, section 8 would be violated by both persons.
3. Facts: A, a real estate broker, obtains all necessary licenses under state law to act as a title insurance agent. A refers individuals who are purchasing homes in transactions in which A participates as a broker to B, an unaffiliated title company, for the purchase of title insurance services. A performs minimal, if any, title services in connection with the issuance of the title insurance policy (such as placing an application with the title company). B pays a commission to A (or A retains a portion of the title insurance premium) for the transactions or alternatively B receives a portion of the premium paid directly from the purchaser. Comments: The payment of a commission or portion of the title insurance premium by B to A, or receipt of a portion of the payment for title insurance under circumstances where no substantial services are being performed by A is a violation of section 8 of RESPA. It makes no difference whether the payment comes from B or the purchaser. The amount of the payment must bear a reasonable relationship to the services rendered. Here A really is being compensated for a referral of business to B.
4. Facts: A, a credit reporting company, places a facsimile transmission machine (FAX) in the office of B, a mortgage lender, so that B can easily transmit requests for credit reports and A can respond. A supplies the FAX machine at no cost or at a reduced rental rate based on the number of credit reports ordered. Comments: Either situation violates section 8 of RESPA. The FAX machine is a thing of value that A provides in exchange for the referral of business from B. Copying machines, computer terminals, printers, or other like items which have general use to the recipient and which are given in exchange for referrals of business also violate RESPA.
5. Facts: A, a real estate broker, refers title business to B, a company that is a licensed title agent for C, a title insurance company. A owns more than 1% of B. B performs the title search and examination, makes determinations of insurability, issues the commitment, clears underwriting objections, and issues a policy of title insurance on behalf of C, for which C pays B a commission. B pays annual dividends to its owners, including A, based on the relative amount of business each of its owners refers to B. Comments: The facts involve an affiliated business arrangement. The payments of a commission by C to B is not a violation of section 8 of RESPA if the amount of the commission constitutes reasonable compensation for the services performed by B for C. The payment of a dividend or the giving of any other thing of value by B to A that is based on the amount of business referred to B by A does not meet the affiliated business agreement exemption provisions and such actions violate section
6. Similarly, if the amount of stock held by A in B (or, if B were a partnership, the distribution of partnership profits by B to A) varies based on the amount of business referred or expected to be referred, or if B retained any funds for subsequent distribution to A where such funds were generally in proportion to the amount of business A referred to B relative to the amount referred by other owners such arrangements would violate section
8. The exemption for controlled business arrangements would not be available because the payments here would not be considered returns on ownership interests. Further, the required disclosure of the affiliated business arrangement and estimated charges have not been provided.
Enforcement and Penalties Violations of RESPA’s anti-kickback, referral fees and unearned fees provisions are subject to criminal and civil penalties. In a criminal case, a settlement agent who violates Section 2607 may be fined up to $10,000 and imprisoned up to one year. In a private law suit, a settlement agent who violates this Section may be liable to the person charged for the settlement service an amount equal to three times ( treble damages) the amount of the charge paid for the service. The statute does enumerate one defense to the failure to provide the CBA Disclosure. If the failure to provide the Disclosure was not intentional and resulted from a bona fide error, notwithstanding maintenance of procedures that are reasonably adapted to avoid such error, that person is not liable under the Act.
RESPA’s Prohibition Against Seller-Required Title Insurance RESPA also prohibits a seller from requiring the home buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale. 12 U.S.C. § 2608(a). d.
Enforcement and Penalties Violations of RESPA’s anti-kickback, referral fees and unearned fees provisions are subject to criminal and civil penalties. In a criminal case, a settlement agent who violates Section 2607 may be fined up to $10,000 and imprisoned up to one year. 12 U.S.C. § 2607(d)(1). In a private law suit, any person who violates this Section may be liable to the person charged for the settlement service an amount equal to three times the amount of the charge paid for the service. 12 U.S.C. § 2607(d)(2). Buyers may sue a seller who violates the provision prohibiting seller-required title insurance for an amount equal to three times all charges made for the title insurance. 12 U.S.C. § 2608(b).
Prohibition under RESPA against kickbacks and referral fees:
RESPA prohibits the giving or receiving of any fee, kickback, or other thing of value for the referral of a “settlement service.” 12 USC 2602(3) and 24 CFR 3500.2 An agreement or understanding for the referral of business incident to or part of a settlement service need not be written or verbalized but may be established by a practice, pattern or course of conduct.
YSP- A Yield Spread Premium is a fee paid by a mortgage lender to a mortgage broker for arranging a loan with an interest rate at a higher amount than the par rate. Payment of a yield spread premium is not a per se violation of this section, but may be illegal under RESPA based on a factual inquiry into the circumstances surrounding the payment.
Vargus v Universal Mortgage corp. 2001 US Dist. LEXIS 6696, 6 ( N. Dist. Ill. 2001)
Culpepper v Inland Mortgage Corp. 132 F. 3 D 692 ( 11th Cir. 1998)
383.14 Prohibition against unearned fees and fee splitting: 12 USC 2607 (b) 24 CFR 3500.14 RESPA prohits the giving and receiving of “ any portion, split or percentage of any charge made or received for the rendering of a settlement services in connection with a transaction involving a federally related mortgage loan other than for services performed. The regulations further state that , A charge is an unearned fee and violates this section.”
Remedies: Private right of action for violation of 2607 (Illegal referral fee or kickback and fee splitting) Statutory damages: Person charged for the settlement service can recover an amount equal to “ three times the amount of any charge paid for such settlement service” plus attorneys fees and costs. 12 USC 2607(d)
1 year for affirmative claims.
Unlimited as a defense for foreclosure in the nature of recoupment or setoff.
735 ILCS 5/13-207 Bank of new York v. Heath 2001 WL 1771825
A story that simply refuses to dieis the spat between title insurance company LandAmerica Financial and former Colorado Deputy Insurance Commissioner (and current Director of the Colorado Division of Real Estate) Erin Toll. Toll led a multi-state campaign to "ding" title insurance companies over alleged schemes to pay illegal referral fees to real estate agents and homebuilders through "captive reinsurance" companies. As everyone involved in the residential mortgage banking business should know, paying compensation to a person or entity for the referral of "settlement services" violates anti-kickback provisions of RESPA and various state laws.
RESPA and Captive Reinsurance Agreements
The following provides more information about the RESPA and state law regulatory environment of captive reinsurance agreements. Under a captive reinsurance agreement, a title underwriter or private mortgage insurer pays part of the insurance premium to a reinsurance company that is owned by another company (for title underwriters, the reinsurance company would be owned by a home builder, real estate broker, or mortgage lender; for private mortgage insurers, the reinsurance company would be owned by a mortgage lender). Captive title reinsurance agreements are currently undergoing federal and state regulatory scrutiny under RESPA and state laws. HUD and state regulators look to see whether the payment of the premium is commensurate with the risk assumed by the ‘captive’ reinsurance company or whether it is an illegal kickback paid to get referrals of business.
THE COMPLEX TRAIL - Excerpts taken from a Lenders Investment Statement
Inserts highlighted in Yellow.
INVESTMENT STATEMENT 10-K Certain of our TRSs also engage in other businesses that are ancillary to their loan origination and servicing activities, including operating two mortgage reinsurance subsidiaries, a title abstract subsidiary and a “vendor management company.” These TRSs also are participants in mortgage lending joint ventures that are designed to generate assets for us. ( THEY FAIL TO “NAME” WHO THESE COMPANIES ARE AS IT IS IN THEIR BEST INTEREST TO BE SECRETIVE CONSIDERING THE TREMENDOUSE SCRUTINY THESE ARRANGEMENTS ARE NOW UNDER!) We are organized and operate as a real estate investment trust, or REIT, for federal income tax purposes, and our corporate structure includes both qualified REIT subsidiaries (“QRSs”) and taxable REIT subsidiaries (“TRSs”). We conduct most of our investment activities, including loan origination for our own portfolio, directly or through our QRSs. We conduct our businesses of originating loans for sale and servicing mortgages, as well as ancillary businesses ( NO NAMES) such as mortgage reinsurance, in our TRSs. In addition, our TRSs operate our retail and mortgage broker acceptance branches where we accept mortgage applications from customers. The net interest income we earn from our investment activities generally will not be subject to federal income tax to the extent we dividend such income to our stockholders. By contrast, income that we earn on activities we conduct in our TRSs will be subject to federal and state corporate income tax. We may retain any after-tax income generated by our TRSs, and, as a result, may increase our consolidated equity capital and thereby grow our business through retained earnings. We may, however, dividend all or a portion of our after-tax TRS earnings to our stockholders, subject to REIT qualification limitations. See “Certain Federal Income Tax Considerations” below.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mortgage Reinsurance—One of the Company’s captive reinsurance subsidiaries, Melville Reinsurance Corp. (“MRC”), has entered into mortgage reinsurance agreements with two primary mortgage insurance companies. Under these agreements, MRC absorbs mortgage insurance losses in excess of a specified percentage of loss retained by the primary mortgage insurers in exchange for a portion of the primary mortgage insurers’ insurance premium. Approximately $1.7 billion of the Company’s conventional servicing portfolio is covered by these mortgage reinsurance agreements. Each annual book of business has a maximum life of ten years and the maximum exposure is the amount of assets held in the trust on behalf of MRC. At December 31, 2006, those assets totaled $6.0 million. No reserve has been recorded and management believes no reserve is required based upon loss experience.
The Company’s other captive reinsurance subsidiary, CNI Reinsurance, Ltd. (“CNIRE”), has entered into mortgage reinsurance agreements with four primary mortgage insurance companies. Under these agreements, CNIRE absorbs mortgage insurance losses in excess of a specified percentage of the principal balance of a pool of loans, subject to a cap, in exchange for a portion of the pool’s mortgage insurance premium. Approximately $3.2 billion of the conventional servicing portfolio is covered by such mortgage reinsurance agreements. Each annual book of business has a maximum life of ten years and the maximum exposure is the amount of assets held in the trust on behalf of CNIRE. At December 31, 2006, those assets totaled $8.3 million. No reserve has been recorded and management believes no reserve is required based upon loss experience.
OFCOURSE NO RESERVE IS REQUIRED BASED ON LOSS EXPERIENCE, ITS JUST ANOTHER WAY TO OVERCHARGE THE BORROWER AND REAP THE REWARDS.
WHEN YOU START TO UNDERSTAND THE MULTITUDE OF WAYS THEY DEVISE TO EXTRACT MONEY FROM THE TRANSACTION AND AVOID LAWS WHICH ARE AIMED AT STOPPING THEM - YOU GET REALLY ANGRY THAT IT HAS BEEN ALLOWED TO GO ON FOR SO LONG.
