Property ManagementSettlements Reveal HUD Realty Crackdown Priorities
Federal regulators have promised a major crackdown in 2002 against real estate, title and mortgage companies who violate rules prohibiting settlement kickbacks and unearned fees.
Newly-obtained copies of the actual settlement agreements negotiated between the department of Housing and Urban Development (HUD) and a group of major real estate-related companies provide insights into what the government will be targeting in 2002, and what it expects from firms it pinpoints for alleged violations.
Copies of previously-unreleased legal settlement documents were obtained exclusively last week by Realty Times. The companies involved in the settlements announced last month are all prominent: Florida"s largest residential community developer, ARVIDA/JMB; Central Pacific Mortgage Corp., a company headed by the Mortgage Bankers Association of America"s vice-chairman, John Courson; title and settlement-service giants First American Corp. and Transamerica Corp; and Conseco Finance Corp.
The settlement agreement in the case of Central Pacific Mortgage reveals that an investigation by HUD of home loans closed at 21 branch offices between 1998-2001 found that "consumers were charged more for credit reports...than the cost (paid by) Central Pacific to the provider of the credit reports." Approximately $92,900 in overcharges were documented, according to the settlement agreement, but the same audit also turned up "many" instances of undercharges on credit reports. HUD rules prohibit "mark-ups" of settlement items, absent additional services to justify the mark-up.
What was involved here, according to mortgage industry experts, was a commonplace practice known as "average pricing." When high-volume firms aren"t sure how much certain services will cost, they sometimes assign an "average" amount that they charge all customers at closing. For example, a lender paying actual credit report charges ranging anywhere from $15 to $80 per application may simplify its paperwork by charging everyone a flat $35.
But HUD"s settlement agreement with Central Pacific -- unusually high-profile because of Courson"s leadership role in the mortgage industry -- amounts to a warning to other lenders to stop using "average pricing" in 2002. The Real Estate Settlement Procedures Act (RESPA) "requires transaction by transaction pricing, " said a Washington lawyer. "You can"t overcharge some of your customers while undercharging others.You can"t overcharge anybody."
Central Pacific, though admitting no breach of the law as part of its settlement, agreed to make refunds to overcharged borrowers, pay $50,000 to the federal government, and to cease its credit report pricing practices.
The settlement agreement with ARVIDA/JMB represents a "shot across the bow" against homebuilders on several commonplace settlement practices. ARVIDA/JMB was accused by HUD of charging new home buyers a flat fee -- 1.5 percent of the total purchase price of the home -- to cover certain "identified and unidentified" closing costs. ARVIDA, according to the settlement documents, collected the fees "without regard to whether ARVIDA"s actual closing costs totalled 1.5 percent of the purchase price" -- in effect, pocketing the difference when actual costs were lower.
HUD accused ARVIDA of charging still another illegal fee -- a financial penalty paid by home buyers who chose to use an independent title insurance agency to close the purchase transaction, rather than ARVIDA"s own, affiliated title agency. Though many builders strongly encourage buyers to use their highly-profitable in-house title agencies and mortgage subsidiaries, RESPA specifically prohibits the "required use" of any title agency.
ARVIDA admitted no wrongdoing as part of its settlement, but is now making refunds to affected customers, mailing out letters to customers informing them that "We have determined that you were among certain buyers who may have been charged an unnecessary closing fee."
The settlement agreements negotiated by HUD with title industry giants First American Corp. and Transamerica Corp. produced the heftiest financial payouts -- $1.25 million and $613,000 respectively. Both were in connection with alleged schemes providing banks with free or reduced-cost flood zone determination and tax-service reviews of their mortgage portfolios in exchange for referrals of future flood determination and tax service business on new loans. Thirty-eight banks and credit unions benefited from the alleged referral arrangements, and agreed to pay up to $7,500 apiece to settle the charges.
Look for more -- a lot more -- of the same as new investigations take shape in 2002.
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