Federal Deposit
Insurance Corporation

Question 1. Whether a lender may "markup" a third party vendor's fees for the purpose of making a profit when no additional services are provided by the lender and thereby disclose the "marked-up" fee on the HUD-1, or whether the lender is limited to charging/disclosing its actual cost in obtaining the service?

RESPONSE:
A lender that purchases third party vendor services for purposes of closing a federally related mortgage loan may not, under RESPA, mark up the third party vendor fees for purposes of making a profit. HUD has consistently advised that where lenders or others charge consumers marked-up prices for services performed by third party providers without performing any additional services, such charges constitute "splits of fees" or "unearned fees" in violation of Section 8(b) of RESPA.

Section 8(b) of RESPA provides that "[n]o person shall give and no person shall accept any portion ... of any charge made or received for the rendering of a real estate settlement service ... other than for services actually performed." 12 USC 2607(b). The RESPA regulations repeat this prohibition under 24 CFR 3500.14(c), adding that "[a] charge by a person for which no or nominal services are performed... is an unearned fee and violates this section." Under these provisions, any settlement service provider that charges a fee as a "mark-up" of a fee for a third party's services in a covered transaction without itself rendering services or furnishing goods in exchange for that portion of the fee would violate RESPA's prohibitions against split or unearned fees.

This has been a long-standing position of HUD, and was most recently articulated in a preamble of a final rule issued with a statement of policy on computerized loan origination systems, on June 7, 1996 (61 Fed. Reg. 29238).¹ That publication states, in part:

HUD believes that Section 8(b) of the statute and the legislative history make it clear that no person is allowed to receive "any portion" of charges for settlement services, except for services actually performed. This provision of Section 8(b) could apply in a number of situations: (1) where one settlement service provider receives an unearned fee from another provider; (2) where one settlement service provider charges the consumer for third party services and retains an unearned fee from the payment received; or (3) where one settlement service provider accepts a portion of a charge (including 100% of the charge) for other than services actually performed.

(61 FR 29238, 29249).

The HUD-1 and HUD-1A Settlement Statement must reflect the amount actually paid to the third party settlement service provider-that is, the actual amount of the fee-in compensation for the third party services. This is set forth in the General Instructions to the HUD- 1, made applicable in 24 CFR 3500.8(b) and found in Appendix A to part 3500, which state that the settlement statement shall "itemize all charges imposed upon the Borrower and the Seller by the Lender... and any other charges which either the Borrower or the Seller will pay for at settlement...The names of the recipients of the settlement charges in section L...should be included in the blank lines." (Emphasis added.) The instructions for Section L pertaining to settlement charges further clarify that "[f]or all items except for those paid to and retained by the Lender, the name of the person or firm ultimately receiving the payment should be shown." Pursuant to these provisions, charges for third party services must be separated and specifically itemized.

If the lender charges additional amounts for performing actual services in connection with a particular settlement service purchased from a third party (for example, processing and evaluating an applicant's credit report purchased from a third party credit reporting company), those amounts cannot simply be added to the fee paid to the third party provider for disclosure purposes. Rather, such charges by lenders for processing or other services must be broken out from the particular third party fee and specifically identified and disclosed in the line item reserved for processing or origination costs (line 801) or, in accordance with section 3500.9(a)(4), may be inserted in blank spaces.

Question 2. In the context of processing a residential loan application to which RESPA applies and where the lender selects a credit reporting company, does the phrase "the cost of the credit report" (in Regulation X, 24 CFR section 3500, Appendix A, Instructions for HUD-1, line 804) mean the credit reporting company's charge to the lender?

RESPONSE:
Yes. As per HUD's Response to Question 1, the actual fees paid to third-party settlement service providers for goods furnished or services actually provided must be disclosed and separated from any charges imposed by the lender.

Question 3. Whether, if a lender performs actual settlement services (for example, evaluation of a borrower's creditworthiness) additional to those provided by third party vendors, may the lender charge the borrower for both the actual services provided by the lender and those provided by the third-party vendor?

RESPONSE:
Yes. Under RESPA rules and regulations, a lender may charge borrowers for goods actually furnished and services actually performed. See 24 CFR 3500.14(g)(1)(iv). Also, pursuant to the unearned fee prohibitions of Section 8, "[a] charge by a person for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee and violates this section." 24 CFR 3500.14(c). Lenders must, therefore, assure that when they charge fees in addition to fees for services performed by third party vendors, lenders must provide services to justify any additional fees, and such services must be actual, necessary and distinct from the primary services provided by that lender and by such third party vendors. 24 CFR 3500.14(c), 3500.14(g)(3). As per HUD's Response to Question 1, the actual fees paid to third party settlement service providers for goods or services actually provided must be specifically disclosed and separated from any charges imposed by the lender.

Question 4. In the context of processing a residential loan application to which RESPA applies and where the lender selects an appraiser from its approved list, does the phrase "appraisal fees" (in Regulation X, 24 CFR section 3500, Appendix A, Instructions for HUD- 1, line 803) mean the appraiser's charge to the lender?

RESPONSE:
Yes. The disclosure of the appraisal fee in the settlement statement should only include the appraiser's charge to the lender and should be separately disclosed.

Question 5. Whether, if a lender performs actual settlement services (for example, assessment of a property valuation) additional to those provided by third-party vendors, may the lender charge the borrower for both the actual services provided by the lender and those provided by the third party vendor?

RESPONSE:
Yes. Under RESPA rules and regulations, a lender may charge borrowers for goods actually furnished and services actually performed. See 24 CFR 3500.14(g)(1)(iv). Lenders must assure that they provide services to justify any additional fees, and such services must be actual, necessary and distinct from the primary services provided by that lender. 24 CFR 3500.14(c), 3500.14(g)(3). As indicated in the response to Question 1, the actual fees paid to third party settlement service providers for goods or services actually provided must be specifically disclosed and separated from any charges imposed by the lender.

* Letter from Gail Laster, General Counsel (HUD) dated December 10, 1999 to Honorable Bruce Mitchell, County Superior Court, Los Angeles, CA.