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Illegal Referral Fees Cost Lenders $2 Million

Overcharging for credit reports among violations that led to settlements with HUD

November 26, 2001


The Department of Housing and Urban Development (HUD) announced Friday that it recently entered into several settlement agreements resulting in $2.25 million in payments for violations involving illegal kickbacks and referrals. The settlements are part of HUD's initiative on enforcement of the Real Estate Settlement Procedures Act (RESPA). The settlements include consumer housing counseling and education, refunds to homebuyers, and payments to the government.

RESPA requires that lenders provide disclosures of settlement costs to homebuyers. RESPA also prohibits kickbacks and referral fees among settlement service providers and prohibits the charging of unearned fees for settlement services.

Last month, HUD said it would step up funding for enforcement of RESPA. Noting that it fielded more than 900 RESPA-related complaints last year, HUD indicated that a new $1.25 million contract will enable it to investigate the complaints and add personnel to handle cases & enhance coordination between HUD and the major Federal banking regulators.

Central Pacific Mortgage Corp. settled with HUD for a $50,000 payment and a deposit of $35,000 to be applied to any refunds or penalties that may be required by the state of California. The settlement was the result of a tip from California's Department of Corporations, which had discovered the potential violations during routine state audits. HUD sampled 21 of Central Pacific's offices nationwide and determined that the company had overcharged (and undercharged) for credit report fees. HUD said that the upcharges were in violation of section 8(b) which prohibits charging a settlement service fee when no services are provided.

The practice of upcharging is not so uncommon; one Texas mortgage broker, who spoke on the condition of anonymity, said he routinely upcharges for all of his credit reports.

Another lender to settle with HUD was Conseco Finance Corp. (formerly Green Tree). In exchange for the referral of retail loans to buyers in land/home combination transactions, Conseco's commercial loan division funded manufactured home dealers' floor plan inventories at reduced interest rates. HUD concluded that such volume-based referrals for discounts violated Section 8(a) of RESPA, which prohibits the giving or receiving a thing of value for the referral of business. The settlement agreement provides that Conseco will cease and not reinstate these programs, and pay $190,000 to the U.S. Treasury.

In the third quarter of this year, Conseco originated more than $3 billion in loans.

HUD Secretary Mel Martinez said, "these cases demonstrate HUD's determination to enforce RESPA and to stop illegal referral fees and unearned fees that may ultimately raise the price that unsuspecting families pay for their homes."

HUD says that so far this year, it has entered into 38 settlements with lenders for violations of the anti-kickback provisions of Section 8 of RESPA. The violations involve the referral of flood and tax servicing in exchange for free review of existing loan portfolios by tax and flood determination servicers. As part of these settlements, $127,000 has been contributed to 30 consumer housing counseling/education agencies.

Secretary Martinez added that HUD will continue enforcement action against these abuses.


Details of Lender Settlements

Bank of Newport Middletown, RI $7,500
Salem Five Cents Savings Bank Salem, MA $15,000
Central Cooperative Bank Somerville, MA $3,750
Cambridge Trust Company Cambridge, MA $1,000
Fairfield County Savings Bank Norwalk, CT $1,000
Century Bank & Trust Co. Medford, MA $3,750
Clinton Savings Bank Clinton, MA $3,750
Abington Savings Bank Abington, MA $3,750
Bay Finance Co. Webster, MA $1,000
Bay State Federal Savings Bank Brookline, MA $3,750
Brockton Credit Union Brockton, MA $7,500
Brotherhood Credit Union Lynn, MA $1,000
Cambridgeport Bank (branch) Brighton, MA $7,500
Community Credit Union of Lynn Lynn, MA $1,000
Crescent Credit Union Brockton, MA $3,750
Everett Co-Operative Bank Everett, MA $1,000
First Essex Bank Lawrence, MA $3,750
Foxboro Federal Savings & Loan Foxboro, MA $1,000
Hingham Institution for Savings Hingham, MA $1,000
Leader Mortgage Co. Arlington, MA $1,000
Leominster Credit Union Leomister, MA $5,000
MBTA Employees Credit Union South Boston, MA $1,000
Milford Federal Savings & Loan Milford, MA $7,500
Mt. Washington Co-Operative South Bank Boston, MA $1,000
Northern Bank and Trust Co. Woburn, MA $1,000
Rockland Federal Credit Union Rockland, MA $3,750
Taunton Federal Credit Union Taunton, MA $1,000
Telephone Worker Credit Union Boston, MA $1,000
Webster First Federal Credit Union Webster, MA $3,750
Woronoco Savings Bank Westfield, MA $7,500
Barre Savings Bank Barre, MA $1,000
Digital Federal Credit Union Maynard, MA $3,750
St. Anne's Credit Union of Fall River Fall River, MA $3,750
Chelsea Groton Savings Bank Norwich, CT $3,750
Fall River Municipal Employees Credit Union Fall River, MA $1,000
Medway Co-Operative Bank Medway, MA $1,000
RTN Federal Credit Union Waltham, MA $3,750
Members Plus Credit Union Somerville, MA $3,750

Sam Garcia has been in mortgage lending since 1980, and is managing editor of MortgageDaily.com. He also owns and operates CloseNow.com, a real estate portal site.

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