Practical Applications Business Brokerage CE # RE

Transcription

1 Practical Applications Business Brokerage CE # RE By Dr. Cindy Weber Approved for: 3 Hours General Continuing Education Credit ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 1

2 Table of Contents Chapter 1: What s with Nevada Business Brokerage?...3 Who is a business broker?...3 What is a business?...4 Business transactions not handled by a business broker permit holder...4 Changes to engage in business as a business broker...5 What do I need?...6 Chapter 2: What s new legally?...8 What is an emergency regulation?...8 NRS 233B Emergency Regulation E645-01?...10 Chapter 3: What business broker case law has emerged?...12 Case 1: Unlicensed Business Broker...12 Case 2: Unlicensed Advisors and Finders...13 Chapter 4: What are the other states up to with business brokerage licensing?...15 Chapter 5: How do I keep up with this topic?...16 Commission Meetings...16 Real Estate Division Web site...16 Nevada Association of Realtors Web site...16 Chapter 6: RESPA Update...18 RESPA case...33 Regulations Z Disclosure Requirements...34 Nevada Law and Reference Guide...37 Trust Fund Accounting and Record Keeping Guide for Nevada Brokers...38 Quiz Answers...39 Web Links...40 Comment Page...41 In accordance with the Department of Business and Industry, Real Estate Division; the Real Estate Commission neither approves nor endorses any of the forms used in this class with the exception of those prescribed by State or Federal law. ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 2

3 Business Brokerage Chapter 1 What s with Nevada Business Brokerage? Course Learning Goals: 1. Characterize a business broker. 2. Name situations itemized in the phrase engage in business as a business broker. 3. Separate specific businesses exempted from Nevada business brokerage law in the Nevada definition of existing enterprise. 4. Refer to current case law for practical assistance. 5. Demonstrate familiarity with an emergency regulation. 6. Illustrate effective calculations in practical situations. 7. Utilize stated resources to keep current with business brokerage. Who is a business broker? A Web search of the term business broker produces an early hit by the online encyclopedia, Wikipedia. Other major hits include primarily advertisements by companies offering business broker services and trade organizations for business brokers. Wikipedia.com defines a business broker as 1 a person or firm that acts as an intermediary between sellers and buyers of businesses. Nevada didn t create such a concise definition of a business broker. NRS in Nevada law defines a business broker as a person who, while acting as a real estate broker, real estate broker-salesman or real estate salesman for another and for compensation or with the intention or expectation of receiving compensation: 1. Sells, exchanges, options or purchases a business; 2. Negotiates or offers, attempts or agrees to negotiate the sale, exchange, option or purchase of a business; or 3. Lists or solicits prospective purchasers of a business. 1 Retrieved February 25, 2007, from Wikipedia Web site: ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 3

4 Business Brokerage What is a business? Hard-copy and online dictionaries alike have not concisely established a single line definition of a business and uses of the term business. According to these sources, the term business can be used as a noun, an adjective and an idiom (a phrase with an unpredictable meaning). Nevada law offers two separate definitions of a business. Unlike the business definition found in Nevada s 2 Title 32 - REVENUE AND TAXATION law, which focuses on profits and the use of IRS form 1040 for its business definition; Nevada Real Estate Licensee s law NRS defines a business as the tangible assets and goodwill of an existing enterprise. What business transactions do not need to be handled by a business broker permit holder? At Nevada Commission meetings that addressed the business brokerage regulations, the Commissioners and interested parties found it challenging to distinguish between types of businesses that should be covered and those that should be exempt from coverage by the new business brokerage permit legislation and regulations. The intent of this regulation was to exclude businesses that would not have value if they were not transferred with the real property. These final exemptions can be found in NAC 645, in the definition of an existing enterprise. Per the emergency regulation, they include the following: The sales of real property concurrently with a related business where more than 50% of the income stream from the related business is directly derived from the use of that particular property, including but not limited to: o Tenant occupancy transfers of lease and/or management agreements, o Storage facilities, o Hotels, o Motels, o Ranches, and/or o Other businesses that would have no value without a concurrent transfer of the real property. 2 NRS defines a business. ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 4

5 Business Brokerage What changes were made to the definition, engage in business as a business broker? The regulation interpreting the phrase, engage in business as a business broker was changed by an emergency regulation in an attempt to 3 remove any question that any transaction involving real estate does not need a business broker permit. IRS form 8594 was removed, requiring a business broker permit whenever 2 intangible assets and goodwill are part of the value of the transaction. The Commission s rationale for the change was to 2 specifically exclude real estate in order to effectively eliminate investment property from the definition, and further, by excluding capital gains from the percentage determination, it removes the potential for very large income variations due to a sale of an asset. Also rental income on an individual return is reported on Schedule E, so that exclusion is not referenced. It focuses on the FACT of a business rather than the tax attribute of the transactional elements. Tax advice is not rendered; as the determination is based upon past filings, not future events. The definition captures both an asset purchase and a stock partnership. Membership interest sale and excludes the traditional seal of investment real estate. 3 Quoted from hand-out at February 6, 2007 adoption hearing, during Nevada Real Estate Commission hearing. ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 5

6 Business Brokerage If I don t need a business broker permit, because of the new exemptions what do I need? As a reminder, business brokers needed a real estate license to handle transactions, before the business broker permit was created because of NRS As the Commission creates exemptions in the regulations, it is easy to forget the basics. Nevada Supporting Statute: NRS Real estate broker defined. 1. Real estate broker means a person who, for another and for compensation or with the intention or expectation of receiving compensation: (a) Sells, exchanges, options, purchases, rents or leases, or negotiates or offers, attempts or agrees to negotiate the sale, exchange, option, purchase, rental or lease of, or lists or solicits prospective purchasers, lessees or renters of, any real estate or the improvements thereon or any modular homes, used manufactured homes, used mobile homes or other housing offered or conveyed with any interest in real estate; (b) Engages in or offers to engage in the business of claiming, demanding, charging, receiving, collecting or contracting for the collection of an advance fee in connection with any employment undertaken to promote the sale or lease of business opportunities or real estate by advance fee listing advertising or other offerings to sell, lease, exchange or rent property; (c) Engages in or offers to engage in the business of property management; or (d) Engages in or offers to engage in the business of business brokerage. NRS Real estate broker-salesman defined. 1. Within the meaning of this chapter, a real estate broker-salesman is any person who holds a real estate broker s license, or who has passed the real estate broker s examination, but who, as an employee or as an independent contractor, for compensation or otherwise, is associated with: (a) A licensed real estate broker in the capacity of a salesman, to do or to deal in any act, acts or transactions included within the definition of a real estate broker in NRS ; or NRS Real estate salesman defined. Within the meaning of this chapter, a real estate salesman is any person who, as an employee or as an independent contractor, is associated with a licensed real estate broker or registered owner-developer to do or to deal in any act, acts or transactions set out or comprehended by the definition of a real estate broker in NRS , for a compensation or otherwise. ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 6

7 Business Brokerage Quiz 1 (Answers can be found at the end of this course.) 1. Nevada defines a business broker as a person who, while acting as a real estate broker, real estate broker-salesman or real estate salesman for another and for compensation or with the intention or expectation of receiving compensation: A. Sells, exchanges, options or purchases a business. B. Negotiates or offers, attempts or agrees to negotiate the sale, exchange, option or purchase of a business. C. Lists or solicits prospective purchasers of a business. D. All of the above. 2. Licensee Mansour is the licensee representing the owner in the sale of The Florida Hotel s real and personal property in Elko. Does Mansour need to be a business broker permit holder? A. No, licensees representing the sale of hotels and motels are exempt because they are specifically listed in the existing enterprise definition as an exemption. B. Yes, because all business opportunity sales need representation by a business broker permit holder. C. No, only an attorney can represent hotel owners. D. Yes, if the goodwill value is greater than the real property value of the hotel. 3. Licensee Deborah is negotiating the sale of the Kietzke Lane motel in Reno. The property will be sold as a business opportunity, and will not include any real property. Deborah is not a business broker permit holder, but her broker does hold a permit. Who should represent the motel owner? A. Deborah. B. Deborah s broker. C. Neither. D. Either Deborah or Deborah s broker. ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 7

8 Business Brokerage What s new legally? Chapter 2 Back in 2007, an Emergency Regulation was adopted by the Real Estate Commission to clarify a misunderstanding in the Business Broker law in NRS and NAC chapters 645. What is an emergency regulation? Per NRS 233B.0613, if an agency determines that an emergency exists, the agency needs to submit a written statement describing the reasons for the determination to the Governor. The Nevada Real Estate Commission, at its meeting on February 6, 2007, adopted an emergency regulation by unanimous vote because they felt that a misunderstanding existed in the real estate industry in Nevada dealing with the business broker law. According to the Commissioners, because the misunderstanding created a hardship to real estate licensees they deemed it necessary to adopt the emergency regulation to clarify the misunderstanding. An emergency regulation does not require a public workshop or a 30-day notice. It is only valid for 120 days, and must be signed by the Governor. It becomes effective immediately upon its filing in the Office of the Secretary of State. The regulation may be adopted by this emergency procedure only once. The Nevada Real Estate Commission s emergency regulation became effective on February 14, 2007, and will stay effective for 120 days. During that time frame, the Commission will have the opportunity to try out the effectiveness of the emergency regulation, go through the formal workshop and notice process and make any needed changes to a new, permanent regulation. The emergency regulation will expire automatically on the effective date of the new temporary or permanent regulation. ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 8

9 Business Brokerage Nevada Supporting Statute: NRS 233B.0613 Emergency regulation. 1. If an agency determines that an emergency exists, it shall submit to the Governor a written statement of the emergency which sets forth the reasons for the determination. If the Governor endorses the statement of the emergency by written endorsement at the end of the full text of the statement of emergency on the original copy of a proposed regulation, the regulation may be adopted and become effective immediately upon its being filed in the Office of the Secretary of State pursuant to subsection 3 of NRS 233B.070. The statement of the emergency endorsed by the Governor must be included as a part of the regulation for all purposes. A regulation so adopted may be effective for a period of not longer than 120 days. A regulation may be adopted by this emergency procedure only once. 2. If an agency adopts, after providing notice and the opportunity for a hearing as required in this chapter, a permanent or temporary regulation which becomes effective and is substantially identical to its effective emergency regulation, the emergency regulation expires automatically on the effective date of the temporary or permanent regulation. ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 9

10 Business Brokerage Emergency Regulation E ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 10

11 Business Brokerage ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 11

12 Business Brokerage Chapter 3 What business broker case law has emerged? Case 1: Unlicensed Business Broker Chapin v. Neuhoff Broadcasting-Grand Island, Inc., 684 N.W.2d 588 (2004) Nebraska Supreme Court 4 Facts: Chapin, unlicensed, acted as an agent in connection with the sale of a radio station. The radio station consisted of the business enterprise and its assets including a tower, a studio and a parcel of land where the transmitting facilities and tower were located. Chapin testified that he delivered documents back and forth and negotiated the sales price of the transaction. After the closing, Chapin filed suit against Neuhoff Broadcasting to recover a fee for negotiating the sale to Waitt Media. Neuhoff Broadcasting refused to pay alleging that as a matter of law, Chapin was barred from recovering a brokerage fee since part of the sale involved real estate and to sell real estate in the State of Nebraska one must hold a license issued by the State Real Estate Commission. A jury awarded Chapin $66,000 and Neuhoff Broadcasting appealed. Issue: Whether the seller of a business enterprise, part of which includes real estate, must pay a commission to a business broker when the business broker does not hold a real estate license issued by the Nebraska State Real Estate Commission. Held: In this case the Supreme Court held that the seller of a business enterprise was not required to pay any commission to a business broker if real estate is involved. The Nebraska Supreme Court recognized that some states allow a business broker to recover a commission if the real estate component is merely incidental to the sale of the business. The Legislature identified certain exceptions to the license law, and because business brokers negotiating the sale of an ongoing business, which incidentally included real estate, were not listed as an exception, the Court would not create one. 4 Retrieved February 25, 2007, from ARELLO Web site: ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 12

13 Business Brokerage Case 2: Unlicensed Advisors and Finders 5 G. C. Timmis & Company v. Guardian Alarm Company, 662 N.W.2d 710 (2003) Supreme Court of Michigan Facts: Timmis is an investments advisor, but not a licensed real estate broker. Timmis entered into a contract with Guardian Alarm Company to assist Guardian in locating other alarm businesses. Guardian agreed to pay Timmis for each business purchased. Timmis assisted Guardian in purchasing alarm contracts from another firm. When Guardian wouldn t pay, Timmis sued. Guardian moved to dismiss on the grounds that Timmis wasn t licensed as a real estate broker. The court denied the motion. The Court of Appeals, however, sided with Guardian and Timmis appealed. Issue: Whether one who acts as an advisor for the purchase of businesses must be licensed to receive payment. Held: Reversed and remanded. 6 The Real Estate Brokers Act requires brokers who act for others in the sale of business opportunities or business goodwill to be licensed as real estate brokers. The Supreme Court found that because the Real Estate Brokers Act mostly deals with agents involved in real estate transactions, the business opportunities section of the statute must be read and understood in the real estate context of the statute. Here, Timmis would be required to be licensed only if the deal it put together involved the sale or transfer of real property. Because the record of case below did not indicate whether the deal Timmis arranged for Guardian involved real estate, the case was remanded to the trial court. Further, the Supreme Court charged the trial court with determining whether Timmis acted as a broker or merely a finder. If Timmis bought or negotiated the purchase of real estate on behalf of Guardian, it would be barred from recovery because it was unlicensed. If Timmis was merely a finder, it could recover. 5 Retrieved March 1, 2007, from ARELLO Web site 6 Author researched The Real Estate Brokers Act. Linked to Canadian Real Estate Brokerage law, many states also refer to their real estate licensing law as the The Real Estate Brokers Act. Nevada s NRS and NAC 645 paragons The Real Estate Brokers Act ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 13

14 Business Brokerage 1. An Emergency Regulation: Quiz 2 (Answers can be found at the end of this course.) a. Is a permanent regulation. b. Does not require public notice and workshops. c. Will stay effective for 120 days. d. Both B & C. 2. Per the Commission s decision, business opportunity transactions that were under contract on January 1, 2007 needed to be handled by: a. A business broker permit holder. b. A Nevada real estate licensee. c. Only a Nevada real estate broker. d. The owner of the business opportunity. 3. New business broker regulations will: a. Require an additional emergency regulation. b. Require any proposed regulations to come before the public in workshops and a public hearing. c. Be codified by the Nevada Real Estate Commission. d. Be codified by the Nevada Real Estate Division. 4. The definition engaging in business as a business broker includes: a. Selling, exchanging, optioning or purchasing (including the sale, exchange, optioning or purchasing of individual assets of the business or the sale of stock, partnership interest or membership in an LLC). b. Negotiating or offering, attempting or agreeing to negotiate the sale, exchange, option or purchase of. c. Both a and b. ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 14

15 Business Brokerage Chapter 4 What are the other states up to with business brokerage licensing? 7 In all human activities, practically in all matters of business, times of stress and difficulty are seasons of opportunity when the seeds of progress are sown. Thomas F. Woodlock, Business brokerage designations: In most states, business brokers are licensed solely under the umbrella of a real estate license. A few states require an additional designation to perform any commercial real estate activities. During a phone survey of real estate licensing agencies, additional licensing requirements through offices such as the Secretary of State, etc. were also mentioned as possible state requirements. Arizona was the only state who acknowledged having an additional business broker designation requirement for their licensees. Specifics about this designation will be added as it becomes discovered. 7 Thomas F Woodlock was the former editor of The Wall Street Journal. ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 15

16 Business Brokerage Chapter 5 How do I keep up with this topic? Commission Meetings Commission meeting are a great first-hand source of information! In addition to keeping licensees abreast of the changing environment, regulations and statutes; they are also an enlightening glimpse into the potential pitfalls that befall an inattentive licensee. Real Estate Division Web site The Real Estate Division Web site posts upcoming hearings, workshops, updated disclosure forms, Commission meetings, etc. on their comprehensive Web site. Nevada Association of Realtors Web site The state and local Association of Realtors Web sites are a good source of upcoming issues that may turn into Senate Bills (SB), Assembly Bills (AB), and Regulations in the near future. The NVAR also s a newsletter to keep their members up-to-date with their endeavors. ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 16

17 Business Brokerage Quiz 3 Profit is the ignition system of our economic engine. 8 Charles Sawyer. 1. Following recasting of his restaurant s financial statements, restaurant owner Jake Pilling showed net income of $18,000 at years end. Business broker permit holder Cathy Doyan found a buyer for Mrs. Pilling s restaurant, and negotiated a purchase price of $86,000. After paying Ms. Doyan s 10% commission, and assuming the net income stays constant; approximately what percentage of annual revenue will the buyer earn on his investment the first year? A) 21% B) 2% C) 23% D) 77% 2. Business buyer Mr. Black has earned a greater than inflation 9% on his investment. This totaled $27,000 his first year. After expenses, what was the price of Mr. Black s new business venture? A) $300,000 B) $400,000 C) $100,000 D) $2,430 8 Charles Sawyer was United States Secretary of Commerce for President Truman. ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 17

18 Chapter 6: RESPA Update On January 1, 2010, HUD will require that lenders and mortgage brokers provide consumers with a standard Good Faith Estimate (GFE) that clearly discloses key loan terms and closing costs. Closing agents will also be required to provide borrowers a new HUD-1 Settlement Statement that clearly compares consumers' final and estimated costs. The new RESPA rule became effective on January 16, 2009, but provided a one-year transition period for the mortgage industry to incorporate these changes. HUD will continue to work with the mortgage industry during this period, including providing a comprehensive set of frequently asked questions (FAQs) on its website. By improving the disclosures borrowers receive when applying for a mortgage, and by promoting comparison shopping, HUD believes its new RESPA regulation will save consumers an average of nearly $700 in mortgage costs. HUD Supplied RESPA Questions and Answers Applicable to Real Estate Licensees are listed below. 6) Q: How should payments by the seller or real estate agent that are for settlement services included on the GFE be shown on the HUD-1? A: If a seller or real estate agent pays for a charge that was included on the GFE, the charges should be listed in the borrower's column, with an offsetting credit reported in Lines of the HUD-1, identifying the party paying the charge. For a seller-paid charge, the charge should also be listed in Lines For a charge paid by the real estate agent, the name of the person paying the charge must also be listed. 10) Q: May an addendum be added to the HUD-1 to list additional fees and other information? ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 18

19 A: Yes, an additional page may be attached to the HUD-1 to add sequentially numbered lines as needed to accommodate the complete listing of all items required to be shown on the HUD-1, and for the purpose of including customary recitals and information used locally in real estate settlements (for example, breakdown of payoff figures, a breakdown of borrower s total monthly mortgage payments, check disbursements, a statement indicating receipt of funds, applicable special stipulations between buyer and seller, and the date funds are transferred). 4) Q: May a real estate agent rebate a portion of the agent s commission to the borrower? If so, how should the rebate be listed on the HUD-1? A: Yes, real estate agents may rebate a portion of the agent s commission to the borrower in a real estate transaction. The rebate must be listed as a credit on page 1 of the HUD-1 in Lines and the name of the party giving the credit must be identified. Real estate agent or broker commission rebates to borrowers do not violate Section 8 of RESPA as long as no part of the commission rebate is tied to a referral of business. HUD series 1) Q: Where do I put the percentage of commission to the real estate agents on the HUD-1? A: The percentage used to compute the sales commission has been removed from the HUD-1 to better reflect current practices in the real estate industry. The total amount of the commission to each real estate broker or agent must be shown on Lines 701 and 702. The amount of the commissions disbursed at settlement must be shown inside the columns on Line ) Q: If a real estate agent is retaining some of the borrower s earnest money deposit as part of the agent's commission, is that amount listed in the 700-series on the HUD-1? A: Yes, if a real estate agent is holding the borrower s earnest money deposit, the amount of the earnest money deposit applied towards the commission and the party holding the earnest money must be identified on Line 704 of the HUD-1 as Paid Outside of Closing or P.O.C. Only the amount of the commission disbursed at settlement is entered in the columns on Line 703. ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 19

20 This page is located on the U.S. Department of Housing and Urban Development's Homes and Communities Web site at FAQs About RESPA for Industry Scope of RESPA 1. What kinds of transactions are covered under RESPA? Information by State Print version Transactions involving a federally related mortgage loan, which includes most loans secured by a lien (first or subordinate position) on residential property. This includes: home purchase loans, refinances, lender approved assumptions, property improvement loans, equity lines of credit, and reverse mortgages. 2. What types of transactions are generally not covered? The following are kinds of transactions that are not covered: an all cash sale, a sale where the individual home seller takes back the mortgage, a rental property transaction or other business purpose transaction. 3. Is a "time share" a covered transaction under RESPA? Yes, if the lender's interest is secured by a lien on residential property. 4. Is a loan secured by a condominium unit or a cooperative share a covered transaction under RESPA? Yes, as long the units are not used for business purposes. 5. Is a loan secured by a manufactured home (mobile home) covered transaction under RESPA? Yes, but only if the manufactured home is located on real property on which the lender's interest is secured by a lien. 6. Does a federally related mortgage loan only involve FHA, VA or other government sponsored loans? No, RESPA covers most conventional loans too. See the statute or regulations for the definition of a federally related mortgage loan. ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 20

21 7. Are home equity loans covered under RESPA? Yes, home equity loans secured by residential property are covered. 8. How does the coverage of home equity loans and subordinate lien loans differ from other RESPA covered loans? If the loan involves an open-end line of credit, providing the disclosures required by Regulation Z satisfies the RESPA good faith estimate and the HUD-1 or HUD-1A requirements. Both subordinate lien loans and open-end lines of credit (home equity loans) in first lien position are exempted from the loan servicing requirements. 9. Are construction loans covered under RESPA? No. Unless: 1) the loan is used as, or may be converted to permanent financing by the same lender; or 2) the lender issues a commitment for permanent financing; or 3) the loan is used to finance a transfer of title to the first user; or 4) the loan is for a term of two years or more, unless it is to a bona fide builder. 10. If a construction loan is covered under RESPA, how do you account for construction loan closing on the HUD-1 if funds will be held back by the lender until performance? List the sales price of the land on Line 204, the construction cost on Line 105 (Line 101 is left blank) and the amount of the loan on line 102. The remainder of the form should be completed taking into account adjustments and charges related to the temporary and permanent financing which are known at the date of the settlement. 11. When the loan transaction includes an option for the borrower to obtain additional funds in the future merely by signing a note for the new amount, must RESPA's disclosure requirements be followed for the future advance of additional funds? Yes, because there is a new note. This is consistent with Truth in Lending Act provisions. 12. If a loan is sold within 1-7 days of closing to another lender, does the sale of that loan fall within RESPA's coverage? The sale of a loan after the original funding of the loan at settlement is a secondary market transaction. Such a sale is exempt from RESPA coverage as a secondary market transaction. However, any transfer of ownership and/or servicing rights is subject to RESPA's requirements in Section Does the exemption from RESPA for the sale of a land parcel of at least 25 acres apply even if there are 2 homes on the property? Yes, as long as the property is a single parcel. ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 21

22 14. Can a credit agency provide a lender with a dedicated printer to expedite communication between the credit agency and the lender? Yes, provided the printer can only be used for communication with the lender and not for general use. If it's for general use it may be considered payment for the referral of business. 15. Can a flood zone certification company examine a lender's existing loan portfolio for free or at a reduced rate, in exchange for the lender sending the company future business? No. Flood zone certification is a covered settlement service (24 CFR ), therefore RESPA would apply to agreements by companies or persons providing portfolio reviews. Providing free or reduced reviews is a thing of value. Providing this service in exchange for referrals of future flood insurance business would violate Section 8(a) of RESPA which provides that "[n]o person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person." 16. Can a lender set up a contest for real estate agents under which the agent who provides the lender with the most business will win a trip to Hawaii? No. Under RESPA, the trip itself, and even the opportunity to win the trip, would be a thing of value given in exchange for the referral of business. 17. Can a lender give a borrower an incentive, such as a chance to win a trip or a rebate, for doing business with the lender? RESPA does not prohibit a lender or other settlement provider from giving the borrower an incentive for doing business with it as long as the incentive is not based on the borrower referring business to the lender. 18. Can a mortgage banker and a real estate broker advertise their services together, for example, on the same brochure or newspaper advertisement? Nothing in RESPA prevents joint advertising. However, if one party is paying less than a pro-rata share for the brochure or advertisement, there could be a RESPA violation. 19. Can a lender give a real estate agent note pads with the lender's name on it? Yes. Such note pads with the lender's name on it would be allowable as normal promotional items. However, if the lender gives the real estate agent note pads with the real estate agent's name on it for the agent to use to market clients for its real estate business, then the note pads could be a thing of value given for referral of loan business, because it defrays a marketing expense that the real estate agent would otherwise incur. 20. Can a mortgage broker be compensated for referring business to a lender that is unrelated to a real estate transaction, such as automobile loans? Yes, provided that the compensation is exclusively related to the automobile loan and does not represent, in whole or in part, compensation for the referral of real estate business, and no lien is placed on a residence to secure the auto loan. ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 22

23 Affiliated businesses 21. If a lender refers a consumer to more than one of its affiliated settlement service providers, does the lender have to provide a separate affiliated business arrangement disclosure statement for each referral? No, the lender can use one disclosure statement. 22. If a lender refers a consumer to a settlement service provider with which it does not have an affiliate relationship, as defined by RESPA, does the lender still have to provide the affiliated business arrangement disclosure statement? No, the affiliated business arrangement disclosure statement is only for affiliates. 23. When a principal in a law firm is a member of the board of a lender and the lender refers RESPA covered settlement service business to the firm, but not personally to the principal, must the relationship be disclosed? Yes. When the lender refers the borrower to the law firm, the borrower must be given an Affiliated Business Arrangement Disclosure Statement. Fee splitting 24. Can a lender charge a borrower a fee for sending documents via courier and disclose it on the HUD-1 where in fact the borrower stops by the lender's office and picks up the documents instead? No, because the charge for the courier service does not represent a charge for work actually performed which can be imposed on the borrower. 25. Can a lender collect from the borrower an appraisal fee of $200, listing the fee as such on the HUD-1, yet pay an independent appraiser $175 and collect the $25 difference? No, the lender may only collect $175 as the actual charge. It is a violation of Section 8 (b) for any person to accept a split of a fee where services are not performed. 26. Can a lender charge a borrower at closing a one time charge for setting up an account with a tax service to arrange for tax payments? Yes, the lender may collect a reasonable charge for the service provided. 27. Can a title company, which has the only convenient closing room in the area, provide it to any interested party at $100 per closing? Yes, provided the charge is reasonably related to the value of the space. Specific forms and consumer information 28. Where a mortgage broker is used, is it the mortgage broker's responsibility to provide the Good Faith Estimate (GFE) to consumers, or is that the lender's responsibility? If the mortgage broker is not an exclusive agent of the lender, the broker should provide a GFE within 3 days of receiving an application. The lender is not required to send an additional GFE; however, it is the lender's responsibility to ascertain that one was sent and includes an estimate of all costs that are likely to occur. Where the broker is the ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 23

24 exclusive agent of the lender, either the broker or the lender shall provide the GFE. 29. When must the special information booklet be provided and by whom? In general, the lender or mortgage broker should provide the special information booklet at application. Alternatively, they may place it in the mail to the applicant not later than three business days after the application is received or prepared. 30. Must a mortgage servicing transfer notice be given for a prospective table funded transaction? Yes, by the mortgage broker. 31. When the potential borrower furnishes a substantial amount of financial information for prequalification, but no particular property has been identified, must the good faith estimate be furnished to the borrower? No. A submission by a borrower to a lender that does not identify a property is not an application and thus does not trigger the Good Faith Estimate requirement. However, HUD encourages providing information to the borrower on settlement costs as soon as it can be estimated, so that the borrower may be better able to shop. 32. If the servicer neglects to pay the homeowner's insurance bill out of escrow and, as a result, the consumer loses coverage, what are the servicer's responsibilities and what is the servicer's liability for harm to the consumer that results? The servicer is required to pay escrow items on time, so long as the borrower is timely in his/her mortgage payments. If the borrower is damaged by the servicer's failure to pay for the insurance on time, the borrower can sue under section 6. Additional FAQs 33. If the borrower is getting a "no cost" loan, must the lender list charges the lender is going to pay? Yes. The charges to be shown on the GFE and the HUD-1 must include any payments by the lender to affiliated or independent settlement providers. These payments should be shown as P.O.C. (paid outside of closing). 34. The regulations at (b)(1)(i) state that where a lender makes a referral to a borrower the condition for providing an Affiliated Business Disclosure (AfBA) may be satisfied as part of and at the time of the GFE. Does this mean the lender does not have to give a separate AfBA disclosure if the information is part of the GFE? No. A separate AfBA must be given. The regulation means the AfBA may be given at the time the GFE is given if this is when the affiliate is referred or is required to be used (a lender may require the use of an appraisal, credit reporting company, or attorney). ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 24

25 35. Must a mortgage broker disclose payments he receives that the borrower does not pay for directly? Yes. The mortgage broker must disclose all payments and fees he receives whether they are received directly from the borrower or indirectly from the lender. 36. If I have a question concerning the calculation of the "Annual Percentage Rate" or "APR", can HUD answer it? The calculation of the APR is part of the Truth-in-Lending Act (TILA) which is administered by the Federal Reserve Board. Questions concerning TILA as well as Section 32 (high cost loan disclosure) may be directed to the Federal Reserve Board at (202) May a settlement service provider charge a fee that reflects its own fee plus any recording fees as the servicer provider's fee? Example: An attorney charges $500 for its services and the county charges $30 for recording fees. May the attorney simply charge the consumer $530 and pay the county as a cost of doing business? No. The "Line Item" instructions to the HUD-1 state 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." The attorney must disclose all entities ultimately receiving the fee. 38. May real estate agents that are independent contractors be considered employees under the "employer-employee" exemption, for purposes of being allowed to be paid referral fees from employers? No. The exemption applies only to bona-fide employees. 39. If the borrower's escrow account includes a surplus greater than $50 which HUD's rules require be refunded, may the servicer credit the surplus directly to the principal, rather than refund the surplus to the borrower? No. However, the servicer may inform the borrower in the information accompanying the return of the surplus that the borrower may elect to use the refund to reduce principal or have it credited against the next year's escrow payments. 40. If there is a surplus in the escrow account and the borrower is in default, may the servicer retain the surplus as payment towards the amount in default? HUD's escrow rules are inapplicable to loans that are in default, which is defined under the RESPA rules as current payments which are more than 30 days delinquent. The parties should consult the mortgage documents or state law to resolve whether escrow funds are available for this purpose. 41. May a consumer delay or avoid a mortgage transaction if it discovers that there exists a RESPA violation? No. RESPA specifically provides that it does not affect the validity or enforceability of any sale or contract for the sale of real property, or any agreement arising in connection with a federally-related mortgage loan. ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 25

26 42. How should I report a violation of RESPA? You should send a written complaint describing the practice that you believe violates RESPA. The complaint should include the names, addresses and phone numbers of the alleged violators. It is preferred that you include your name and phone number in case an investigator wishes to ask further questions. You may request confidentiality. Send the complaint to: U.S. Department of HUD Office of RESPA and Interstate Land Sales 451 7th Street, SW, Room 9154 Washington, DC You may also wish to send a complaint to State and other Federal agencies that have the responsibility for regulating the settlement providers engaged in the referenced practice. U.S. Department of Housing and Urban Development 451 7th Street, S.W., Washington, DC Telephone: (202) Find the address of a HUD office near you Accessed December 3, ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 26

27 (RESPA) Real Estate Settlement Procedures Act Hud Information: INTRODUCTION The Real Estate Settlement Procedures Act (RESPA) is a consumer protection statute, first passed in The purposes of RESPA are: 1. to help consumers become better shoppers for settlement services and 2. to eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services. Details about RESPA Corresponding with the above purposes: 1. RESPA requires that borrowers receive disclosures at various times. Some disclosures spell out the costs associated with the settlement, outline lender servicing and escrow account practices and describe business relationships between settlement service providers. 2. RESPA also prohibits certain practices that increase the cost of settlement services. Section 8 of RESPA prohibits a person from giving or accepting anything of value for referrals of settlement service business related to a federally related mortgage loan. It also prohibits a person from giving or accepting any part of a charge for services that are not performed. Section 9 of RESPA prohibits home sellers from requiring home buyers to purchase title insurance from a particular company. ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 27

28 RESPA in general RESPA covers loans secured with a mortgage placed on a one-to-four family residential property. These include most purchase loans, assumptions, refinances, property improvement loans, and equity lines of credit. HUD's Office of Consumer and Regulatory Affairs, Interstate Land Sales/RESPA Division is responsible for enforcing RESPA. RESPA REQUIRED DISCLOSURES: At the time of loan application When borrowers apply for a mortgage loan, mortgage brokers and/or lenders must give the borrowers: a Special Information Booklet, which contains consumer information regarding various real estate settlement services. (Required for purchase transactions only) and 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 of 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. It also provides information about complaint resolution. If the borrowers don't get these documents at the time of application, the lender must mail them within three business days of receiving the loan application. If the lender turns down the loan within three days, however, then RESPA does not require the lender to provide these documents. The RESPA statute does not provide an explicit penalty for the failure to provide the Special Information Booklet, Good Faith Estimate or Mortgage Servicing Statement. However, bank regulators may choose to impose penalties on lenders who fail to comply with federal law. Please read the section on RESPA enforcement for more information. Disclosures before settlement/closing occurs The terms "settlement" and "closing" can be and are used interchangeably. An Affiliated Business Arrangement (AfBA) Disclosure is required whenever a settlement service provider involved in a RESPA covered transaction refers the consumer to a provider with whom the referring party has an ownership or other beneficial interest. ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 28

29 The referring party must give the AfBA disclosure to the consumer 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. The HUD-1 Settlement Statement is a standard form that clearly shows all charges imposed on borrowers and sellers in connection with the settlement. RESPA allows the borrower to request to see the HUD-1 Settlement 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. Disclosures at settlement The HUD-1 Settlement Statement shows the actual settlement costs of the loan transaction. Separate forms may be prepared for the borrower and the seller. Where it is not the practice that the borrower and the seller both attend the settlement, the HUD-1 should be mailed or delivered as soon as practicable after settlement. The Initial Escrow Statement itemizes the estimated taxes, insurance premiums and other charges anticipated to be paid from the Escrow Account during the first twelve months of the loan. It lists the Escrow payment amount and any required cushion. Although the statement is usually given at settlement, the lender has 45 days from settlement to deliver it. Disclosures after settlement Loan servicers must deliver to borrowers an Annual Escrow Statement once a year. The annual Escrow account statement summarizes all escrow account deposits and payments during the servicer's twelve month computation year. It also notifies the borrower of any shortages or surpluses in the account and advises the borrower about the course of action being taken. A Servicing Transfer Statement is required if the loan servicer sells or assigns the servicing rights to a borrower's loan to another loan servicer. Generally, the loan servicer must notify the borrower 15 days before the effective date of the loan transfer. As long the borrower makes a timely payment to the old servicer within 60 days of the loan transfer, the borrower cannot be penalized. The notice must include the name and address of the new servicer, toll-free telephone numbers, and the date the new servicer will begin accepting payments. ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 29

30 RESPA'S STATUTES EXPLAINED: CONSUMER PROTECTIONS and PROHIBITED PRACTICES Section 8: Kickbacks, Fee-Splitting, Unearned Fees Section 8 of RESPA prohibits anyone from giving or accepting a fee, kickback or anything of value in exchange for referrals of settlement service business involving a federally related mortgage loan. In addition, RESPA prohibits fee splitting and receiving unearned fees for services not actually performed. Violations of Section 8's anti-kickback, referral fees and unearned fees provisions of RESPA are subject to criminal and civil penalties. In a criminal case a person who violates Section 8 may be fined up to $10,000 and imprisoned up to one year. In a private law suit a person who violates Section 8 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. Section 9: Seller Required Title Insurance Section 9 of RESPA prohibits a seller from requiring the home buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale. Buyers may sue a seller who violates this provision for an amount equal to three times all charges made for the title insurance. Section 10: Limits on Escrow Accounts Section 10 of RESPA sets limits on the amounts that a lender may require a borrower to put into an escrow account for purposes of paying taxes, hazard insurance and other charges related to the property. RESPA does not require lenders to impose an escrow account on borrowers; however, certain government loan programs or lenders may require escrow accounts as a condition of the loan. During the course of the loan, RESPA prohibits a lender from charging excessive amounts for the escrow account. Each month the lender may require a borrower to pay into the escrow account no more than 1/12 of the total of all disbursements payable during the year, plus an amount necessary to pay for any shortage in the account. In addition, the lender may require a cushion, not to exceed an amount equal to 1/6 of the total disbursements for the year. The lender must perform an escrow account analysis once during the year and notify borrowers of any shortage. Any excess of $50 or more must be returned to the borrower. ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 30

31 RESPA ENFORCEMENT Civil law suits Individuals have one (1) year to bring a private law suit to enforce violations of Section 8 or 9. A person may bring an action for violations of Section 6 within three years. Lawsuits for violations of Section 6, 8, or 9 may be brought in any federal district court in the district in which the property is located or where the violation is alleged to have occurred. HUD, a State Attorney General or State insurance commissioner may bring an injunctive action to enforce violations of Section 6, 8 or 9 of RESPA within three (3) years. Loan Servicing Complaints Section 6 provides borrowers with important consumer protections relating to the servicing of their loans. Under Section 6 of RESPA, borrowers who have a problem with the servicing of their loan (including escrow account questions), should contact their loan servicer in writing, outlining the nature of their complaint. The servicer must acknowledge the complaint in writing within 20 business days of receipt of the complaint. Within 60 business days the servicer must resolve the complaint by correcting the account or giving a statement of the reasons for its position. Until the complaint is resolved, borrowers should continue to make the servicer's required payment. A borrower may bring a private law suit, or a group of borrowers may bring a class action suit, within three years, against a servicer who fails to comply with Section 6's provisions. Borrowers may obtain actual damages, as well as additional damages if there is a pattern of noncompliance. ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 31

32 Other Enforcement Actions Under Section 10, HUD has authority to impose a civil penalty on loan servicers who do not submit initial or annual escrow account statements to borrowers. Borrowers should contact HUD's Office of Consumer and Regulatory Affairs to report servicers who fail to provide the required escrow account statements. Filing a RESPA Complaint Persons who believe a settlement service provider has violated RESPA in an area in which the Department has enforcement authority (primarily sections 6, 8 and 9), may wish to file a complaint. The complaint should outline the violation and identify the violators by name, address and phone number. Complainants should also provide their own name and phone number for follow up questions from HUD. Requests for confidentiality will be honored. Complaints should be sent to: Director, Office of RESPA and Interstate Land Sales US Department of Housing and Urban Development Room th Street, SW, Washington, DC RESPA: stands for Real Estate Settlement Procedures Act * provide a copy of a special informational Housing and Urban Development (HUD) booklet to every person making loan application within 3-days of application * provide a good-faith estimate of settlement costs within 3 business days of application * provide Uniform Settlement Statement to borrower and seller at least 1 business day before closing * kickbacks, referral fees, or unearned fees not allowed * Requires controlled business arrangement disclosure. ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 32

33 RESPA Case Payment of Yield Spread Premium Byars v. SCME Mortgage Bankers Inc, 109 Cal. App. 4th 1134 (2003) California Court of Appeals Facts: In February 1997, Byars used a mortgage broker, Spectrum Financial Group, to obtain a Federal Housing Administration (FHA) loan to purchase a home. Byars did not investigate interest rates, but relied on Spectrum to obtain the going rate. Byars paid a 1% loan origination fee which was paid to Spectrum. Spectrum placed the loan with SCME Mortgage Bankers, Inc. The HUD-1 Settlement State provided to Byars included the statement broker rebate paid by lender to Broker $1, This rebate is a standard in the industry called a yield spread premium (YSP). The YSP reflects payment for goods, services, or facilities provided by the broker on behalf of the borrower for the transaction. After consulting with his attorneys, Byars felt that he could have received a better rate and that he was overcharged for the loan. Issue: Whether payment of a YSP by a lender to a mortgage broker violated The Real Estate Settlement Procedures Act of 1974 (RESPA), and whether it violated the HUD regulation limiting loan origination fees to 1% of the loan amount. Held: The court first looked at HUD s policy statements which made it clear that YSPs are not per se legal or illegal, and that there must be an individualized examination of the particular transaction at issue. In examining the situation, HUD adopted a two prong test: 1) whether goods or facilities were actually furnished or services were actually performed for the compensation paid; and 2) whether the payments are reasonably related to the value of the goods or facilities that were actually furnished or services that were actually performed. The court found that the YSP did not violate RESPA in this case. As for the origination fee of 1 percent, the court found that the unambiguous language of the regulation itself limits only fees collected from the mortgagor by the mortgagee. Thus the YSP was not collected from Byars directly but rather from the lenders, Spectrum and Allstate, and therefore it did not violate HUD regulation Accessed January 27, ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 33

34 Regulation Z Disclosure Requirements The Truth in Lending Act requires lenders to make certain disclosures on loans subject to the Real Estate Settlement Procedures Act (RESPA) within three business days after their receipt of a written application. This early disclosure statement is partially based on the initial information provided by the consumer. A final disclosure statement is provided at the time of loan closing. The disclosure is required to be in a specific format and include the following information: 1. Name and address of creditor 2. Amount financed 3. Itemization of amount financed (optional, if Good Faith Estimate is provided) 4. Finance charge 5. Annual percentage rate (APR) 6. Variable rate information 7. Payment schedule 8. Total of payments 9. Demand feature 10. Total sales price 11. Prepayment policy 12. Late payment policy 13. Security interest 14. Insurance requirements 15. Certain security interest charges 16. Contract reference 17. Assumption policy 18. Required deposit information ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 34

35 Disclosure Requirements for ARM Loans If the annual percentage rate on a loan secured by the consumer's principal dwelling may increase after consummation and the term of the loan exceeds one year, The Truth in Lending Act requires additional adjustable rate mortgage disclosures to be provided, including: The booklet titled Consumer Handbook on Adjustable Rate Mortgages, published by the Board and the Federal Home Loan Bank Board or a suitable substitute. A loan program disclosure for each variable-rate program in which the consumer expresses an interest. The loan program disclosure shall contain the necessary information as prescribed by Regulation Z. The Truth in Lending Act requires servicers to provide subsequent disclosure to consumers on variable rate transactions in each month an interest rate adjustment takes place. Right of Rescission In a credit transaction in which a security interest is or will be retained or acquired in a consumer's principal dwelling, each consumer whose ownership is or will be subject to the security interest has the right to rescind the transaction. Lenders are required to deliver two copies of the notice of the right to rescind and one copy of the disclosure statement to each consumer entitled to rescind. The notice must be on a separate document that identifies the rescission period on the transaction and must clearly and conspicuously disclose the retention or acquisition of a security interest in the consumer's principal dwelling; the consumer's right to rescind the transaction; and how the consumer may exercise the right to rescind with a form for that purpose, designating the address of the lender's place of business. In order to exercise the right to rescind, the consumer must notify the creditor of the rescission by mail, telegram or other means of communication. Notice is considered given when mailed, filed for telegraphic transmission or sent by other means, when delivered to the lender's designated place of business. The consumer may exercise the right to rescind until midnight of the third business day following consummation of the transaction; delivery of the notice of right to rescind; or delivery of all material disclosures, whichever occurs last. When more than one consumer in a transaction has the right to rescind, the exercise of the right by one consumer shall be effective for all consumers. When a consumer rescinds a transaction, the security interest giving rise to the right of rescission becomes void and the consumer will no longer be liable for any amount, including any ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 35

36 finance charge. Within 20 calendar days after receipt of a notice of rescission, the lender is required to return any money or property that was given to anyone in connection with the transaction and must take any action necessary to reflect the termination of the security interest. If the lender has delivered any money or property, the consumer may retain possession until the lender has complied with the above. The consumer may modify or waive the right to rescind if the consumer determines that the extension of credit is needed to meet a bona fide personal financial emergency. To modify or waive the right, the consumer must give the lender a dated written statement that describes the emergency, specifically modifies or waives the right to rescind and bears the signature of all of the consumers entitled to rescind. Printed forms for this purpose are prohibited. Advertising Disclosure Requirements If a lender advertises directly to a consumer, The Truth in Lending Act requires the advertisement to disclose the credit terms and rate in a certain manner. If an advertisement for credit states specific credit terms, it may state only those terms that actually are or will be arranged or offered by the lender. If an advertisement states a rate of finance charge, it may state the rate as an "annual percentage rate" (APR) using that term. If the annual percentage rate may be increased after consummation the advertisement must state that fact. The advertisement may not state any other rate, except that a simple annual rate or periodic rate that is applied to an unpaid balance may be stated in conjunction with, but not more conspicuously than, the annual percentage rate Accessed November 24, ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 36

37 Link to the Nevada Law and Reference Guide: Nevada Law and Reference Guide Chapter 1 - Nevada Law on Real Estate Agency Chapter 2 - Nevada Law on Fiduciary Duties Chapter 3 - Nevada Law on Brokerage Agreements Chapter 4 - Nevada Law on Offers and Purchase Agreements Chapter 5 - Nevada Law on Disclosures Chapter 6 - Nevada Law on Advertising Acknowledgments Copyright Info ABC Real Estate School Practical Applications: Business Brokerage Update Dec 2009 Page 37