MLO 3.1.11 RESPA Essentials: Referrals, Penalties, and Escrow

Referral Rules and Exceptions

  • Definition of referral: any oral or written action directed to a person that affirmatively influences the selection of a settlement service provider, when the person will pay for the service; a referral also occurs when the payer is required to use a particular provider.

  • Allowable exceptions:

    • Payment to an attorney at law for services actually rendered
    • Payment by a title company agent for services actually performed in issuing title insurance
    • Payment by a lender to its duly appointed agent or contractor for services actually performed in origination, processing, or funding of a loan
    • Payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed
    • Payment pursuant to cooperative brokerage and referral arrangements
    • Agreements solely between real estate agents and real estate brokers
    • Normal promotional and educational activities not conditioned on referral and that do not involve defraying expenses that would otherwise be incurred by persons in a position to refer settlement services
    • An employer's payment to its own employees for any referral activities

  • Penalties: a fine not more than 10,00010,000 or imprisonment not more than 11 year, or both.

  • Consumer rights: with certain exceptions, the borrower or consumer maintains the right to select the settlement service providers used in the transaction.

  • Section 9 (Seller restrictions on title): no seller of property financed by a federally related mortgage loan may require the buyer to purchase title insurance from a particular title company. If a seller requires or conditions sale on using a particular title insurer, the seller will be liable to the buyer in an amount equal to three times all charges for such title insurance.

Escrow Accounts (Impound Accounts)

  • Definition: An escrow account, also referred to as an impound account, is a component of the federally related mortgage loan through which a mortgage servicer disburses certain debt obligations on behalf of the borrower.

  • Why servicers prefer escrow: ensures that homeowner's insurance and real estate taxes are paid and current; delinquency could cause hardship to the collateral or tax sale.

  • When is an escrow account required?

    • Escrow must collect for and pay the property's real estate taxes whenever an escrow account is established.
    • Conventional mortgage loan: escrow is mandatory if PMI is required; escrow collects for homeowners insurance and real estate taxes.
    • If flood insurance is required due to flood zone, escrow for flood insurance and real estate taxes becomes mandatory.
    • If the loan is a higher priced mortgage loan (HPML), escrow for real estate taxes and homeowners insurance is mandatory for no less than the loan's first 55 years.
    • If a conventional loan requires escrow and the property does not require flood insurance, the borrower may petition the servicer for elimination of the escrow account once PMI is no longer required.
    • If the loan is an HPML, the borrower may petition for elimination of escrow at the latter of 55 years when PMI is no longer required.
    • All government mortgage loans mandate escrow for homeowners insurance and real estate tax.