Chances are, if you are a lender or insurance tracking provider, you have heard of the Real Estate Settlement Procedures Act (RESPA).
RESPA was signed into law in December 1974 with the intent to provide consumers protection from abusive practices during the real estate settlement process. It protects through education, regulation of escrow accounts, and prevention of kickbacks.
Additionally, RESPA outlines mortgage servicing requirements that affect insurance tracking service providers, especially when it comes to force-placed insurance.
How RESPA Requirements and Insurance Tracking Overlap
Force-placed insurance requirements can be found under Subpart C Section 1024.37 of RESPA. At first glance, Section 1024.37 appears to be information overload.
- Have a reasonable basis to begin the force-placement process,
- Go through the notification cycle process (which includes an initial notice and reminder notice), and
- Secure coverage when necessary.
Seems simple, right? If only.
As you begin to dive deeper, the realization hits that these regulatory requirements are incredibly complex. This is where insurance tracking providers come into play.
Insurance tracking providers specialize in force-placed insurance, which means our workflows are designed to ensure compliance with RESPA and all other force-placed insurance regulations.
Because of the strict and complex RESPA requirements, many lenders choose to partner with an insurance tracking service provider, not only to ensure compliance but also to reduce borrower noise.
Insurance tracking and the force-placed insurance process is not easy. If you need more guidance on that, please visit our article 9 Steps to CFPB Compliance.
What Settlement Agreements and RESPA Have in Common
We all know that RESPA applies to insurance tracking (as part of the mortgage servicing process), but what does it have to do with settlement agreements?
Well, everything comes with a price tag attached.
So, when lenders partner with an insurance tracking service provider, they must pay a negotiated fee. Let’s look at how that affects Settlement Agreements:
An insurance tracking provider might offer a few different pricing models, one being Origination-Based Pricing.
Under this pricing structure, a flat fee for each new loan is charged to the lender at origination. The lender may choose to absorb the charge or pass it along to the borrower.
Origination-Based pricing pays for tracking new loans going into the portfolio. We must now deal with tracking the existing loans already in the portfolio.
At Miniter, loans tracked in the existing loan portfolio are priced separately from new loans on the origination-based pricing model and are billed monthly. Those loans are then serviced on a per loan/per month basis. Once all loans in the existing portfolio are paid off and tracking is no longer needed, the lender will have insurance tracking services at no cost. So, as you can see, in the long term, origination-based pricing can be a very attractive pricing model.
As we discussed earlier, the origination-based insurance tracking fee is assessed at loan origination, making it a part of the original settlement agreement.
Put simply, complying with RESPA and avoiding hefty fines means the insurance tracking fee must be disclosed to borrowers at loan closing, regardless of whether the lender chooses to absorb the charge or pass it along to the borrower.
As part of the settlement agreement, lenders must provide home buyers and sellers with disclosures that list all settlement service costs in connection with the real estate transaction, including origination-based insurance tracking fees.
These disclosures protect consumers by requiring transparency during the settlement process.
In 2015, the TILA-RESPA Integrated Disclosure (TRID) rule took effect for the purpose of merging the disclosure and regulation requirements associated with TILA and RESPA.
This merger made settlement charges more transparent, therefore, more borrower friendly.
Lenders must use the closing disclosures and instructions outlined in the TILA-RESPA Integrated Disclosures (TRID) to disclose the flat, one-time fee for origination-based insurance tracking services.
Although there have been questions concerning the topic of disclosing costs in connection with the settlement transaction, the TILA-RESPA Integrated Disclosures (TRID) FAQs provided answers that made things clear:
Lenders must disclose any costs in connection with the settlement transaction, even if they are absorbed, on the closing disclosure statement.4. Is a creditor required to disclose a closing cost and related lender credit on the Closing Disclosure if the creditor will absorb the cost?
Yes, if the closing cost is a cost incurred in connection with the transaction. A creditor must disclose on the Closing Disclosure a closing cost it incurs even if the consumer will not be charged for the closing cost (i.e., the creditor will “absorb” the cost). If a creditor absorbs a cost incurred in connection with the transaction, the creditor must disclose such cost on the Closing Disclosure in the “Paid by Others” column in the Loan Costs or Other Costs table, as applicable.
The TRID Rule requires that the Closing Disclosure include all costs incurred in connection with the transaction.
Once a fee (origination-based insurance tracking)becomes a part of the original settlement agreement, the provider (the insurance tracker) becomes a settlement service provider and is bound to other RESPA sections regarding regulated mortgage loans, such as RESPA Section 8(a) which states:
No 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.
RESPA and Regulation X broadly define “things of value.” A few examples are:
- Services of all types at special or free rates
Ensuring RESPA Compliance in Settlement Agreements
Recently, the insurance tracking industry has implemented a few questionable pricing models that risk RESPA Section 8(a) violations as described above.
This flawed model has the insurance tracker charge origination-based insurance tracking fees, while providing free insurance tracking on the existing portfolio. This is a clear violation of RESPA 8(a) as described above.
Beware of service providers that offer free or reduced-cost tracking services for existing loans in your portfolio in exchange for future business (tracking fees on new loan originations).
Free or reduced-cost insurance tracking on your existing portfolio is a “thing of value,” and origination-based insurance tracking fees for new loans are “referrals of business.”
Partnering with a reputable insurance tracking provider with full-time compliance professionals is crucial to ensuring RESPA compliance. It’s true that some service providers in the industry may be willing to sacrifice compliance in hopes of an easy sale.
These service providers are putting lenders at risk for regulatory scrutiny and hefty fines.
Unfortunately, the old saying goes: “If it is too good to be true, it probably is”!
Here at Miniter, we have made it our mission to ensure that lenders are partnering with an insurance tracking provider that they can trust, which is why we are willing to shed light on the unsavory practices in our industry.
Because our lenders are our top priority, we invest a significant amount of time and resources into our compliance program.
This helps us to protect them from regulatory scrutiny and reduce borrower noise.