Mr. Mitchell, an attorney with the Washington-based law firm of Reed Smith LLP and the former senior attorney for RESPA at the Department of Housing and Urban Development, issued a report on "RESPA and E-Commerce Lending" at a conference sponsored by Real Estate Services Providers Council Inc. last month. An excerpt from that report, edited to fit available space, is presented here as this month's Viewpoint.

I was in charge of RESPA interpretations for many years. But that ended April 1, 1999, so anything that I say about HUD's view must be viewed with a caveat - I do not speak for current or future administrations even though matters involving RESPA interpretations evolve slowly. And, of course, I would recommend that you hire your own counsel if you intend to create any sort of online mortgage lending arrangement.

RESPA is the Real Estate Settlement Procedures Act, a far-reaching federal law which Congress enacted in December, 1974, and which applies to almost all residential mortgage loan transactions, whether they are undertaken by pen, typewriter, computer or the Internet. RESPA requires disclosures in covered transactions, it provides criminal and civil penalties for those who fail to follow the rules; it also frequently referees who wins and loses in the mortgage loan business.

The statute is deceptively simple. RESPA and Regulation X prohibit a person from paying or receiving a "thing of value" pursuant to any "agreement or understanding" that business incident to a "settlement service" involving a "federally-related mortgage loan" shall be referred, and this includes loan origination, defined as taking of loan applications, loan processing and the underwriting and funding of such loans. With limited exceptions, Regulation X provides that "any referral of a settlement service is not a compensable service." On the other hand, RESPA never prohibits a payment by a lender to its duly appointed agent or contractor for services actually performed in the origination, processing, or funding of a loan, or a 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."

The dilemma in the e-commerce world (and frequently the paper- commerce world) is that the prohibitions run contrary to the business generation instincts of the "marketing people."

"If I can get enough eyes to my site who eventually translate into customers for a lender, why shouldn't I be well-rewarded for my success?" Similar questions have been raised since the dawn of RESPA. California case law involving commercial real estate transactions allows finder's fees to be paid; many believed they should be permissible in residential real estate transactions as well. HUD said no. Later, HUD also disallowed payments by a lender to real estate brokers even though a state regulatory board allowed them.

Economists occasionally suggest that a paid referral is economically cheaper than requiring a business to sift through a sea of uninterested persons to find the few that care for its product. Nonetheless, this view has not prevailed in the residential real estate regulation context, and this may be because the precept that "a man's home is his castle" has been transmuted into the official policy of the federal government, and perhaps the state governments as well - witness the special tax treatment accorded home purchase costs, the ongoing subsidy in the IRS tax code for interest paid during the life of the loan, the elimination of capital gains on residential property for all but the most expensive homes and the nurturing of a well-established and well-funded secondary market to provide liquidity for home loans.

Seen in this light, it is not surprising that a potential homebuyer and homeowner, who, at least 27 years ago when RESPA was first passed, was an infrequent venturer into home finance, would be accorded special consumer protections by Congress. And despite wishful thinking that cyberworld is so clear, so simple, and so representative of the working of a perfect market that fraud and calumny will disappear, this is not yet proven and the laws of the paper world, including RESPA, are likely to remain.

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