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HUD WITHDRAWS REVISED RESPA “REQUIRED USE” DEFINITION

The Department of Housing and Urban Development (HUD) has issued a final rule withdrawing revisions to the definition of “required use” in its November 17, 2008 final rule amending the Real Estate Settlement Procedures Act (RESPA) regulations. The definition of “required use” is one element of an exception to RESPA’s general prohibition against kickbacks and referral fees. That is, certain business arrangements between affiliated entities (e.g., incentives such as payment of closing costs or provision of upgrades by homebuilders to customers of affiliated lenders) may be permissible under specified conditions, including that borrowers are not required to use the affiliated business. The revised definition was to become effective on January 16, 2009.

Following issuance of the final rule, a trade association and a group of home builders and affiliated mortgage lenders brought an action against HUD challenging the revised “required use” definition. See National Association of Home Builders v. Donovan, No. 08-CV- 1324, E.D. Va. (filed Dec. 22, 2008). (When filed, the case was styled National Association of Home Builders v. Preston because Steve Preston was HUD Secretary until January 2009, when he was replaced by Shaun Donovan.) The plaintiffs asserted that HUD’s rule violated the Administrative Procedure Act because, among other things, it contravenes the plain language of RESPA.

In January 2009, HUD delayed the effective date of the revised “required use” definition until April 16, 2009. See 74 Fed. Reg. 2369 (Jan. 15, 2009). In March 2009, HUD again delayed the effective date until July 16, 2009 and solicited comment on withdrawal of the revised definition and the need for new rulemaking on required use. See 74 Fed. Reg. 10172 (Mar. 10, 2009).

Based on further evaluation of affiliated business arrangements and review of comments received, HUD has determined that its revised “required use” definition did not strike the right balance between HUD’s goals of enhancing consumer protection and providing guidance to industry participants. In this latest final rule, HUD therefore is withdrawing the revised “required use” definition and leaving in place the definition currently codified in 24 C.F.R. § 3500.2 (i.e., the definition before revisions made by the November 17, 2008 final rule).

This latest final rule will be effective 30 days after publication in the Federal Register, which is expected shortly, except that the amendment to 24 C.F.R. § 3500.2 (i.e., replacing the revised definition of “required use” with the definition as it existed before the November 17, 2008 final rule) is effective July 16, 2009.

HUD will initiate a new rulemaking process to address RESPA’s prohibitions on required use.

  • Judy Scheiderer