Payment to a subordinate lien holder to secure release


There is lots of discussion regarding payments to secure release of various subordinate liens. Second mortgage, tax lien, HOA, water etc.

Anyone who works with short sales knows the problem.

And, one hears quite frequently: "It's illegal!! Clearly, a violation of RESPA."

I am not an attorney nor a RESPA expert, by any means, but I have actually read RESPA and parts of the CFR. I find no reference nor have I seen anyone cite a reference to the CFR, or US Code, or RESPA showing the violation.

Let's put an example on the table:

The buyer pays $200,000 for the property. The 1st accepts net-proceeds as full satisfaction of the debt, taking a loss. The 1st offers $3,000 consideration to the second for release.

At the table, the buyer makes an addition $4000 payment to the second to secure release, so the second ends up with $7000, releases its lien and accepts the $7000 as full satisfaction.

The HUD show purchase price of $200,000, the $3000 is listed in section 500. The $4000 additional payment to the second does not appear on the HUD.

As far as I can tell, there is no RESPA violation here. The 2nd is exercising its right to collect on its debt. The $4000 is a payment agreed to between the buyer and the 2nd.

Can anyone cite the section of Code, Regulation or court cases that states that this is a violation?


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Comment by Cathy Baumbusch on May 26, 2010 at 10:06pm
What if its the Seller that has been asked for the additional funds? Case in point- I have a SS right now where I have an 'additional funds request' from the 2nd- the letter clearly states it has to be POC, but they won't release otherwise. Same scenario- the 2nd won't take the $3000, they want $3800 more. However, this is NOT a HAFA loan because the 1st investor is Freddie. But both servicers are Wells Fargo. Seller is willing to beg borrow and steal to do it. 1st trust actually said if we could negotiate something 'off HUD' that would be OK, and when I said that was illegal, she IMMEDIATLEY called me and back tracked. But if the Seller pays it POC before settlement and we go to settle at a later date, is there anything wrong with that?
Comment by Bryant Tutas on May 2, 2010 at 2:29pm
Michael. The definition of Mortgage Fraud as per the FBI is: "material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase or insure a loan.".

The examples you are giving in your comment are not what's happening as described in your article. Your article is talking about the 1st lender not agreeing to pay the 2nd $7,000 from the sale so to skirt around this you will just have the buyer pay off $4,000 outside of closing. This $4,000 is compensation to the seller for the purchase of the property. This fact, that is pertinent to the sale, is being withheld from the 1st lender.

Also, a Title company that does this without placing these funds on the HUD could very well be breaking the law. Title Companies exist to protect lenders and borrowers. The monies required to release this lien are a title issue and therefore need to be shown on the HUD.


But again I want to ask you.... Not disclosing this to the first lien holder is fraud. If it weren't ....then disclosing it would not be an issue. Would it?

Now having said all of that I know these types of transactions happen every day. The chance of being caught and prosecuted are probably slim to none.'s still fraudulent and it's still wrong. Of course I am NOT an Attorney and this is just my opinion.

Here's some more great info:

HUD promulgates regulations to enforce RESPA, known as Regulation X (24 C.F.R. section 3500, et seq.). Regulation X includes the requirement that settlement statements be prepared in the form of the HUD-1. The regs include line-by-line instructions and rules as to how the HUD-1 is to be completed. The following is from the "General Instructions" (24 C.F.R section 3500, Appendix A):

"The settlement agent shall complete the HUD-1 to itemize all charges imposed upon the Borrower and the Seller by the Lender and all sales commissions, whether to be paid at settlement or outside of settlement, and any other charges which either the Borrower or the Seller will pay for at settlement. Charges to be paid outside of settlement, including cases where a non-settlement agent (i.e., attorneys, title companies, escrow agents, real estate agents or brokers) holds the Borrower's deposit against the sales price (earnest money) and applies the entire deposit towards the charge for the settlement service it is rendering, shall be included on the HUD-1 but marked `P.O.C.' for "Paid Outside of Closing" (settlement) and shall not be included in computing totals. P.O.C. items should not be placed in the Borrower or Seller columns, but rather on the appropriate line next to the columns."

The "P.O.C." requirement is also set forth in the upper part of the first page of the HUD-1 form.

Above info was taken from this article

So after reading that article I will have to change my opinion about this NOT being a RESPA since according to this article it certainly is.
Comment by Michael Schneider on May 2, 2010 at 7:58am

Mortgage Fraud?

From Wiki:

Fraud is an intentional deception made for personal gain or to damage another individual.... The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation.

Which civil law do you think prohibits these two parties from establishing this agreement? Or requires them to disclose the terms to an unrelated party?

If I buy a house for $200,000, but I would have actually been willing to pay $210,000, would you call this "fraud"? Would you say that I have a legal obligation to disclose that that I would be willing to pay $210,000? And, if so, to whom? The Seller, an unrelated party? (The Bank is not a party to the Purchase and Sale Agreement). And, if I voluntarily agree to pay, at time of closing on a short sale, a contractor $5,000 for uncompensated work performed on the house, because I think he deserves to be paid, is this fraud? Suppose I wait until the day after closing, does it become non-fraud now?

Again, which civil law, regulation, or court case makes you believe this is illegal? Maybe it is illegal, but I've never seen specific reasons to believe this.

Comment by Margaret C. Taylor on May 1, 2010 at 4:45pm
Thank you for this discussion. I understand why you would want to do this Michael but I also understand Bryant's logical explanation. Simply put if 'extra money' is not a problem why be afraid to 'disclose it'.
What I especially appreciated was Bryant saying "Don't give up!", it's not over until it's denied!! Margaret C.
Comment by Bryant Tutas on May 1, 2010 at 1:58pm
Michael. If money changes hands related to a real estate transaction then it needs to be on the HUD. But let's go with your argument that the above scenario is not a violation of RESPA. I happen to agree it is NOT a violation of RESPA. But it is mortgage fraud.

The reality is that the buyer is agreeing to pay $4,000 more in compensation for the property by agreeing to pay the 4k towards the 2nd lien holder "outside of closing". Not disclosing this to the first lien holder is fraud. If it weren't ....then disclosing it would not be an issue. Would it?

Of course we know that disclosing that there is an additional $4,000 available in the deal may mean the 1st lien holder is going to want it. That's why this information needs to be withheld. That's fraud.

The only way to handle this situation is to place the 4k on the buyer side of the HUD. Even if it is a POC item. And submit it to the 1st lien holder for approval. Negotiate as hard as you can and the let the chips fall where they may.

****Of course I am NOT an Attorney nor do I play one on TV. This is just my opinion.


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