Affiliated Businesses Land in RESPA Hot Water
The Consumer Financial Protection Bureau ("CFPB") determined in a recent administrative proceeding that RealtySouth ("Broker"), a large Alabama real estate broker, failed to comply with the Real Estate Settlement Procedures Act ("RESPA") through a number of referral activities, including improperly referring customers to its affiliate settlement companies ("Affiliated Companies").
Section 8(a) of RESPA prohibits giving or accepting a "fee, kickback, or thing of value" for business referrals to settlement services for federally-related mortgage loans. A "thing of value" includes "increased equity in a parent or subsidiary entity." Nonetheless, Section 8(c)(4) of RESPA provides a "safe harbor" for affiliated businesses. This safe harbor consists of a three prong test, providing that referrals to affiliated businesses are permissible if all of the following requirements are met: (1) the client is provided a written disclosure ("Required Disclosure") in a particular format, setting forth the affiliated nature of the businesses and a written estimate of the charge or charges generally made by the company to which the client is referred; (2) the client is not required to use the affiliated business; and (3) the only "thing of value" received under the arrangement are returns on ownership interest.
RESPA's implementing regulation provides precise requirements as to the form and scope of the Required Disclosure. Specifically, RESPA mandates that the Required Disclosure be set forth on a separate sheet of paper, provided to the client either at or before the time of referral, and include: (1) identification of the consumer and the entity making the referral, the property address, and the date; (2) a description of the business relationship between the referring entity and the company to which the client is being referred; (3) a signature line for the client to sign acknowledging their understanding; (4) the estimated charge or charges for the settlement service; and (5) a clear statement that the client is not required to use to affiliated company, and an explanation that the client has other choices in settlement service providers.
RESPA Appendix D to Part 1024 ("Appendix D") sets forth a model Required Disclosure that contains specific language and typography for the Required Disclosure, including the following language:
Set forth below is the estimated charge or range of charges for the settlement services listed. You are NOT required to use the listed provider(s) as a condition for [settlement of your loan on] [or] [purchase, sale, or refinance of] the subject property. THERE ARE FREQUENTLY OTHER SETTLEMENT SERVICE PROVIDERS AVAILABLE WITH SIMILAR SERVICES. YOU ARE FREE TO SHOP AROUND TO DETERMINE THAT YOU ARE RECEIVING THE BEST SERVICES AND THE BEST RATE FOR THESE SERVICES.
In administrative proceedings, the CFPB found that Broker's referral activities had violated RESPA by:
- Strongly encouraging its agents (and in some cases requiring its agents) to use Affiliated Companies;
- For a period of over a year, using a preprinted purchase contract explicitly directing title and closing services to one of Affiliated Companies;
- Later changing the language in the preprinted purchase contract regarding title and closing services, but continuing to steer clients to Affiliated Companies by requiring them to check off one of two boxes for title services, either an Affiliated Company or "Other"; and
- Providing customers with an "Affiliated Business Arrangement Disclosure Statement" that did not comply with RESPA, as it did not use the format of Appendix D. Specifically, the CFPB pointed out that Broker's disclosure statement (a) did not use capital letters or other means of emphasizing to customers that they could obtain similar services from other providers, and that they were free to shop around, (b) incorporating the disclosure language into a list of descriptions of Affiliated Companies, and (c) including overt marketing language in the disclosure statement "touting the benefit and value" of Affiliated Companies.
The CFPB concluded that Broker and Affiliated Companies violated RESPA by "giving and receiving a thing of value pursuant to an agreement or understanding" that Broker refer settlement services to Affiliated Companies by "affirmatively influencing the selection" of the Affiliated Companies, and that Broker's disclosure did not satisfy RESPA's safe harbor provision for affiliated business relationships.
The CFPB ordered Broker to emphasize to its salespeople that they cannot require the use of any affiliate in real estate transactions, to provide disclosure statements in the format provided in RESPA Appendix D, to cease from making any marketing statements "or any other statement or content that materially interferes with…the required disclosures.", and ordered Broker and its Affiliated Companies to cease all violations of RESPA.
Finally, the CFPB ordered Broker and Affiliated Companies to pay a civil penalty of $500,000.
In the Matter of: JRPBW Realty, Inc., doing business as RealtySouth; TitleSouth, LLC, File No. 2014-CFPB-0005 (May 28, 2014).
NOTE: For the full text of the RESPA Appendix D model disclosure form, please visit: http://www.ecfr.gov/cgi-bin/text-idx?SID=0c5cd1979bff9bdbb62d21e1e1fbd93d&node=12:188.8.131.52.184.108.40.206.41&rgn=div9