- Did You Know that the CFPB is Still Aggressively Prosecuting RESPA Violations?
- April 10, 2017 | Authors: Matthew D. Alegi; Sarah D. Cline; Danielle M. Dolch; David M. Kochanski; Marc D. Lipman; David A. Pordy; James E. Savitz
- Law Firms: Shulman, Rogers, Gandal, Pordy & Ecker, P.A. - Potomac Office; Shulman, Rogers, Gandal, Pordy & Ecker, P.A. - Washington Office; Shulman, Rogers, Gandal, Pordy & Ecker, P.A. - Potomac Office; Shulman, Rogers, Gandal, Pordy & Ecker, P.A. - Washington Office; Shulman, Rogers, Gandal, Pordy & Ecker, P.A. - Potomac Office
- In our last installment, we discussed recent guidance from the Virginia Bureau of Insurance prohibiting title companies from paying for home warranties and home inspections. The Virginia Bureau of Insurance has determined that when title companies offer to pay for items such as a home warranty or inspection, they are illegally rebating title insurance by using part of their title insurance premiums to fund the incentive. Maryland and the District of Columbia have not yet addressed this issue, but it is likely that they would come to the same conclusion.
In our last installment, we also discussed the anti-kickback provision of Section 8(a) of the Real Estate Settlement Procedures Act (RESPA), which prohibits the payment of kickbacks or anything of value in order to obtain referrals of settlement services relating to federally related mortgage loans (virtually all settlement services are related to federally related mortgage loans). The prohibition against kickbacks has been the law since 1974, and these provisions are now monitored and enforced by the recently created Consumer Financial Protection Bureau (CFPB). Since its creation, the CFPB has been aggressive in prosecuting RESPA violations, and in spite of RESPA’s longstanding prohibition against kickbacks, there are still offenders in the marketplace engaging in prohibited practices. Given the potential severity of the penalties for RESPA violations, the prudent agent should be on guard against potential partners in the marketplace engaging in these prohibited behaviors.
For example, in a Consent Order entered on January 30, 2017, a California-based mortgage company agreed to pay the CFPB a civil penalty of $3,500,000 for violation of the anti-kickback rules. A number of continuing monitoring and reporting requirements were also imposed to help ensure that the violations will not be repeated in the future. In this case, the mortgage company paid referral fees, bonuses and kickbacks to real estate agents and other referral sources to send them mortgage business. The mortgage company paid cash or cash equivalent bonuses each time a client was referred to them and utilized a series of coercive measures to ensure that there would be direct contact with the consumers. For example, listing agents were encouraged to require any prospective purchaser to obtain pre-approval from the subject mortgage company, irrespective of who the consumer wanted to use for financing. This gave the company an early competitive advantage over any other mortgage company, and payments were made to those agents or real estate offices that adopted those procedures.
Another method of coercion was to provide that payment of certain fees would be waived or credits given by the seller or agent only if the subject mortgage company was used for financing. Some payments were blatant violations of the law, such as paying a real estate broker between $25 and $500 for each lead. According to the Consent Order, over a three-year period, one real estate broker received over $145,000 from such kickbacks. Another less blatant practice that the mortgage company engaged in was the creation of Marketing Service Agreements, which in some cases are permissible if legitimate and proportional marketing expenses are incurred. However, in this case, the mortgage company paid the “marketing expenses” based on the number of referrals, and the expenses far exceeded actual marketing costs, in violation of RESPA. In some situations, the mortgage company rented space in a real estate office at a rate far above market value, with the excess being used as a conduit for payment of referrals.
The lesson is that there are still unethical companies in the marketplace willing to overlook the law and pay for the referral of settlement services. Agents should be vigilant in recognizing any schemes to either pay or be paid for referral of settlement-related business. The fines and penalties are significant enough to discourage even the appearance of a compensation plan. If you are not sure if a proposal is lawful, feel free to contact one of the attorneys in our residential real estate department and we can advise you if it is compliant or in violation of RESPA.