A Cautionary Tale For Real Estate Brokerages About Kickbacks And Affiliated Business Arrangements: The RealtySouth Case

kick·back  – noun \ˈkik-ˌbak\: An amount of money that is given to someone in return for providing help in a secret and dishonest business deal.  Merriam-Webster online.

Introduction.  Kickbacks and referral fees are regulated by Section 8 of the Real Estate Settlement Procedures Act codified at 12 U.S. Code § 2607 . Essentially, the law provides that in any transaction involving a federally related mortgage loan, no person shall give or receive “…any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise…” other than for services actually performed. [Underscore mine.] This proscription also applies to “…any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service….”

There are several exceptions:

• The following fees, salaries, compensation or other payments are permitted:The payment of a bona fide salary or compensation for goods or facilities actually furnished, or for services actually performed;
  • To attorneys for services actually rendered; or
  • Paid by a title company to its authorized agents for services actually performed in the issuance of title insurance; or
  • By a lender to its authorized agent for services actually performed in the making of a loan.
• The payment of a real estate commission pursuant to cooperative brokerage and referral arrangements;
• Affiliated business arrangements.

The Take-Away.  At the risk of over overgeneralizing the issue, the take-away is this:  Subject to the following sentence, “real estate settlement service providers” [e.g. title and escrow companies, lenders, real estate brokers, and similar companies involved in the real estate closings (i.e. the “settlement process”) are prohibited from sharing fees or anything else of value with third parties, unless it is a bona fide payment for services actually performed. The one exception is for “affiliated business arrangements.”

Affiliated Business Arrangements (“AfBAs”). These are business referral relationships between the referring and referred party.  AfBAs are subject to the following rules:

• The existence of the arrangement must be disclosed, along with “…a written estimate of the charge or range of charges generally made by the provider to which the person is referred;
  • Note:  There are specific rules regarding the nature and timing of the disclosure based upon whether the referral is face-to-face, or via written, electronic, and telephonic means. [For details, see §12 USC 2607(4).]
  • The referred person may not be required to use any particular provider of settlement services; and
  • The only thing of value that is received from the arrangement [other than the permitted payments], “…is a return on the ownership interest or franchise relationship, or such other payments or classes of payments or other transfers as are specified in regulations prescribed by the Bureau, after consultation with the Attorney General, the Secretary of Veterans Affairs, the Federal Home Loan Bank Board, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, and the Secretary of Agriculture.”
    • Exceptions:
      • Any arrangement that requires a buyer, borrower, or seller to pay for the services of an attorney, credit reporting agency, or real estate appraiser chosen by the lender to represent the lender’s interest in a real estate transaction, or
      • Certain exceptions that appear to be created for those areas of the country that use attorneys to close real estate or loan/refinance transactions. The west coast of the United States is not one of those areas.

Penalties for Violation. Any person who violates the anti-kickback provisions of RESPA is subject to a fine of not more than $10,000 or imprisoned for not more than one year, or both. Liability is joint and several. Damages may be trebled, i.e. equal to three times the amount of any charge paid for such settlement service.  The burden of proof requires that the accused prove by a preponderance of the evidence that their violation was “…not intentional and resulted from a bona fide error notwithstanding maintenance of procedures that are reasonably adapted to avoid such error.” The Consumer Finance Protection Bureau (“CFPB”), the Secretary of Veterans Affairs, or the attorney general or the insurance commissioner of any State may bring an action to enjoin violations.

There is also a private right of action that may be brought by individuals harmed by a violation. In such case, the court may award costs and reasonable attorneys’ fees.  State law violations may also be enforced, so long as its law is no less stringent than the federal RESPA rules.

A Cautionary Tale: The RealtySouth Case.

On May 28, 2014, the CFPB announced that it had taken enforcement action against JRHBW Realty, Inc. d/b/a RealtySouth and TitleSouth, LLC, both of which are Berkshire Hathaway HomeServices of America companies.  The violation?  The failure to make proper disclosures under the AfBA laws, (i.e. 12 U.S.C. §2607, summarized above), and its implementing regulations found at 12 C.F.R. Part 1024.  An additional failure was that RealtySouth’s form purchase agreements required that its customers use TitleSouth services. The companies entered into a Consent Decree, here, and were tagged for $500,000 – probably a lot less money than what they made by ignoring the law.

Findings In Consent Decree. Here are some of the findings from the Consent Decree:

• RealtySouth strongly encouraged its agents, and in certain instances told them they were required to use, its family of services, in particular, TitleSouth.
• From March 2011 until May 2012, RealtySouth had a preprinted sale agreement that explicitly directed the title and closing services for which consumers would pay a charge to TitleSouth.
• RealtySouth’s sale agreement stated: “Title Insurance.  Seller agrees to furnish Buyer a standard form owner’s title insurance policy issued by TitleSouth, LLC in the amount of the purchase price….”
• The same sale agreement contained a section entitled “Selection of Closing Agent” which stated: “Buyer and Seller hereby agree that the closing of this transaction shall be conducted by the TitleSouth Real Estate Closing Center and agree to share equally the closing fees for this transaction.”
• In 2012, RealtySouth changed the language in its sale agreement regarding title insurance and closing services to allow consumers to check TitleSouth or “Other.” Specifically, it stated: “The title insurance policies specified herein shall be obtained from (check one) [ ] TitleSouth; [   ] Other.” Paragraph 17 stated, “The closing of the transaction contemplated by this contract shall be performed by (check one) [  ] TitleSouth Closing Center; [  ] Other.”
• RealtySouth provided consumers with an AfBA disclosure that failed to comply with 112 C.F.R. § 1024.15(b), in that it did not use the format of Appendix D of the rules.[1]  It did not use capital letters or another means of highlighting the fact that consumers could obtain similar settlement services from other providers and that they were free to shop around for those services. RealtySouth’s disclosure language informed consumers that they could shop around, but it was not set apart from the disclosure itself; rather it was “…incorporated into the end of a list of descriptions of seven affiliated businesses, and was hidden in what appeared to be a second description of RealtySouth.“
• RealtySouth’s AfBA disclosure also included marketing statements touting the benefit and value of its affiliated entities.   It stated, for example, that “[w]e at RealtySouth  believe our affiliates provide superior  service, value, and convenience”  and “we believe that our affiliates’ charges are reasonable and are competitive with the amounts charged by others  for the same services” and           “[w]ith competitive, reasonable rates, coupled with the smooth  and efficient manner in which the transaction  will be handled, the affiliates of RealtySouth are in a unique position  to provide you with exceptional  value and service in handling your transaction.”
• Lastly, in what appears to have been a RealtySouth’s Mea Culpa Moment, the Consent Decree recites that: “When apprised of the (CFPB’s) concerns regarding RealtySouth’s ABA Disclosure, RealtySouth immediately changed its AfBA Disclosure to address those concerns.”

Conclusion.  RESPA has been around since 1974. Most Realtors® have only a passing familiarity with the law, i.e. that it outlaws “kickbacks.”  But you can be sure that most large real estate companies with affiliated business relationships, are intimately familiar with the law.  As we see from the Consent Decree, RealtySouth had seven AfBAs.  This is not a case of the brokerage being oblivious of the law.  It had previously been introduced to the RESPA minefield in April, 2009, when it lost a class action lawsuit filed against it for charging 30,000 buyers an illegal $149 fee since 2003.

When the CFPB rode into town in 2011, with six shooters blazing, I would have thought that RealtySouth’s AfBA disclosures would have been squeaky clean.  This isn’t a case of the law being confusing or ambiguous.  After all, the company is reportedly Alabama’s largest real estate firm.  ~PCQ

HyperLynx has been on the prowl again, and has supplied the following RESPA Resources:

1. http://www.consumerfinancialserviceswatch.com/2014/06/03/cfpb-widens-respa-enforcement-to-focus-on-affiliated-business-arrangement-disclosures/

2. http://www.respalawyer.com/2014/05/respa_cfpb_announces_affiliate.html

3. http://www.lexology.com/library/detail.aspx?g=2f56fb4f-3af4-4fe7-a56f-28d2497de1d5

4. https://www.vuwriter.com/vubulletins.jsp?displaykey=BL127724017200000050

5. http://www.klgates.com/cfpbs-respa-radar-pointed-at-affiliated-business-arrangements-06-17-2013/

6. http://www.realtor.org/rmoquiz2.nsf/respaquiz?openform

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