The Consumer Financial Protection Bureau (CFPB) has recently started taking enforcement actions against illegal referral fees in violation of the federal Real Estate Settlement Procedures Act (RESPA). This serves as a good reminder for real estate agents to understand and comply with RESPA requirements, and to refrain from using business structures to conceal illegal referral fees. RESPA generally prohibits settlement service providers, including real estate agents, from giving or receiving anything of value in exchange for the referral of business for transactions involving federally-related mortgage loans for one-to-four residential units.
Most recently, on October 24, 2013, the CFPB filed a lawsuit against a Kentucky law firm for allegedly paying disguised illegal kickbacks using nine affiliated title insurance companies, each of which were owned jointly by the law firm and a local real estate or mortgage broker company. In Kentucky, buyers and sellers use attorneys instead of escrow officers for real estate closing services. The CFPB complaint alleges that the nine joint ventures were not bona fide entities as they did not, among other things, have their own office space, email addresses or employees. The CFPB also alleges that the law firm failed to provide proper affiliated business disclosures.
As another example, back on April 4, 2013, the CFPB filed complaints in a federal court in Florida against four national mortgage insurance companies for alleged illegal kickbacks to lenders using captive reinsurance schemes (as explained below). These complaints were the first RESPA enforcement actions taken by the CFPB since it took over enforcement authority from the U.S. Department of Housing and Urban Development (HUD) in July 2011 in accordance with the Dodd-Frank reform law. For this set of lawsuits, the CFPB believed that, for over 10 years, the named mortgage insurers engaged in a prevalent practice of funneling millions of dollars to mortgage lenders in exchange for the referral of business. The mortgage insurers have settled their claims by agreeing to pay $15.4 million and refrain from engaging in these arrangements, but they have admitted no wrongdoing.
The captive reinsurance arrangements alleged in the April 4 complaints involve the mortgage insurance companies issuing mortgage insurance for loans originated by a certain lender, and the lender’s subsidiary company providing reinsurance to cover the mortgage insurer’s risk of loss. Captive reinsurance schemes can also involve settlement service providers other than mortgage insurers and lenders.
For more information about referral arrangements under RESPA, C.A.R. offers a legal article called Referral Fees (password-protected for members only). For more information about RESPA enforcement actions, visit CFPB’s website.