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CFPB Continues Crackdown on Real Estate Kickbacks

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Steven L. Owen
Foster Swift Finance, Real Estate & Bankruptcy News
November 25, 2014

Referrals are common in the real estate industry. Brokers and builders refer clients to mortgage lenders. Lenders refer clients to title companies. And so on. The real estate referral ecosystem is critical to moving real estate transactions along efficiently and effectively. Most clients need introductions to qualified professionals to assist them in what is often the most complicated financial transaction they will ever be involved in.

But referrer beware. Demanding something in return can cost you.

On September 30, 2014, the Consumer Financial Protection Bureau (“CFPB”) ordered Lighthouse Title (“Lighthouse”), a Michigan title insurance agency, to pay $200,000 for illegal quid pro quo referral agreements. According to a press release issued by the CFPB, Lighthouse violated the Real Estate Settlement Procedures Act, which prohibits, among other things, providing something of value to any person with an agreement or understanding that the person will refer real estate settlement services.

The “kickback” agreement at issue involved Lighthouse entering into marketing services agreements (“MSAs”) with companies such as real estate brokers with the expectation that mortgage closing and title insurance business would be referred to Lighthouse. The CFPB determined that fees paid by Lighthouse under the MSAs - ostensibly for marketing services - were actually set by determining the number of referrals Lighthouse received from the companies, and that companies on average referred much more business to Lighthouse if they had an MSA in place.

In addition to the $200,000 fine, Lighthouse is required to terminate MSAs with companies in a position to refer business to it, and is prohibited from entering into new MSAs with such companies.

This action is part of a continuing effort by the CFPB to crack down on illegal kickback agreements. Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 created and authorized the CFPB to implement, examine for compliance with, and enforce federal consumer financial law.

Under Dodd Frank, the CFPB has regulatory, supervisory, and enforcement authority of depository institutions and credit unions with total assets of more than $10 billion, as well as certain non-banks, regardless of size, including mortgage companies, originators, brokers, and servicers. If the CFPB detects a possible violation by a smaller financial institution, it will refer that violation to the institution’s prudential regulator for enforcement.

The CFPB has recently stepped up enforcement actions to prevent real estate kickbacks. Just a few examples include:

So what can companies in the real estate industry do to remain in compliance and avoid penalties and liability? For starters, have any fee (or other consideration) paying agreements that your company has in place reviewed by an attorney to make sure it doesn’t violate the law. Some arrangements may be permissible if proper disclosures are made to the consumer. Also, have written policies and procedures in place and train employees at all levels on these issues. Periodically audit - either by an internal team or an outsourced expert - your practices to ensure continued compliance.

The CFPB is actively investigating illegal kickback schemes. If you have any questions about these and other compliance issues, please contact your Foster Swift lawyer.