Two weeks ago, the Consumer Financial Protection Bureau (CFPB) issued a RESPA decision, and the results will hit close to home for many of the nation’s real estate agents. Prospect Mortgage, Keller Williams Mid-Willamette, ReMax Gold Coast, and Planet Home Lending, LLC were deemed to have participated in an illegal kickback scheme. The CFPB levied a fine to Prospect in the amount of $3.5 million. The Brokerages and Planet Home Lending a mortgage servicer, combined had to pay an additional $495,000 fine for their participation in the plot. That is nearly 4 MILLION DOLLARS in fines.
So exactly what occurred?
Prospect Mortgage is a large lending operation. From 2011 to 2016, the CFPB found that Prospect entered into a variety of “kickback schemes” for referrals of mortgage loan business. Prospect would enter into agreements with over 100 brokerages, and track the amount of referrals they received. If Prospect received more referrals, the price they would pay in these agreements would increase. If Prospect didn’t receive as many referrals, they would decrease the amount. The issue is this specific type of arrangement is expressly prohibited under 12 CFR 1024 – the Real Estate Settlement and Procedures Act. All marketing agreements have to be for actual marketing services performed. They cannot in any way be tied to referrals. Another key component in this is that RESPA is a two way violation; meaning both the Offeror and the Accepter of a prohibited kickback are guilty. This agreement issue alone would be problematic and give rise to RESPA charges. Unfortunately, the story does not conclude there.
The Brokers that were paid by Prospect required consumers to pre-qualify with Prospect Mortgage, even if those consumers were already pre-qualified. The CFPB notes that one method Prospect used was to have brokers “write in” Prospect into their real estate listings. “Writing in” meant that agents required anyone seeking to place an offer on their listed property had to have a pre-qualification letter from Prospect. Again, this occurred regardless of that consumer’s status with another lender. Prospect and Planet Home split fees from a Home Affordable Refinance Program (HARP) for their loans, and then Prospect sent the servicing directly back to Planet Home.
From the brokerage side of the consent order came the issue at hand for real estate agents. All real estate professionals make recommendations to their clients for the services related to real estate transactions. This can include homeowner’s insurance, title insurance, inspectors, closing companies, and mortgage lenders. Among other things, RESPA disallows agents to profit by exploiting consumers’ reliance on these recommendations. The profiting typically occurs through the payment of kickbacks once the deals close, or through the payment when a referral is given.
The CFPB’s investigation found that ReMax Gold Coast and Keller Williams Mid-Willamette accepted illegal payment for referrals. Where this should hit home, due to its prevalence in many marketplaces, is that The parties were fined for RESPA violations because the lender was improperly financing and covering the costs of the agent websites and advertising expenditures. According to the CFPB, the lender “subsidized a portion of the third party website advertising in exchange for the agents’ exclusive promotion of the lender in those advertisements.” While joint advertising is not itself illegal, each party (the agent and the lender) must pay their fair portion of the costs. For example, if the website advertising costs $1,000 and the agent is receiving 80% of the promotional benefit of the ad, then the agent must pay $800. If the lender covers more than $200 in this example, then the CFPB views it as an illegal, disguised referral fee back to the agent. Just because the website or lender offering to do this says its legal, that doesn’t make it so.
It is incredibly dangerous to split costs with lenders. Make sure the affiliated business form is properly disclosed, and that the services are performed and paid for at actual fair market value.
Until next time, stay in the loop.
Austin Buchanan, General Counsel