When a TV ad shows a man in a lab coat promoting a new prescription drug, viewers realize the “doctor” is being paid to recommend it.
But, when a Realtor recommends a lender or title company to their client, the client likely assumes the Realtor isn’t being paid by the companies to give that advice.
Sometimes he or she is. And the consumer is often the one paying for the illegal practice.
The Consumer Financial Protection Bureau is pursuing title, mortgage and real estate companies that give or receive incentives for customer referrals.
The practice is illegal under Section 8 of the Real Estate Settlement Procedures Act. The law prohibits real estate professionals from receiving anything of value in return for referring settlement service business.
“Realtors and brokers have a fiduciary duty to clients,” said Fred Ahern, an attorney who practiced real estate law 30 years in Northeast Florida before retiring in 2011. “The vast majority of consumers are not familiar with what goes on and rely completely on their Realtor.”
In 2011, the consumer protection bureau took over enforcement of the act from the Department of Housing and Urban Development. Since then, it has racked up 11 lawsuits and settlements for illegal kickbacks.
It’s been a wake-up call to the industry.
The National Association of Realtors recently offered training to members on illegal referrals.
“It has long been an issue,” said Ken Trepeta of NAR. “But when HUD enforced RESPA, they did it so sporadically it was hard for people to get in trouble for anything.”
Consumer protection bureau actions so far have targeted two types of deals — marketing service agreements and affiliated business arrangements.
Both can be legal if done properly. But they also have been used to disguise illegal referral-based kickbacks.
Marketing service or referral fee?
Marketing service agreements allow real estate brokers, lenders and title companies to share marketing costs. They buy an ad together, one puts brochures in another’s office for a fee, or they share offices and the rent.
But, those agreements are illegal when one company gives payments or incentives to another based on customer referrals.
In one lawsuit, a Michigan title insurance company had agreements with several real estate brokers and lenders who referred closings exclusively to their company. The title company set the size of its “marketing” payments by considering the volume of referrals it expected from each one.
The consumer protection bureau last year fined the title insurance company $200,000, noting “the companies on average referred significantly more business … when they had MSAs (marketing service agreements) than when they did not.”
In another case, a nonbank lender paid a veterans group “lead-generation fees,” in exchange for being named its exclusive lender.
Direct mail brochures to veterans said the “exclusive lender” title was based on the company’s “high standards for service.” It never disclosed the financial relationship between the companies. The consumer protection bureau fined the lender $2 million.
Agreements occur in Jacksonville
Marketing service agreements are common in Jacksonville. But, the bureau’s actions have some brokerages rethinking how they structure theirs.
“It can be hard for us as business owners to address it,” said Ray Rivera, CFO for Exit Real Estate Gallery. “The way we learn is when someone gets into trouble.”
Rivera has taken the NAR training on illegal kickbacks and also consulted with an attorney familiar with the settlement act.
The company is having a third-party review of all of its marketing service agreements. That’s to make sure payments they get for giving lenders access to their customers reflect a fair market value for the service.
Otherwise, those payments could be interpreted legally as payments for referrals, instead of for marketing. Realtor sales teams will not be able to form marketing service agreements without broker approval.
Exit Real Estate has always had relationships with five or six lenders, Rivera said, and agents aren’t required to use them.
When talking about them, agents steer away from the phrase “preferred lender.” Instead, they are a lender Exit Real Estate markets with.
Asked if he thinks the settlement act violations are a problem in Northeast Florida, Rivera said a lot of brokers have a relationship with just one lender or just one title company.
“I see that as a problem personally, and I think it’s something (regulators) are going to look at,” he said. “If you have just one company that you market, how does the consumer have choice?”
But another Jacksonville real estate company doesn’t agree.
Coldwell Banker Vanguard Realty has a marketing service agreement with EverBank that names the bank as its official lender. A second marketing service agreement names FFA Residential as its title company.
“If we have an agreement with ABC lender and refuse to allow our people to go anyplace else, that’s a violation,” Coldwell Banker broker Pete Dalton said. “But on the flip side, that doesn’t mean we need to have multiple agreements with multiple lenders.”
Guidance from NAR, though, sides with Rivera. It warns not to market the services of only one lender or one title company.
Recommending a company that you own
Another target of consumer protection bureau enforcement is affiliated business arrangements. That’s when, for example, a real estate brokerage also owns a mortgage company or a lender also owns a title company.
According to rules HUD set in 1992, brokers or lenders can refer clients to affiliates. But, they must disclose the financial relationship between the two companies in writing at the time of the referral.
Consumers can’t be required to use the affiliate. And, no payments or incentives may be given for the referrals, except the brokerage may receive a fair share of profits from its ownership stake.
In one recent lawsuit, an Alabama real estate brokerage referred customers to an affiliate title company.
But, the disclosure document it used did not highlight the consumer’s right to choose another provider. It was buried in a section of the contract that made marketing claims about company prices. The consumer protection bureau fined the brokerage $500,000.
In Jacksonville, Ahern has seen worse. There have been times when the affiliated business arrangements disclosure form wasn’t given to clients until they were at the closing table, he said.
“That’s too late to tell somebody,” he said. “You’re sitting there and they pass you a paper to sign. Basically you consent to what’s going on.”
Benefits and penalties of using affiliates
After HUD passed its affiliated business arrangements guidance in 1992, the market in Jacksonville began to change. Affiliates before then handled about 10 percent of the area’s title business. Today, they dominate the market, about 75 percent by Ahern’s reckoning.
It wasn’t the competition he minded.
“I felt that if I could not compete with good service and good pricing then I shouldn’t have the business,” Ahearn said.
But in many cases, competition was not what happened.
Brokers required their agents to steer clients to affiliates though a combination of incentives and penalties, Ahern said.
His business, previously in the top 10 percent in Duval and St. Johns counties by volume for closings, dropped 70 percent.
He’d ask Realtors who were former clients why they weren’t bringing their closings to him anymore.
“And they would say, ‘Well, we can’t,’” Ahern said. “Our broker has a title company and we have to send all of our closings to that title company.”
If they didn’t do so, they would be penalized, he said he was told. The broker would delay their commission checks by two to three weeks. They’d lose their floor time — an assignment that allowed them to pick up clients when phone calls came in. Or, the broker would stop paying to advertise their listings.
Realtors who did use the affiliates would get gift cards and points toward free vacations.
Blake Deal, a Jacksonville Beach estate lawyer who’s conducted nearly 10,000 closings in his 20-year career, said he’s also seen the steering tactics.
“I have and still do encounter numerous cases of Realtors receiving a set amount of compensation per closing from a title services provider,” he wrote in an email.
He wrote that one major Jacksonville real estate company compensates its office brokerages in part on the “capture rate” of closings sent to the company’s in-house title company.
Another gives consumers the impression the brokerage and the in-house title company are separate, non-affiliated companies, he said.
Impact on consumers
The steering of clients to affiliates hasn’t just affected independent closing attorneys.
It’s affected consumers.
Ahern said he has seen statements from the other side of the closing table with higher fees than normal.
In the old days, it was common for Realtors to comparison shop between closing attorneys.
Ahern said he sometimes lowered his price to match a competitor’s.
Today, that’s not so.
“If Realtors are going to benefit in some way, why would they encourage you to shop?” he said. “It’s just human nature. You’re going to charge what you can get away with.”
In theory, affiliated business arrangements were supposed to create efficiencies in the industry, Ahern said.
In practice, those savings were never passed on to the consumer.
Today, almost all major real estate companies or franchises have relationships with other businesses, making it nearly impossible for independent attorneys to capture business.
“If I were to start out today, either as a new title insurance company or as an attorney to try to do real estate closings, I wouldn’t consider it,” Ahern said.
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