CFPB Takes Action on RESPA Disclosure Rules Concerning Affiliated Business Arrangements

By: Shane Biffar

On May 24, 2014, the CFPB entered a Consent Order with RealtySouth, the largest mortgage brokerage firm in Alabama, which requires the company to pay $500,000 for alleged inadequate disclosures related to its affiliated business arrangements (“ABA Disclosures”).

As a general rule, Section 8(a) of the Real Estate Settlement Procedures Act (“RESPA”) prohibits giving or accepting a “fee, kickback, or thing of value” pursuant to an agreement or understanding to refer business to real estate settlement services for a federally related mortgage loan. However, RESPA Section 8(c)(4) provides a “safe harbor” which permits certain affiliated business arrangements as long as: (1) a disclosure of the existence of the arrangement and a written estimate of the charges generally made by the provider to which the person is referred (ABA Disclosure) is provided, (2) the consumer is not required to use the affiliated business, and (3) the only “thing of value” received from the arrangement is a return on the ownership interest.

In the case of RealtySouth, the company was charged with violating the above RESPA provisions in connection with title insurance and title examination referrals made to its affiliate, TitleSouth Closing Center, which provides real estate closing services. The CFPB found that RealtySouth’s referrals failed to comply with the safe harbor provision for two reasons. First, the CFPB found that the written disclosures contained in RealtySouth’s ABA disclosure forms failed to comply with the ABA Disclosure requirements as set forth in Appendix D of the implementing regulation, 12 CFR 1024. Second, the CFPB found that RealtySouth’s referral process, as evidenced by both the instructions given to its agents and the format of its purchase contracts, violated Section 8(a) of RESPA by giving a “thing of value” in connection with the affiliated business arrangement.

With respect to the written disclosures, RealtySouth’s disclosure form allegedly failed to comply with RESPA because the disclosure language was not set apart, but rather buried in a section of text that also made marketing claims about the company’s prices. RealtySouth apparently immediately changed its ABA disclosure form when advised of the Bureau’s concerns.

Perhaps more significant are the Bureau’s findings regarding RealtySouth’s ABA referral process. The Bureau concluded that RealtySouth’s form purchase contracts violated Section 8(a) of RESPA by giving and receiving a “thing of value” pursuant to an agreement or understanding that RealtySouth refer settlement services to TitleSouth. Specifically, the Bureau noted that RealtySouth’s form purchase contracts either explicitly directed or suggested that title and closing services be conducted by its affiliate, TitleSouth. By referring consumers to TitleSouth in this manner, the Bureau found that RealtySouth “affirmatively influenc[ed] the selection of TitleSouth” which amounts to a prohibited exchange of a “thing of value” under the Section 8(a). This aspect of the decision is significant because the CFPB is interpreting the act of affirmatively influencing the selection of an affiliate to constitute an exchange of a “thing of value” in violation of Section 8(a). The definition of “thing of value” as set forth in the implementing regulation, 12 CFR 1024.14(d), would not necessarily lead to this conclusion.  

In addition to taking issue with RealtySouth’s ABA disclosures and form purchase contracts, the Bureau also found a “pattern and practice” of RealtySouth encouraging its agents, and in certain instances requiring them, to use RealtySouth’s family of mortgage settlement services, in particular, TitleSouth.

In resolution of this matter, the recently entered Consent Order requires RealtySouth to ensure that its disclosures comply with RESPA and ensure that its training materials emphasize that its agents cannot require the use of TitleSouth affiliates. However, based on the Consent Order, the Bureau appears to be taking the position that mortgage brokers should do more than simply provide the required disclosures and “not require the use of the affiliated business.” Indeed, the Bureau appears to be on the lookout for any referral process that may mislead a consumer regarding his right to shop around when pursuing settlement services. With this in mind, it may be prudent for mortgage brokers to ensure that their ABA referral process highlights the consumer’s right to choose and does not undermine or detract from the required RESPA disclosures.

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