Broker Lands in Hot Water Over Referral Practices

Broker Lands in Hot Water Over Referral Practices

Brokerage Guilty of Violating RESPAIt seems the National Association of REALTORS® is making good on its promise to promote legitimate and transparent activity for its members. The association recently called out a large Alabama real estate broker as part of a judiciary slap on the wrist for some indecent referral practices with its affiliated businesses.

The Consumer Financial Protection Bureau (CFPB) determined at a recent hearing that Alabama-based RealtySouth failed to comply with a code of ethics known as the Real Estate Settlement Procedures Act (RESPA) after it essentially pressured clients into using their affiliated businesses for assistance in their real estate transactions.

The section of the act that was found to be violated is Section 8(a) which prohibits giving or accepting a “fee, kickback, or thing of value” for business referrals to settlement services for federally-related mortgage loans. The section also outlines that a specific statement must be included in the language of the disclosure of services that clients are free to shop for the best possible rates and services and that they are in no way expected to use a brokers’ affiliated companies.

The CFPB found RealtySouth guilty of violating RESPA as it had strongly encouraged, and in some cases required, its agents to use affiliated companies in addition to completely leaving out a statement from the disclosure of services that encourages clients to shop for settlement services. As a result, the CFPB ordered the broker to emphasize to its agents that the required use of any affiliate is strictly prohibited while also having to pay a hefty civil penalty of $500,000.

RESPA Exists to Protect Clients and Agents

While RESPA outlines many rules and regulations for real estate brokerages, these rules exist as a safeguard as much for clients as they are for agents themselves. In fact, RealtySouth may have been able to protect itself from disciplinary action for referring client to their affiliated businesses had the brokerage just followed a few simple “safe harbor” requirements.

RESPA does not completely negate the possibility of businesses fostering relationships with each other, especially after many years of working together. As a result, the act outlines a few requirements that, if followed correctly, warrant complete compliance for such practices. These requirements exist as a three-prong test and consist of (1) providing a client with a written disclosure that outlines in specific format the nature of the relationship between the two businesses, (2) the client is not at all required to use the affiliated service and (3) the only “thing of value” received by the referring business are returns on ownership interest.

Had RealtySouth recommended its affiliates under these provisions, the brokerage would not be facing the stern actions the CFPB has had to implement. While the brokerage was the main entity at fault, its affiliated companies were also implicated in the violations and were forced to pay a portion of the $500,000 penalty that was enforced on all of the offending parties.