A May 28, 2014 consent order against an Alabama company serves as a warning to the residential real estate industry to be careful about properly disclosing its affiliate relationships with closing service providers.
In March, the Consumer Financial Protection Bureau (“CFPB”) brought an administrative proceeding against JRHBW Realty, Inc., which does business as RealtySouth, and its affiliate, TitleSouth, LLC (the “companies”), asserting that the companies had violated RESPA Section 8(a) and 8(c)(4), 12 U.S.C. §2607. The CFPB alleged that RealtySouth strongly encouraged, and in some cases required, its agents to use TitleSouth without proper disclosure of the affiliate arrangement. The companies entered into a consent order with the CFPB in which they agreed to pay a $500,000 civil penalty without admitting wrongdoing. See a copy of order here.
RESPA Section 8(a) prohibits giving or accepting a “fee, kickback, or thing of value” pursuant to an understanding to refer business related to real estate settlement services for a federally related mortgage loan. Under Regulation X, both “understanding” and “thing of value” are defined broadly. See 12 C.F.R. 1024.14. RESPA Section 8(c)(4) provides that the Section 8’s prohibitions do not apply to affiliates where the real estate agency making the referral has an affiliate business arrangement with the service provider and the real estate agency provides a written disclosure to each person whose business is being referred in the format of the model form provided by Regulation X. See 12 U.S. Code §2607 and 12 C.F.R. §1024.15.
RealtySouth argued that its referral arrangement came within the affiliated business arrangements safe harbor because its standard form contract included a disclosure statement. The CFPB rejected this argument. RealtySouth’s disclosure statement did not strictly follow the model form provided as an appendix to Regulation X. Further, the CFPB noted several deficiencies within the disclosure itself, including the failure to highlight that consumers could obtain the similar settlement services from other providers and that they were free to shop for such settlement services.
The CFPB’s approach is notable. The courts have been split on whether failure to comply with Section 8(c)(4)’s disclosure requirement was independently actionable as a RESPA violation. Some courts have concluded that the only actionable provisions of RESPA Section 8 are found in Sections 8(a) and 8(b), a view which sets a significantly higher hurdle for RESPA Section 8 claims (particularly class claims). Compare Minter v. Wells Fargo Bank, 924 F.Supp.2d 627 (Maryland 2013) with Washington v. National City Mortgage Co., Case No. 10-5042 (N.D. Cal. May 16, 2011).
In pursuing this enforcement action, the CFPB appears to have now sided with those courts who have held that a violation Section 8(c)(4)’s nondisclosure provision is independently actionable. It also appears to have endorsed the view that strict compliance with Regulation X’s model disclosure form is necessary to avoid violating this provision.
Real estate agencies with affiliated businesses should review their disclosures to make sure that they track the language of the model forms in Regulation X and, in particular, highlight the opportunity for consumers to shop for closing services. They should also be very careful about encouraging their agents to steer buyers and sellers to those affiliated agencies. Agencies may even want to consider providing the consumer with a written list of alternative vendors for those services at the initiation of the closing process.
More broadly, the residential real estate industry in general should be on notice. Referrals for closing services are common and long-standing industry practice. The CFPB’s aggressive position in the RealtySouth proceeding suggests that these practices are firmly on the agency’s agenda.