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RESPA violations result in hefty penalty

Does your brokerage have an affiliated business such as a title company or mortgage brokerage? If so, the following RESPA case is a “must read” to make sure you aren’t running afoul of the RESPA disclosure requirements.

By Lorie Garland, OAR Assistant Vice President of Legal Services

The Consumer Financial Protection Bureau (CFPB) recently entered into a Consent Order with RealtySouth, a large Alabama real estate brokerage, over the affiliated business arrangement disclosure form (Disclosure Form) the brokerage used when referring consumers to their affiliated title company, TitleSouth, LLC. RealtySouth was ordered to pay a $500,000 civil penalty for failing to comply with the Real Estate Settlement Procedures Act (RESPA) requirements.

RESPA prohibits the giving or receiving of a fee or “thing of value” for referring a consumer to a settlement service provider (lender, real estate broker, title company, etc.). RESPA permits settlement service providers that have an affiliated business arrangement (joint ownership) to make referrals between affiliated companies as long as:

  1. certain disclosures are made to the consumer at the time of the referral,
  2. the consumer is not required to use the affiliated company, and
  3. the only “thing of value” received for the referral is a return on their ownership interest.

RESPA Appendix D to Part 3500 provides a model disclosure form that fulfills the RESPA disclosure requirements. The model disclosure form requires information to be provided on the business relationship between the companies, the estimated changes for the settlement service provided by the affiliated company and the fact that the consumer is not required to use the services of the affiliated company. A disclosure form must provide the following language and typography:

Set forth below is the estimated charge or range of charges for the settlement services listed. You are NOT required to use the listed provider(s) as a condition for [settlement of your loan on] [or] [purchase, sale, or refinance of] the subject property. THERE ARE FREQUENTLY OTHER SETTLEMENT SERVICE PROVIDERS AVAILABLE WITH SIMILAR SERVICES. YOU ARE FREE TO SHOP AROUND TO DETERMINE THAT YOU ARE RECEIVING THE BEST SERVICES AND THE BEST RATE FOR THESE SERVICES.

Upon investigation of RealtySouth’s referral practices, the CFPB determined that RealtySouth’s referrals to TitleSouth violated RESPA based on the following findings:

  • RealtySouth strongly encouraged its agents, and in certain instances, required their agents to use TitleSouth.
  • From March 2011 until May 2012, RealtySouth had a preprinted purchase contract that directed title services to TitleSouth. In 2012, RealtySouth changed the language in the purchase contract to allow consumers to check off TitleSouth or “other.”
  • RealtySouth’s Disclosure Form did not meet RESPA requirements as it did not use the format of Appendix D. It did not use capital letters and set apart the language informing consumers that they can shop around for services.  Instead, this language was hidden in a list of descriptions for seven affiliated companies. RealtySouth’s Disclosure Form also included marketing statements touting the benefit and value of the affiliated companies. When the CFPB notified RealtySouth of its concerns with the form, RealtySouth immediately changed its form to address those concerns.

In addition to the $500,000 civil penalty, the CFPB ordered RealtySouth to ensure that its Disclosure Form be in the format of Appendix D with no additional marketing statements and that its agents be trained that they cannot require the use of any affiliated company.

Tags: legal