1.) What is the Real Estate Settlement Procedures Act (“RESPA”)?
The Real Estate Settlement Procedures Act “RESPA” is a federal law enacted in 1975 for the purpose of providing consumers with information regarding their settlement costs and of reducing closing costs by getting rid of referral fees and kickbacks. Importantly, RESPA prohibits any person from giving or accepting “any fee, kickback, or thing of value” in exchange for the referral of business to any settlement service provider. The term “thing of value” includes any “payment, advance, funds, loan, service, or other consideration”. 12 U.S. Code § 2602(2).
Settlement services include, but are not limited to any service provided in connection with a real estate settlement, including the preparation of or issuance of any of following services: title searches, title insurance and/or certificates, attorney services, property surveys, appraisals, rodent inspections, home warranties, services by real estate professionals, the origination of a federally related mortgage loan, and the procedure of processing and closing at a settlement. 12 U.S. Code § 2602(3).
However, one important exception to this prohibition is if the payment is made pursuant to an “affiliated business arrangement” where the only “thing of value” received by the owner is a return on an ownership interest. 12 CFR § 1024.15(b)(3). Typically, this means corporate dividends or distributions in proportion to the owners’ ownership interest. However, what is not permissible is giving or receiving any “payment based on an ownership, partnership or joint venture share which has been adjusted on the basis of previous relative referrals by recipients of similar payments.” 12 CFR § 1024.15 (b)(3)(ii)(C).
Moreover, the person making each referral must provide their client with a written disclosure known as an “Affiliated Business Arrangement Disclosure Statement,” (“ABA”) which specifies that there is no requirement to use the referred settlement services provider.
For example, if you own a photography business on the side or if your spouse is a home inspector, before referring your real estate clients to these services, you must provide an ABA to your client and inform them of the nature of your business interests. As a best practice tip, we recommend giving your clients multiple options for service providers to avoid giving any preferential treatment to companies where you may have an interest.
2.) What is the Consumer Financial Protection Act?
The Consumer Financial Protection Act of 2010 (CFPA) was enacted to increase oversight and to refine the consumer finance laws regulating financial transactions in order to protect consumers. CFPA states that it is unlawful for any “covered person or service provider” to “engage in any unfair, deceptive or abusive act or practice.” 12 U.S. Code § 5536 (a)(1) (B). A joint-venture partner is considered a “covered person” when it provides real estate settlement services to a consumer. 12 U.S. Code § 5481(5)(6) & (15)(A)(iii).
An abusive practice is any act or practice which takes unreasonable advantage of a consumer’s lack of understanding of the risks or costs of the product or service, a consumer’s reliance on the covered person to act in their best interests, and the inability of the consumer to protect their own interest when choosing a product or service. 12 U.S. Code § 5531(d).
3.) What to Remember When Forming a Joint Venture
A real estate joint venture (JV) is a business arrangement between a title company and a real estate agent or brokerage whereby the parties each have a legal, vested interest in the business. A successful JV can be very prosperous for all parties. However, it is important to remember the RESPA requirements when engaging in business practices in furtherance of the JV.
When entering into a JV with a title company, there are several significant things to keep in mind:
- The referring party must provide an ABA disclosure to the home buyer in writing at or before the time of the referral and obtain a written acknowledgement from the buyer that they have reviewed the disclosure;
- No party to the JV should receive any “thing of value” from the JV other than a return on ownership/franchise interest.
- Stay away from JVs that have minimum quota requirements or that compensate agents based on the number of referrals made.
- Make sure the JV is a bonified “provider of settlement services” and not a sham entity. In its Statement of Policy 1996-2 (link to https://www.govinfo.gov/content/pkg/FR-1996-06-07/pdf/96-14331.pdf) , HUD laid out 10 factors it considers when determining whether a controlled business arrangement is a “sham” or whether it constitutes a bona fide provider of settlement services. Relevant factors include the following:
- “(1) Does the new entity have sufficient initial capital and net worth, typical in the industry, to conduct the settlement service business for which it was created? Or is it undercapitalized to do the work it purports to provide?
- (2) Is the new entity staffed with its own employees to perform the services it provides? Or does the new entity have “loaned” employees of one of the parent providers?
- (3) Does the new entity manage its own business affairs? Or is an entity that helped create the new entity running the new entity for the parent provider making the referrals?
- (4) Does the new entity have an office for business which is separate from one of the parent providers?
- (5) Is the new entity providing substantial services, i.e., the essential functions of the real estate settlement service, for which the entity receives a fee?
- (6) Does the new entity perform all of the substantial services itself? Or does it contract out part of the work? If so, how much of the work is contracted out?
- (8) If the new entity contracts out work to another party, is the party performing any contracted services receiving a payment for services or facilities provided that bears a reasonable relationship to the value of the services or goods received?
- (9) Is the new entity actively competing in the market place for business? Does the new entity receive or attempt to obtain business from settlement service providers other than one of the settlement service providers that created the new entity?
- (10) Is the new entity sending business exclusively to one of the settlement service providers that created it (such as the title application for a title policy to a title insurance underwriter or a loan package to a lender)? 61 F.R. 29258, at 29261 (1996).
- Consult the Compliance Aid issued by the Consumer Financial Protection Bureau (link to https://www.consumerfinance.gov/compliance/compliance-resources/mortgage-resources/real-estate-settlement-procedures-act/real-estate-settlement-procedures-act-faqs/).
- Finally, consider whether it may be interpreted as a conflict of interest for the same agent to represent one of the parties to the transaction and to partially own a JV that serves as the escrow agent (a neutral third-party with a fiduciary obligation to both the buyer and the seller).
For additional FAQs, including common scenarios and examples, please visit NAR’s RESPA FAQ. For specific inquiries, please contact NVAR’s Legal Hotline, available at www.nvar.com.