25 Aug Affiliated Businesses Get Slap on the Wrist For Improper Referrals
It seems the old “refer a friend to a friend” policy adopted by many businesses in affiliation with each other has been landing a few in hot water with the Consumer Financial Protection Bureau (“CFPB”). According to a report from the National Association of REALTORS®, the CFPB has recently been cracking down on a number of referral activities, including those of RealtySouth, a large Alabama-based real estate broker.
NAR reports that RealtySouth was found guilty of violating section 8(a) of the Real Estate Settlement Procedures Act (“RESPA”), which prohibits giving or accepting a “fee, kickback or thing of value” for business referrals to settlement services for federally-related mortgage loans. The brokerage had reportedly strongly encouraged, and in some cases required, its agents and clients to use affiliated companies in real estate business dealings.
In addition to deliberately referring only to its affiliated businesses, RealtySouth was also found guilty of altering the required “Affiliated Business Arrangement Disclosure Statement” to take out a clause that encourages clients to shop around for settlement service providers. This was in direct conflict of RESPA’s requirement that a clause known as Appendix D is included in the document so as to encourage healthy, fair competition among businesses for the consumer’s benefit and protection.
As a result of the violation, the CFPB ordered RealtySouth and its affiliates to pay a civil fine of $500,000 in addition to making it very clear to their agents and associated employees that the required use of affiliate services is not permitted and will not be tolerated.
RESPA Works to Protect Home Buyers and Agents
With this strict ruling, the CFPB is working to enforce a document that is meant to protect home buyers as well as agents and companies vying for additional business with competitive rates for their services. The document exists to ensure that home buyers have ready access to the most competitive rates and are given free range to bring their business to any company that they deem fit.
The RESPA document also acts as a safe harbor for affiliated businesses, providing precise specifications that allow for referral practices. The safe harbor consists of a set of three requirements that permit businesses to refer to their affiliates. The first requirement is that the referring company must disclose the nature of their relationship with the affiliate as well as a breakdown of the expected costs for services to be rendered.
The second requirement mandates that the client may be referred, but not required to use the affiliated business. The third requirement ensures that nothing is exchanged between the businesses for the referral and that the only “thing of value” received under the arrangement are returns on ownership interest.
With the clear delineation of accepted and prohibited practices outlined by RESPA and in light of the recent incident with RealtySouth, the CFPB is certainly asserting its authority in making sure these practices are followed to the utmost extent and healthy, competitive business ensues for all to benefit from.