You probably know that federal law prohibits kickbacks among brokers and others in home real estate deals. That sounds pretty straightforward: You can’t give money to someone simply for steering a home buyer or refinancer to a particular title agency, mortgage lender or escrow company without providing any actual services to the consumer.
Yet as four recent legal settlements suggest, there is still plenty of action underway at the fringes of the law, where technology and creative financial arrangements are raising questions about what’s permissible.
Take the multimillion-dollar settlement July 11 between the Department of Housing and Urban Development and Fidelity National Financial, the country’s highest-volume title insurance and settlement services company. HUD charged that Fidelity and its affiliates have “engaged in a widespread and years-long campaign to pay real estate brokers kickbacks for the referral of real estate settlement services, including home warranties and title insurance.” As part of the settlement, Fidelity denied any wrongdoing but agreed to pay the government $4.5 million.
How was the company allegedly paying kickbacks to brokers? According to HUD, it was done with the help of the Internet: Participating realty brokers were given access to a Web-based portal created by Fidelity that automates home real estate transactions “from listing to closing” and also enables agents to select title insurance and other services for the transaction.
Realty brokers signed “sub-license agreements” with Fidelity subsidiaries to enable the subsidiaries to be listed on the portal as providers of services. Then, as part of the deal, HUD said, Fidelity subsidiaries paid participating real estate brokers for referrals of customers they provided.
It was high-tech and sophisticated and may have involved large numbers of realty offices around the country and thousands of individual transactions. For its part, Fidelity insisted in the settlement that the payments it made were not for referrals but rather for giving brokers access to its automated “TransactionPoint” platform. Dan Murphy, a Fidelity spokesman, declined to comment.
In another case alleging kickbacks, HUD settled for $3.1 million with Prospect Mortgage LLC, a national home lender based in Sherman Oaks, Calif. According to HUD, Prospect “created sham affiliated business arrangements for the purpose of paying improper kickbacks” to real estate brokers, mortgage brokers and other service providers.
Prospect denied that it violated federal law but agreed to dismantle the network it set up to pay the referral fees alleged by HUD. The network itself involved the creation of large numbers of limited liability companies that purported to be legitimate joint ventures with Prospect but that in fact were shells that “had little or no employees, capital and/or offices” — key tests of whether an affiliate is legal under federal law or exists solely to make referrals in exchange for payments, according to HUD.
“In return for the referral of business,” said the agency, “Prospect shared 50 percent of its profits with these entities which HUD determined were not bona fide.”
Ron Bergum, chief executive of Prospect, said in a statement on the company’s Web site that although the same business-generation model “is currently being used by several of our competitors,” the company has “respect” for HUD’s position. Bergum did not identify the competing firms still using what HUD considers kickback schemes.
Still another issue involving controversial fees flowing to realty brokers emerged in two recent settlements in New Jersey: The charging of “admin” fees on top of standard commissions. Weichert South Jersey and Prudential Fox & Roach Realtors settled class-action suits challenging their collection of extra money from thousands of clients at closings for which no additional services were provided. Both firms denied the allegations but agreed to cease charging the fees, which generally ranged from $150 to $275.
A lawyer for the plaintiffs in both cases, Stephen DeNittis, said the class-action suits alleged violations of state laws that track federal law on realty broker compensation in home sales and purchases. “You can call it whatever you want — an admin fee or added commission or some other name, but if you charge money for it, you have to do something” to justify the fee, DeNittis said in an interview.
A spokeswoman for Weichert had no comment on the settlement. An attorney for Prudential Fox & Roach, Jay Varon, said the company “believes that its charging of administration fees was perfectly lawful,” but settled to avoid additional litigation costs.
Bottom line: While you’re not likely to detect some of the most sophisticated referral games being played behind your back — that’s a job for federal regulators — you have no obligation to pay extra fees in home purchases or sales if nobody is providing additional, valuable services to you.