A decision last week by a federal appellate court is casting new light on practices in the real estate field that buyers and sellers often know little about: creative, under-the-table payoff schemes among realty brokers, mortgage lenders and title companies that can stifle market competition and raise settlement costs to consumers by hundreds or even thousands of dollars.
The court case involved a $109 million fine levied against mortgage lender PHH by the Consumer Financial Protection Bureau for allegedly violating the federal real estate anti-kickback statute through its mortgage insurance operations. PHH disputed the charges and filed suit, challenging not only the CFPB’s interpretation of the anti-kickback law but also the bureau’s constitutionality.
The constitutional challenge focused on the unusual structure of the bureau, which is headed by a single director who can be terminated only “for cause.” The court agreed with PHH on the statutory-interpretation issue, vacated the fine and ruled that henceforth the CFPB director would be like other executive branch agency heads: removable by the president at will.
Created by Congress in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the bureau has substantial oversight powers. During its short life, the CFPB has levied fines or provided financial relief to consumers totaling what it estimates to be in excess of $11 billion from banks and other entities accused of illegal activities.
Although the PHH case did not directly involve the types of fees-for-referrals practices that are widespread in the real estate industry, the ruling has called into question the legitimacy of the bureau’s regulatory interpretations on “marketing services agreements” and certain “affiliated business” relationships.
In a typical marketing services agreement, a title company or lender agrees to pay a real estate broker or an individual agent fees for promotional assistance — say, by prominently displaying a title company’s brochures or actively making recommendations to home buyers about the benefits of using its services.
The money involved can be significant — thousands of dollars a month in some cases. One title agency head who refuses to participate in such arrangements, Todd Ewing of Federal Title & Escrow, told me that the “going rate” for marketing services that was quoted to him by a brokerage firm in the Washington, D.C., area was $15,000 per month. In exchange, the brokerage firm would steer new buyers to Ewing’s title firm.
Mark Greene, a loan originator for HomeBridge Financial Services in New Jersey, says that some large realty brokerage firms essentially “put it out for bid”: They ask lenders who would like to receive referrals from their agents, “What do you offer us?”
“It goes to the highest bidder,” he told me in an interview.
Late last year, the CFPB issued a stern warning about marketing services agreements: Large numbers of them may violate the anti-kickback law, the Real Estate Settlement Procedures Act, known as RESPA. Based on the bureau’s investigative efforts, it said, “it appears that many [marketing services agreements] are designed to evade RESPA’s prohibitions against kickbacks and unearned fees.”
As a result of the bureau’s statement, some major lenders said that they were terminating whatever marketing services arrangements they had to avoid the risk of being hit with penalties by the CFPB.
But now, in the wake of the PHH decision that calls into question the CFPB’s interpretations of RESPA, there are concerns in the industry that some companies no longer will feel constrained and may return to old referral-scheme practices or invent new ones.
One legal expert on RESPA, Marx Sterbcow of New Orleans, told me, “My fear is that we’re going to see [companies] think, ‘Okay, now there are no more rules,’ ’’ which might lead to a resurgence of illegal payoff schemes. That, in turn, could “destabilize markets” — harming lenders and title companies that refuse to make referral payments — and expose consumers to needlessly higher settlement charges.
What can you do to avoid settlement cost rip-offs? Sterbcow recommends you ask this question of any realty agent who seems to be nudging you toward a specific title agency or lender: “Does your broker or do you have any type of business relationship with this company?” Ask for any written disclosure about the relationship, which may be tucked away with other boilerplate documents you received, and easy to miss.
Most important of all: Always shop the market aggressively for your mortgage, title and settlement services. Compare quotes. When service providers aren’t paying for what may amount to referrals, they often can offer you better prices.
Ken Harney’s email address is firstname.lastname@example.org.