By Jeffrey T. Baker, Sorling Northrup Attorneys
The Consumer Financial Protection Bureau (CFPB) is continuing its aggressive enforcement of the Real Estate Settlement Procedures Act (RESPA), despite growing threats to its leadership and even existence from Washington. The agency recently announced yet another round of fines and penalties for companies that have violated RESPA’s provisions barring illegal kickbacks and payments for referrals. At the same time, there is a growing chorus from the new Trump administration and Congressional leaders that the relatively new CFPB’s time has come.
Prospect Mortgage is a mortgage lender that operates nationwide. Between 2011 and 2016, Prospect engaged in a series of actions that the CFPB has determined violated RESPA’s provisions on illegal kickbacks and payments for referrals. According to the consumer agency, for that five-year time period, Prospect designed one scheme after another to generate more and more referrals from real estate brokers. In that time, Prospect eventually paid millions to real estate brokers and those brokers illegally received those funds in violation of RESPA.
Section 8(a) of RESPA prohibits any person from accepting any “fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise,” in exchange for a referral of a real estate settlement service involving a federally related mortgage loan. All of Prospect’s agreements with real estate brokers were designed to do just what Section 8(a) barred according to the CFPB.
One of the several illegal schemes that Prospect engineered included entering into lead agreements with over 200 different parties, most of whom were real estate brokers. The agreement quite simply provided that the brokers would be paid per lead that the brokers could produce for Prospect. Prospect met with the brokers with whom it had partnered regularly, and strongly encouraged the brokers to incentivize the agents working for them to produce leads, insuring that the individual agents also would personally profit from any payment for the lead.
Prospect also entered into marketing service agreements with over 120 different companies or persons, again, most of whom were real estate brokers. However, Prospect did not pay anyone based upon the marketing services they provided. Rather, payments were entirely based on referral levels, which were tracked regularly by Prospect’s loan officers. Prospect monitored what they called a party’s “capture rate” or the percentage of the real estate broker’s customers’ loans that used Prospect. The higher the capture rate, the more the broker was paid.
To garner yet even more referrals, Prospect also used desk-licensing agreements with over 100 real estate brokers. The agreements provided that Prospect’s loan officers could be situated right inside the broker’s office. More than that though, the agreement specifically provided that the brokers and their agents would promote Prospect to its customers. Instead of paying fair market rent for the desk space, Prospect based their payments to brokers on the number of referrals the office produced.
The final broker-related scheme that Prospect devised was to form agreements with brokers that mandated all potential buyers on any of a broker’s listings, must pre-qualify with Prospect before submitting an offer. In order to see that this plan was implemented effectively, Prospect advised brokers to include the requirement for pre-qualification in the broker’s remarks section on their MLS listings. Buyer’s agents then would be required to inform their clients that the pre-qualification was necessary if they wanted their offer to be considered. According to the CFPB, “writing in” the mandate guaranteed Prospect the “inside track to the consumer’s eventual mortgage business.”
Not only was Prospect fined $3.5 million by CFPB for its violations of RESPA, but two large west-coast real estate brokerage companies were also caught up in the disciplinary action. ReMax Gold Coast of Ventura, CA and Keller-Williams Mid-Willamette of Corvallis, OR, were also disciplined for their involvement as two of the cooperating brokerages in Prospect’s schemes. ReMax Gold Coast was fined $50,000 and Keller-Williams Mid-Willamette was required to disgorge $145,000 and pay an additional $35,000 in penalties.
In the wake of the D.C. Circuit Court of Appeals’ ruling in October 2016 that found the CFPB’s leadership structure was unconstitutional, Congressional leaders and the White House both want to significantly reign in the expansive federal bureau.
At the time of this article, the PHH Corporation case – where CFPB Director Richard Cordray single-handedly increased the fine being levied from $6.5 million to $109 million – is currently awaiting a decision from the DC appellate court as to whether they will reconsider the court’s original holding. The court ruled in October of last year that a federal agency with a single director, removable by the President of the United States only for cause was unconstitutional. The court instructed Congress to change the statutory structure of the agency accordingly.
Congressional Republicans, emboldened by the new Republican President, are all too happy to oblige the court of appeals. Created by the Dodd-Frank Act, the CFPB is seen by many Republicans in Washington as the benchmark for worst-case-scenario federal bureaucracy. In addition to its powerful director, the bureau is not funded by a congressional budget appropriation – a component of most agencies that Congress can use to steer federal policy – rather it is funded by the profits of the Federal Reserve.
The White House has also signaled that it would like to see changes at the CFPB. President Trump recently signed an executive order directing the Treasury Department to begin the process of dismantling the Dodd-Frank Act, which many conservatives view as an unreasonable restraint on banking and commerce. His spokesperson has also been quoted recently saying that all institutions created by Dodd-Frank are unconstitutional.
The CFPB not only exercises jurisdiction over RESPA but also over TRID, or the TILA-RESPA Integrated Disclosure process that the agency just implemented. An overhaul of the agency – or outright abolishment would cause significant changes for the real estate industry. While the agency appears to be keeping the pedal down on its enforcement actions, where aggressiveness has been its calling card, the agency and the industries regulated by it are keeping a close eye on lawmakers for signs of whether it will continue to have any future role to play.
More resources: NAR's Field Guide to RESPA