Kickbacks and the CFPB: How to Keep your Nose Clean as a Real Estate Agent

Depending on the circumstances, a combination of federal and state laws govern real estate transactions.  If a “federally related mortgage loan” is being taken out to acquire a property, federal law is triggered, specifically the Real Estate Settlement Procedures Act (“RESPA”). Section 2607(a) of RESPA states, “[n]o person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.”

RESPA is now enforced by the Consumer Financial Protection Bureau (“CFPB”), a federal agency created by the enactment of what is called Dodd-Frank.  Before Dodd-Frank, RESPA was enforced by the Department of Housing and Urban Development.  Violations of RESPA came to the forefront recently in the enforcement action brought against a Keller Williams agency in Oregon called: In the Matter of: Willamette Legacy, LLC dba Keller Williams Mid-Willamette (“Willamette”).

Willamette is a brokerage that has or had 130 real estate agents.  Willamette entered into a marketing services agreement with a lender.  The lender paid for access to Willamette’s agents and their clients in exchange for compensation.  At first the fee paid to Willamette by the lender was a fixed monthly sum but it changed to a variable sum.  The receipt of this payment was found to be a violation of RESPA.  The CFPB also found that Willamette gave a cash equivalent to its real estate agents each time an agent referred a client to the lender.  The cash equivalent payment came in the form of credits toward monthly dues or expenses agents had to pay for, e.g., errors & omissions insurance etc.  Depending on the size of the cumulative credit balance to each agent, agents either did not have to pay their obligations that month or it would be reduced accordingly.  If there was an excess balance, it would carry over to future months.  The more referrals by agents, the more the agent could make per referral.

A referral that is a violation of RESPA is “any act” that “affirmatively” influences a consumer’s selection of a settlement service provider.  “Repeated payments connected in any way with the volume or value of the business referred…[are] evidence that [the payments are] made pursuant to an agreement or understanding for the referral of business,” said the CFPB.  Willamette received $140,000 from the lender over the applicable time of the agreement, and the agents received $30,000.  Willamette was found to have violated federal law as a result.  Neither the agents nor the lender were found to have violated RESPA.

The question is, why?  The CFPB certainly had the authority to name the agents and the lender as parties to the administrative proceeding.  As punishment, Willamette was required to disgorge itself of the $140,000 and also pay a $35,000 penalty.  The real estate agents could have easily been required to disgorge themselves of the $30,000 they received from the lender.  The lender presumably received business and fees from the referrals it bought, meaning it could have been required to pay what is received along with a civil penalty.  I can only surmise it was the discretion of the CFPB that prevented them from naming the agents or the lender as parties to the action.

Under federal law, if the payments are tied to referrals, whether a fixed or variable amount, you run the risk of violating RESPA.  If a referral is made but there is no payment in return, there is no violation, so referrals are not a problem by themselves.  It is the conditional payment of money for the referrals that are “kickbacks” subjecting one to a violation of RESPA.  Cash deals do not apply, just deals involving “federally insured mortgages.”  The lesson of Willamette is that real estate agents should be very careful about participating in marketing agreements their brokers have entered into with anyone, a lender, a closing attorney or title company, an insurance agency, or any other settlement service provider, since the CFPB can bring an enforcement action under Dodd-Frank against anyone who gives or receives a payment in exchange for a referral relating to a real estate transaction involving a federally insured mortgage.