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Beach trips and other challenges of interpreting RESPA

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In February, Lyndsi Sitcov updated her Instagram feed with a carousel of photos that showed her smiling and enjoying drinks and sunshine in Miami.

The posts seem innocuous. Sitcov and colleagues vogue for the camera on a tropical getaway amid the depths of winter. Sitcov, though, is a real estate agent at McEnearney Associates Realtors in Alexandria, Virginia. 

And the pictures give a “huge thanks” to Smart Settlements, a home title insurance and closing provider in neighboring Arlington, for “organizing an incredible trip!” Sitcov even includes the hashtag “#orderatsmart” on the post. They also show Sitcov unwinding with Hilary Reyes, the managing partner of Smart Settlements, and Carlos Reyes, president of the title insurer. 

Other sundry Insta postings from agents grabbed the attention of a Smart Settlements rival, Federal Title of Washington, D.C. Todd Ewing, the CEO of Federal Title, has claimed that the Smart Settlements/real estate agent beach retreat was more than a melding of the proverbial corporate synergies. He thinks they may have broken federal law. 

“This is pretty much a blatant violation of the rules,” Ewing claimed. “Treating a group of real estate agents and other referral sources to a trip to Miami, a boat cruise, baseball games, anything of value in exchange for business is not okay.”

What rule would this be? The 1974 Real Estate Settlement and Procedures Act, or RESPA, a statute that bans kickbacks, including between real estate agents and title insurers. But interpreting that rule is far from easy.

Sitcov and her brokerage did not respond to messages for comment. Carlos Reyes declined an interview request. But Reyes wrote back that there was nothing untoward about the Miami excursion. 

“Smart Settlements complies with all laws and regulations governing the company and business,” Reyes stated. “We, of course, deny that Smart Settlements violated any law or regulation with regard to the presumed facts, which are not necessarily accurate, you set forth above.”

As title executives, Ewing and Reyes are rivals. But they are bonded by the challenge of running a referral-heavy business, while tiptoeing around a 48-year-old law that bans quid pro quo arrangements but permits so much else. 

For these executives, and others who clamor for a cut of the lucrative real estate pie, it can be a guessing game whether RESPA is either a tiger ready to pounce or a cat napping in the sun. 

RESPA’s rise and remake 

Three years before the creation of the Occupational Safety and Health Administration, and two years following the Consumer Product Safety Commission’s arrival, Congress’s appetite for consumer safety regulation had yet to be satiated. So began RESPA, a law that banned quid pro quo deals, like, say,  a real estate agent being able to use a title agent’s car for a year in exchange for referrals. 

“Title and other services were high because of these referral relationships between real estate agents and the settlement service providers,” said Holly Spencer Bunting, who is a lawyer at Mayer Brown and represents businesses on mortgage banking and consumer finance matters. “There were all these kickbacks and it had to be covered somewhere.”

RESPA bars “receiving anything of value for a referral,” Bunting notes. An entrepreneur cannot start a title company and pay a real estate agent $1,000 in exchange for providing the new title company two new clients. 

But that entrepreneur can do…well, other things. 

A 1992 amendment to RESPA, for example, permits mortgage partnerships, or joint ventures, where equity in earnings are split 50-50. 

A few brokers and lenders, mostly notably Realogy and mortgage lender Guaranteed Rate, have opted for the joint venture

A less intertwined partnership is the marketing service agreement. Under an MSA, a mortgage lender or title insurer, for example, markets the services of a real estate agent or brokerage, or the brokerage markets the service of a lender or insurer, in exchange for a set fee. 

Some brokerages do away with the marketing pacts and earnings sharings altogether, and simply own a mortgage lender or title outfit outright. 

“Owning and operating the full suite of services — brokerage, mortgage, title/escrow and insurance, moving services, home warranty, inspection and others — translates into increased flexibility and represents the ability for HomeServices to diversify and take advantage of the fluid real estate market,” said Gino Blefari, CEO of HomeServices of America, which owns mortgage companies through various acquisitions. 

Like many other brokerages, HomeServices shops often have desks for the real estate agents in the front office, and work space for the title insurers in the back. That’s perfectly legal under RESPA, and it’s simply good business practice for many real estate businesses. 

“If a client asks their agent a question about financing, the agent has someone within the brokerage they can turn to for help, regardless of whether or not the client is using our mortgage service,” F. Duffy Hanna, the president of Howard Hanna Financial Services, said.

Or as Don Casey, the president and CEO of Realogy Title Group, put it, “The real advantage of having our own mortgage and title companies is that we are never on hold waiting for someone to pick up our call.” 

A conglomerate that includes brand names like Coldwell Banker and Century 21, Realogy’s brokerage and franchise units closed more than 1.4 million home sales in 2021, according to the company’s annual report filed with the Securities and Exchange Commission

Realogy Title Group completed about 140,000 transactions last year, or roughly 10% of the combined home sales. 

Some brokerages, like Samson Properties of Fairfax, Virginia, are evidently RESPA compliant even though their business model depends on referrals to Samson-owned Cardinal Title Services

When it comes to title insurance, real estate brokerages measure their success by “attach rate,” a rarely disclosed figure that is the percentage of customers who use the brokerage’s preferred title option.

A good attach rate is about 30-40%, according to Steve Murray, a senior adviser at RealTrends, who has closely studied brokerage’s utilization of title. 

“Our attach rates were strong this year, but naturally we are looking to improve them,” said Duffy Hanna (who did not provide said attach rate). “The key to this whole business is relationships and building confidence and trust between our service providers and our real estate agents.”

The rule of reason

To illustrate how far companies can go without crossing the RESPA line, let’s jet back to Miami. The Instagram posts from Sitcov and other agents like Josue Pinto suggest that Smart Settlements provided “educational” activities in South Florida.

Educational activities are, in fact, permissible under RESPA. The law allows, “normal promotional and education activities” from one company (in this instance Smart Settlements) vying for the business of another company (here, McEnearney Associates Realtors). 

Educational meet-ups, though, are not permissible when the people being educated have agreed to provide services in exchange, or pay for expenses,  “that otherwise would be incurred by the referral source.” 

So, in Miami, did Smart Settlements do something permissible?

“There is nothing explicit in the statute of the regulations that puts any parameter around what is acceptable and what isn’t,” Spencer Bunting said. “I always like to talk to my clients about it like a rule of reason.“

Stephen Gottheim, the general counsel at the American Land Title Association, gives almost identical legal advice. He tells title executives to consider “degrees of reasonableness.” 

“When you start to add some additional components to the seminar, or you start giving a continuing legal education class and you are not charging for the CLE credits when most other providers in the area do, things get more problematic,” Gottheim said. 

Meanwhile, Richard Andreano, an attorney and practice leader of Ballard Spahr’s mortgage banking group, comes down to a company’s level of “risk appetite.” 

Using reason and assessing risk is common-sense advice. The law, though, is built not just on common sense but also legal precedents, the past cases that shape future court determinations. 

Throughout its history, though, RESPA has been routinely amended, and enforced through federal agency actions, leaving few clear cut examples from the past of how best to handle the future. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act amended the law anew and moved enforcement over to the newfangled Consumer Finance Protection Bureau

Here’s one example of lack of clarity around RESPA. The National Association of Realtors, which is currently facing multiple lawsuits for hard and fast rules about how to list a home and compensate a real estate agent, has a “Frequently Asked Questions” page about RESPA.

One question is “Can a title/mortgage company sponsor a luncheon for real estate professionals” and offer continuing legal education? The answer NAR gives: “Maybe,” elaborating that “the rule of reason should be applied.”

All quiet on the RESPA front

A lack of RESPA cases hinders lenders, insurers and brokers from gaining further clarity on the regulation. During its first few years of enforcement, CFPB issued a few actions, which typically resulted in consent orders with the offending company. 

In 2017, the agency reached a consent order with Sherman Oaks, California-based Prospect Mortgage. The mortgage lender allegedly paid RE/MAX Gold Coast and KW Mid-Willamette monthly fees that were contingent on the number of referrals they gave Prospect Mortgage. 

CFPB dinged the lender, which paid these brokerages up to $20,000 a month, a $3.5 million fine. A few months later, the CFPB fined Meridian Title Corporation $1.5 million for a purported scheme involving mortgage and title kickbacks. 

And then nothing.

The last five years has seen a global pandemic, a shift in presidential administrations, a housing market that has soared to its highest sales velocity and price appreciation since the mid-2000s bubble — and no federal RESPA enforcement actions. 

Outside of the beltway, there is some state-level RESPA activity. For example, the Oregon Real Estate Board levies fines against housing professionals for obvious quid pro quo violations, said Alaina Giguiere, a Cannon Beach, Oregon-based RE/MAX agent.

“Sometimes you see the violations and think, ‘How stupid are you?’” Giguiere said. “But I’m guessing they will say they didn’t know and they thought someone was just being nice and taking them for an extravagant $1,000 steak dinner.”

As for civil lawsuits, there are sweeping, proposed class action lawsuits against mortgage lenders such as Amerihome, Freedom Mortgage, and NationStar in which RESPA is one of several listed alleged violations.

And that, per a LexisNexis search of federal and state courts, is the extent of RESPA actions.

One exception is a shareholder lawsuit still kicking around against Zillow in Washington federal court. The company allegedly did not inform investors the CFPB investigated it for RESPA violations. But the CFPB dropped the investigation itself back in 2018.

“The real question,” fumed Ewing of Federal Title, “is what are the 1,500 employees of CFPB doing right now?” 

There was talk from all political sides, Ewing noted, that enforcement action would pick up under Rohit Chopra, President Joe Biden’s pick to run the CFPB. 

Other issues have taken precedence. 

“Right now, RESPA is not making the list of talking points as a priority for the current CFPB director,” Spencer Bunting said. “There is much more focus on equity and financial services, data privacy and helping consumers get through the COVID-19 pandemic.”

The CFPB declined requests to make officials available for an interview. 

The agency provided a written statement that read in part, “In the past, the CFPB has taken action against individuals and entities who violate RESPA by paying illegal kickbacks and failing to properly disclose affiliate relationships, among other things. We will continue to take action against those who violate RESPA and harm consumers.”  

A brighter tomorrow?

“At the end of the day,” Spencer Bunting said, “You are marketing yourself and your services in a residential mortgage loan transaction. People do not know what title insurance is and they usually are not in the market for it.”

In other words, the real estate agent, while banned from quid pro quo, is entrusted to make a reference. 

For agents interivewed, this can be straightforward.

“Communication is key,”  said Giguire of RE/MAX. “Communicate with me, with the principals in the transaction. Do things in a timely fashion and don’t make me have to call you and remind you that our closing is Tuesday and that you still need to set up the signing appointment.” 

Title insurers, of course, appreciate these references. But some are looking to ramp up direct to-consumer marketing. 

“There is a lot of technology out there that can help us identify likely homebuyers or sellers or even refinance candidates, so we can market directly to those individuals through email or targeted social media ads,” said Ron Frazier, CEO and President of Atlas Title. “Overall, I think we are really starting to see a shift to more B2C marketing in what has been traditionally a B2B business.”

Casey at Realogy Title Group also noted various direct-to-consumer marketing strategies the firm was using.

“We have a few consumer-facing applications that are also helping us,” Casey said. “There is Power Snap, which shows the seller exactly what their net profit will be selling through Realogy and it shows the buyer what the end cost of buying a home will be, including all the fees.”

Sarah Perkins, the director of strategic accounts at ClearTitle Agency of Arizona, has also taken a direct-to-consumer tact, launching a newsletter amid COVID to keep in touch with the firm’s past and current clients. 

But, ultimately, the newsletter is also a replay of the networking, relationships and references Perkins experienced prior to the pandemic. At first she noticed established agent and broker contacts referencing her weekly missives, but now she says new clients are quoting her newsletter in their introduction calls.

“Now, when I meet with new agents and brokerages that we haven’t worked with before, they will reference my newsletters, which is really cool,” Perkins said. 

Perkins, of course, is well within the letter of RESPA law to start a newsletter that gains the attention of agents. What more she and other real estate professionals do depends on their appetite for risk. 

“There is more competition for the same business,” Ewing said, “And they need to find a way to get an edge.” 

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