Enforcement efforts against improper business arrangements seem unrelenting given recent events. On September 20, 2005, the federal Department of Housing and Urban Development (HUD) announced a $48,000 settlement agreement with Prudential Locations, LLC for violating the Real Estate Settlement Procedures Act (RESPA). Prudential's office in Hawaii purportedly offered gifts to its sales agents for referring business to an affiliated mortgage company. Also earlier last month, HUD settled a case against Coldwell Banker in Georgia for $250,000. Coldwell Banker allegedly paid higher sales commissions and offered other incentives to its agents for referring business to an affiliated title company. In addition to the settlement payments, both Prudential and Coldwell Banker agreed to cease business practices that triggered HUD's concerns, but admitted to no wrongdoing.
In a separate matter, Property I.D. and others are currently defendants in a lawsuit alleging RESPA violations due to its arrangements in connection with NHD reports. The plaintiff in this case is seeking class certification.
These recent enforcement efforts and legal actions serve as a reminder for REALTORS® to make sure your business practices comply with RESPA and other laws. Under RESPA, you generally cannot give or receive anything of value in exchange for the referral of settlement service business. RESPA applies to transactions involving one-to-four residential units with a federally-related mortgage loan. There is an exception to RESPA for an affiliated business arrangement if certain requirements are met, but that exception does not allow a brokerage to offer incentives to its agents for referring clients to the broker's affiliate.
Sanctions for failing to comply with RESPA are harsh. Enforcement efforts by federal and state authorities may result in fines and even imprisonment up to one year. In addition, a consumer may bring a civil lawsuit to recover an amount equal to three times the improper kickback, plus attorneys' fees and costs.
In the current legal climate, REALTORS® should be especially mindful that improper referral arrangements may violate laws other than RESPA. As a prime example, an agent who claims or takes a secret or undisclosed compensation, commission or profit may be subject to disciplinary action by the Department of Real Estate, including license suspension or revocation.
For more information about Referral Arrangements, including affiliated business arrangements, C.A.R.'s Legal Department has a Legal Memorandum titled Referral Arrangements at
http://www.car.org/index.php?id=MzQ3OTg. C.A.R.'s Legal Department also provides REALTORS® with various legal memoranda covering a wide range of topics of interest. Here are some of our new or newly revised legal memoranda now available through C.A.R. Online:
Scrutiny Of Affiliated Business Arrangements Continues
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