The Consumer Financial Protection Bureau “CFPB” announced another enforcement action today against JRHBW Realty, Inc. d/b/a RealtySouth and TitleSouth, LLC (both HomeServices of America companies) for violating Section 8 Real Estate Settlement Procedures Act , 12 U.S.C. §2607, and its implementing regulation, 12 C.F.R. Part 1024 (formerly codified at 24 C.F.R. Part 3500)(collectively, RESPA).
Administrative Proceeding File No. 2014-CFPB-0005 “In the Matter of JRHBW Realty, Inc., doing business as RealtySouth; TitleSouth LLC found that RealtySouth used illegal Affiliated Business Disclosure Statements and inserted language in the RealtySouth purchase agreements which mandated the use of TitleSouth both of which violate RESPA.
RealtySouth is a real estate brokerage company operating in the state of Alabama who also owns another company, TitleSouth LLC, which provides title closing services in Alabama. The CFPB made note in the consent order that the President of TitleSouth also is the General Counsel of RealtySouth.
RealtySouth and TitleSouth were order to pay a fine of $500,000 to the CFPB and faced additional requirements as identified below. It should be noted that this isn’t RealtySouth’s first experience with RESPA as it was involved in the infamous RESPA class action case: Vicki V. Busby versus JRHBW Realty, Inc. d/b/a Realty South involving administrative brokerage fees.
The CFPB stated in its consent order that RESPA Section 8(c)(4) provides that a affiliated business arrangement were permitted as long as: (1) a disclosure of the existence of the arrangement and a written estimate of the charge or range of charges generally made by the provider to which the person is referred (AfBA Disclosure form) is provided, (2) consumer is not required to use the affiliated business, and (3) the only “thing of value” received as a result of the arrangement is limited to a return on an ownership interest. 12 U.S.C. §26-07(c)(4).
An affiliated business arrangement is not a violation of Section 8 of RESPA….(1) The person making the referral has provided to each person whose business is referred a written disclosure, in the format of the Affiliated Business Disclosure Statement set forth in Appendix D of part 1024, (2) the nature of the relationship (explaining the ownership and financial interest) between the provider of settlement services (or business incident thereto) and the person making the referral and (3) of an estimated charge or range of charges generally made by such provider (which describe the charge using the same terminology, as far as practical, as section L of the HUD-1 Settlement Statement). The CFPB reiterated in its consent decree that the AfBA disclosure form must be provided to a consumer on a separate piece of paper no later than the time of each referral, or if the lender requires the use of a particular provider, at the time of loan application.
An AfBA disclosure form contained in Appendix D must include these five core components: (1) a preliminary field allowing for identification of the consumer and the entity making the referral, the property address, and the date; (2) a notice and description of the business relationship between the affiliates and a notice of the potential financial benefit the referral may provide the referring party; (3) an acknowledgement with a line for signature by the consumer; (4) the estimated charges or range of charges for the settlement service; and (5) a block paragraph with the following language and typography:
Set forth below is the estimated charge or range of charges for the settlement services listed. You are NOT required to use the listed provider(s) as a condition for [settlement on your loan on][or][purchase, sale, or refinance of] the subject property. THERE ARE FREQUENTLY OTHER SETTLEMENT SERVICE PROVIDERS AVAILABLE WITH SIMILIAR SERVICES. YOU ARE FREE TO SHOP AROUND TO DETERMINE THAT YOU ARE RECIEVING THE BEST SERVICES AND THE BEST RATE FOR THESE SERVICES.
The CFPA said that RealtySouth strongly encouraged its agents, and in certain instances told them they were required to use RealtySouth’s family of services, in particular, TitleSouth. RealtySouth from March 2011 until May 2012 created a preprinted purchase contract that explicitly directed title and closing services for which consumers would pay a fee to use TitleSouth’s services (2011 purchase contract). The order says that Paragraph 5 (Title Insurance) of the RealtySouth purchase contract stated “Seller agrees to furnish Buyer a standard form owner’s title insurance policy issued by TitleSouth, LLC in the amount of the purchase price…” Paragraph 18 (Selection of Closing Agent) further included language which said “Buyer and Seller hereby agree that the closing of this transaction shall be conducted by the TitleSouth Real Estate Closing Center and agree to share equally the closing fees for this transaction.”
The Consent Order further says that in 2012, RealtySouth changed the language regarding title insurance and closing services in its preprinted purchase contract to allow consumers to check off TitleSouth or “Other”.
RealtySouth provided consumers with an “Affiliated Business Arrangement Disclosure Statement” (RealtySouth’s ABA Disclosure) with the 2011 or 2012 Contract used by its clients and that this AfBA Disclosure Statement failed to comply with 12 C.F.R. §1024.15(b) because the ABA Disclosure form did not use the format of Appendix D. It did not use capital letters or another means of highlighting the fact that consumers could obtain similar settlement services from other providers and that they were free to shop around for those services.
The CFPB stated that RealtySouth’s AfBA Disclosure language informing consumers that they could shop around was not set apart, but rather incorporated into the end of a list of descriptions of seven affiliated businesses, and was hidden in what appeared to be a second description of RealtySouth. In addition, the AfBA disclosure form included marketing statements touting the benefit and value of the affiliated entities. Specifically, the language RealtySouth used stated “[w]e at RealtySouth believe our affiliates provide superior service, value, and convenience;” “we believe that our affiliates’ charges are reasonable and are competitive with the amounts charge by other for the same services;” and “[w]ith competitive, reasonable rates, coupled with the smooth and efficient manner in which the transaction will be handled, the affiliates of RealtySouth are in a unique position to provide you with exceptional value and service in handling your transaction.”
RealtySouth made note in the consent order that when RealtySouth was apprised of the CFPB’s concerns that RealtySouth immediately changed its AfBA Disclosure form to address the CFPB’s concerns.
The CFPB found that the RealtySouth and TitleSouth violated Section 8(a) of RESPA by giving and receiving a thing of value pursuant to an agreement or understanding that RealtySouth refer settlement services related to federally related mortgage loans to TitleSouth by affirmatively influencing the selection of TitleSouth through the designation of that affiliate in the 2011 Purchase Contract and 2012 Purchase Contract, as well as a pattern and practice of referrals to TitleSouth, resulting in increased distributions to the entities’ shared parent company.
Lastly, RealtySouth’s AfBA Disclosure Form did not satisfy the “safe harbor” for affiliated business arrangement under 12 USC §2607(c)(4), 12 CFR §1024.15(b).
RealtySouth must ensure that its AfBA Disclosure complies with RESPA and is in the proper format plus the disclosure form shall contain no additional marketing statements or any other statement or content that materially interferes with, detracts from, contradicts, or otherwise obscures the required disclosures.