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Tuesday, June 3, 2014

CFPB Fines Mortgage Broker for Referring Title Insurance Business without Adequate Affiliate Business Arrangement Disclosures

By: ABIA Outside Counsel Chrys D. Lemon and Adam D. Maarec, McIntyre & Lemon, PLLC

On May 24, 2014, the Consumer Financial Protection Bureau (CFPB) entered into a settlement with a mortgage broker resolving alleged violations of the Real Estate Settlement Procedures Act (RESPA) in connection with referral to an affiliated title insurance agency. The CFPB found that the mortgage broker’s affiliated business arrangement disclosure did not conform to the model required by regulation and was surrounded by marketing statements that diluted its effect. As a result, the CFPB alleged that the disclosures did not satisfy the “safe harbor” for affiliated business arrangements and the company agreed to pay a $500,000 civil money penalty.

Background

RESPA prohibits the payment of anything of value in exchange for the referral of a settlement service, including title insurance. Such compensation is often referred to as a “kickback.” The law excepts referrals to affiliates, where compensation from a referral would flow to a referring company’s parent company through the affiliated company’s profits, provided: 1) a disclosure is given; 2) the consumer is not required to use the affiliate; and 3) the only thing of value in exchange for the referral is a return on the ownership interest of the affiliate.  
Regulation X, which implements RESPA, requires that a specific form be used to satisfy the RESPA affiliated business disclosure requirement.  That form is copied below.

Alleged Violations

In this case, the company allegedly did not use the form disclosure, did not highlight that settlement services could be obtained from a nonaffiliate, and incorporated the disclosure into a list in a manner that concealed its purpose. The company also allegedly surrounded the disclosure with marketing messages, stating that the affiliated service provider had “competitive, reasonable rates.” Finally, the company allegedly had preprinted form real estate contracts that, at one time, included an automatic election to use an affiliated title insurance company. In sum, the CFPB alleged that the mortgage broker failed to satisfy the affiliated business arrangement safe harbor requirements and that, as a result, compensation from the affiliate was a kickback in violation of RESPA.

The action is available here.

Read the full article.