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It has been some time since federal regulators have imposed sanctions for violating the Real Estate Settlement Procedures Act commonly known as RESPA.  However, on August 17, 2023, the Consumer Financial Protection Bureau (“CFPB”) took action against Realty Connect USA Long Island (“Realty Connect”) for accepting numerous illegal kickbacks from Freedom Mortgage Corporation (“Freedom Mortgage”).  Specifically, Realty Connect is ordered to pay a $200,000.00 fine and cease its unlawful activity.

RESPA is a federal law enacted in 1974 to ensure that buyers are provided with sufficient information about the nature and cost of financing and closing escrow on a home purchase.  Importantly, RESPA also prohibits “kickbacks” (anything of value) for referrals sent to settlement providers as they tend to increase the cost of financing and settlement charges.  12 U.S.C. § 2607(a).  The CFPB is charged with enforcing RESPA since it was created in 2011.

Realty Connect violated RESPA by accepting “kickbacks” from Freedom Mortgage in exchange for referrals in three (3) ways.  First, Freedom Mortgage hosted parties and provided tickets to events for real estate agents of Realty Connect at no cost.  Freedom Mortgage would supply the food, beverages, alcohol, and entertainment for Realty Connect hosted events.  Freedom Mortgage also provided free tickets to sporting events, charity galas, and the like.  Second, Realty Connect accepted valuable industry subscription services from Freedom Mortgage at no cost.  Over 2,000 Realty Connect agents received monthly access to property reports, comparable sales, foreclosure data and other information for free while Freedom Mortgage paid thousands in subscription fees.  Finally, Realty Connect was paid $6,000 per month pursuant to a Marketing Service Agreement (MSA).  While MSAs can be lawful if they are bona fide compensation for goods or services actually performed, Realty Connect failed to complete many of the tasks it was paid for.

Freedom Mortgage was fined $1,750,000.00 for its illegal acts.  In addition to paying Realty Connect pursuant to an MSA, it also compensated other real estate brokerages under similar agreements via monthly payments totaling $90,000.00 per month for services never provided.

It is evident that the CFPB is making RESPA enforcement a priority.  Brokerages are encouraged to review their MSA practices to ensure the structure and implementation are RESPA compliant.  Payments cannot be based on the number of referrals received or the quantity of business referred.  Likewise, compensation must be given for services or goods actually provided and must not exceed their market value.  Finally, brokers may choose to decline free gifts if it appears they might be illegal “kickbacks” for referrals.

The CFPB’s announcement of its action against Realty Connect can be found at https://www.consumerfinance.gov/about-us/newsroom/cfpb-penalizes-freedom-mortgage-and-realty-connect-for-illegal-kickbacks/

More information on compliant MSAs can be found at https://www.consumerfinance.gov/compliance/compliance-resources/mortgage-resources/real-estate-settlement-procedures-act/real-estate-settlement-procedures-act-faqs/

and https://www.aaronline.com/2023/08/11/real-estate-agent-and-mortgage-broker-may-engage-in-joint-advertising-provided-the-expenses-are-split-pro-rata/

Aaron M. Green, Esq., a licensed Arizona attorney, is the General Counsel for the Arizona Association of REALTORS®.  This article is of a general nature and reflects only the opinion of the author at the time it was drafted.  It is not intended as definitive legal advice, and you should not act upon it without seeking independent legal counsel.