CFPB and Real Estate Agents. A course on the Consumer Financial Protection Bureau and its significant impact on real estate agents

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1 CFPB and Real Estate Agents A course on the Consumer Financial Protection Bureau and its significant impact on real estate agents

2 What is the Consumer Financial Protection Bureau (CFPB)? Independent agency of the United States government Established by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 Jurisdiction includes credit cards, mortgages, and loans Charged with overseeing (and enforcing) all federal financial laws that specifically protect consumers For our industry, these are legal safeguards that our clients rely on when pursuing loans to engage in real property transactions

3 Why was the CFPB created? Prior to establishment, seven different federal agencies were responsible for various aspects of consumer financial protection Their ultimate goal is to restrict the use of unfair, deceptive, and abusive practices against consumers, while ensuring that providers issue clear, upfront information For the first time, non-bank financial institutions will be federally regulated Practically speaking, this means mortgage servicers in our industry (like title companies and conveyancing law firms)

4 How is the CFPB operating? Three main tools are being used in order to promote fair, transparent, and competitive markets 1. Reformation: Fine print and overly long agreements can make transactions difficult to understand for consumers. As such, the CFPB is making substantial changes to lending documents 2. Enforcement: The CFPB is responsible for rule-making, supervision, and filing law suits against practices that produce unfair, deceptive, or abusive acts against consumers 3. Research: The Bureau also engages consumer complaints, analyzes consumer behavior, and monitors financial markets for new risks to consumers

5 CFPB and RESPA The Real Estate Settlement Procedures Act (RESPA) was passed by Congress in 1974 Its original purpose was to prevent undisclosed kickbacks and artificial price inflation by real estate agents, lenders, and title insurance companies Dodd-Frank granted rule-making authority under RESPA to the CFPB, and with respect to entities under its jurisdiction, allowed the CFPB to supervise and enforce compliance with RESPA regulations With these powers, the CFPB has begun to target real estate agencies/companies and individual agents

6 RESPA Violations for Real Estate Agents RESPA can be enforced by the CFPB in many ways, but real estate agents need to be especially be aware of RESPA Section 8(a) and (b). Section 8(a) states that, No person shall give and no person shall accept any fee, kickback or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person. Basically, Section 8(a) prohibits a person or entity from providing a fee, kickback, or thing of value in exchange for a referral of business relating to a real estate settlement service Thing of value is defined as any payment, advance, funds, loan, service or other consideration Regulation X, which the CFPB has amended, further clarifies a thing of value to include the phrase connected in any way with the volume or value of the business referred

7 RESPA Violations for Real Estate Agents RESPA Section 8(b) states that, No person shall give and no person shall accept any portion, split or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed. Bottom Line: Real estate agents need to be extremely wary of payments for the referral of business. If a lender, title company, or law firm offers a real estate agent any sort of gift for the referral of business, that s a RESPA violation The issue is receiving anything beyond your due compensation for the referral of settlement transactions Even an opportunity to win something (like a vacation) would be considered a thing of value for the referral of business

8 RESPA Violations for Real Estate Agents RESPA violations carry significant consequences A fine up to $10, Imprisonment (for up to 1 year) In some cases, RESPA allows for a private cause of action, which will permit the consumer to sue all violators for up to three times the amount paid for settlement services Remember, the CFPB is actively pursuing individuals, as well as real estate companies

9 Exceptions to RESPA Violations Section 8(c)(2) of RESPA states that nothing in Section 8 should be construed as prohibiting the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed. RESPA Section 8(c)(3) permits a payment that is pursuant to a cooperative brokerage arrangement or agreements between real estate agents and brokers. So, a real estate professionals can pay a referral fee to other licensed real estate professionals

10 Exceptions to RESPA Violations Joint advertising is allowed It is permissible for mortgage banker, real estate agents, and title companies to depict their services on the same advertisement The Issue is largely monetary Rule: each party must be paying their pro-rata share Regulation X states that settlement service providers are allowed to engage in Normal promotional and educational activities that are not conditioned on the referral of business, and that do not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or business incident thereto.

11 Exceptions to RESPA Violations Marketing agreements are also satisfactory, provided that they are handled with care. In compensating a provider for marketing services, a company needs to be sure that the amount they pay bears a reasonable relationship to the fair market value of the services provided in order to comply with RESPA. Under RESPA Section 8(c), there is also an affiliated business arrangement (AFBA) exemption It s important to note that the referring company must provide the consumer with an AFBA disclosure statement The disclosure must state arrangement existence, and it must be clear to the consumer that he or she is not required to use that company

12 CFPB Enforcement Examples In March of 2014, the CFPB brought legal action against RealtySouth, an Alabama Real Estate Agency, and its affiliate, TitleSouth, LLC The CFPB brought forth violations of RESPA Section 8(a) and 8(c) (4) Specifically, the CFPB alleged that RealtySouth strongly encouraged, and in some cases required, its agents to use TitleSouth without proper disclosure of the affiliate arrangement RealtySouth argued that its referral arrangement came within the affiliated business arrangements safe harbor because their standard form contract included a blanket disclosure statement The CFPB disagreed, noting that the disclosure failed to highlight consumers choice of settlement services from other providers and their freedom to shop elsewhere Ultimately, a settlement was reached, and RealtySouth agreed to pay $500, without admitting wrongdoing

13 CFPB Enforcement Examples In June of 2014, the CFPB alleged that Stonebridge Title Services Inc. paid commissions to more than twenty independent real estate agents who referred them title insurance business Specifically, the CFPB suggested that Stonebridge solicited real estate agents to provide it with referrals of title business- offering to pay commissions up to 40% of the title insurance premiums that Stonebridge itself received. This practice is a clear violation of Section 8 of RESPA, because kickbacks and payments of unearned fees are explicitly prohibited. As such, Stonebridge agreed to a consent order that required it to pay a $30, penalty to the CFPB.

14 CFPB Enforcement Examples CFPB and Lighthouse Title, Inc. This case is very interesting because the CFPB, for the first time, publicly expressed views on marketing service agreements (MSA s) under Section 8 of RESPA Background MSA s have become popular as a means for settlement service providers to purchase general advertising services directed towards consumers Under these MSA s, a settlement service provider, like a title company, engages another service provider, such as a real estate agent business, to perform marketing services in exchange for periodic fixed fees that are not directly based on volume of business

15 CFPB Enforcement Examples Background (continued) Actual services may include website banner advertisements, physical signage, inclusion of company logos, marks on publications and other resources, etc. Fees, generally, are structured to compensate the service provider only for those marketing and advertising services actually performed Facts Beginning in 2009, Lighthouse Title entered into a series of MSA s with various companies for the provision of marketing and advertising services The CFPB alleged that Lighthouse entered the MSA with the agreement or understanding that, in return the counterparties would refer closings and title insurance business to them The CFPB also asserted that the parties did not determine (or document) a fair market value for services received

16 CFPB Enforcement Examples Facts (continued) Lastly, the CFPB claims that the parties established marketing fees, in part, by considering how many referrals the title agency had received Ultimately, Lighthouse agreed to a consent order that mandated a $200, civil penalty to the CFPB In addition, Lighthouse also agreed to maintain records demonstrating compliance for a 5 (five) year period and ongoing monitoring Monitoring may take the form of randomized on-site visits from CFPB officials, combined with any document requests

17 CFPB Enforcement Examples Lessons from Lighthouse Determining fair market value for the specific services performed is critically important RESPA does not permit that analysis to be based on referrals of settlement service business, or on an examination of what competitors might be willing to pay under a services agreement The service provider should be monitored to ensure it is performing the services for which it is being compensated under the MSA Ultimately, providers and agents should be able to demonstrate to the CFPB that the service provider actually performed marketing services under the MSA, and received a fee that was determined to be of fair market value for the actual services performed

18 Practical Scenarios QUESTION: A real estate agent is sponsoring an open house for other agents. A local title agency reimburses the real estate agent for the cost of a luncheon, and the title agency does not market its title services at the open house. Is this a violation of Section 8 of RESPA? ANSWER: Yes, by reimbursing the real estate agent for the cost of the luncheon, the title agency has given the real estate agent a thing of value in consideration for the referral of business. Both the title agency and the real estate agent could be held responsible for the RESPA violation by the CFPB. If, however, the title company attends the open house to make a presentation or to otherwise market its services, such payments may be lawful under RESPA.

19 Practical Scenarios QUESTION: A real estate broker and a settlement company agree to jointly place a full-page advertisement in a local newspaper. Each company gets exactly one-half of the page to advertise its services. Each company pays one-half of the cost of the advertisement. Is this a violation of Section 8 of RESPA? ANSWER: No, so long as the advertising costs paid by each party are reasonably related to the value of the goods or services received in return, no violation exists. In the past, HUD stated that [n]othing in RESPA prevents joint advertising[,] but if one party is paying less than a pro rata share for the brochure or advertisement, there is a RESPA violation. The CFPB agrees with HUD s statement.

20 Practical Scenarios QUESTION: The CEO of a title agency meets the owner of a real estate brokerage firm for dinner at a local restaurant. The purpose of the dinner is for the two individuals to discuss future marketing opportunities. After the discussion has ended, the owner of the title agency pays for the real estate broker s dinner. Is this a violation of Section 8 of RESPA? ANSWER: No, this appears to comply with RESPA. The owner of the title agency can pay for dinner and not violate RESPA because the purpose of dinner was business related (not a payment for the referral of business) The issue here is the intent of meeting for dinner. For example, if there was a multi-million dollar residential development being constructed, and the CEO was paying for dinner while only discussing that venture, then the bribe factor appears to be more prevalent

21 Practical Scenarios QUESTION: A real estate broker pays its real estate agents $20 for each referral the agents make to the real estate broker s affiliated mortgage company. Is this a violation of Section 8 of RESPA? ANSWER: Yes, although RESPA provides an exception for payments made from an employer to its employees, payments between a real estate broker and its salespeople do not qualify for this exception. Real estate professionals are considered independent contractors, rather than employees of the real estate broker. As a result, the $20 payments described above constitute payments in return for the referral of business in violation of RESPA.

22 Practical Scenarios QUESTION: Do RESPA s prohibitions on referral fees apply to all settlement service providers? ANSWER: Yes, RESPA applies equally to all settlement service providers, and does not distinguish among different types of settlement providers. A settlement service includes any service provided in connection with a real estate settlement including, but not limited to, title searches, title examinations, the provision of title certificates, title insurance, services rendered by an attorney, the preparation of documents, property surveys, the rendering of credit reports or appraisals, pest and fungus inspections, home warranty companies, services rendered by a real estate professional, the origination of a federally related mortgage loan, and the handling of the processing and closing or settlement.

23 Nonpublic Personal Information (NPPI) CFPB authority includes the disclosure of Nonpublic Personal Information, hereinafter NPPI, under Sections of the Gramm-Leach-Bliley Act (15 USC ). NPPI can be defined as personally identifiable data, such as information provided by a customer on a form or application, information about a customer s transactions, or any other information about a customer which is otherwise unavailable to the general public. Practically speaking, this includes: social security number, driver s license number, state-issued ID number, credit card number, debit card number, other financial account numbers, addresses, and phone numbers. Every non-internal electronic communication that contains the above information must be sent in a secure manner. Noncompliance will result in heavy fines Physical Documents with NPPI must be secure at all times as well Locked cabinets, desk draws, etc.

24 CFPB Impact on Clients Beyond the impact CFPB enforcement will directly have on real estate agents, there will be additional practical considerations that will impact daily practice immensely: New Loan Estimate Form This document will replace the Good Faith Estimate and early TIL disclosure Must be delivered to the consumer at least 7 days before closing, and within 3 days of loan application submission. Title Insurance must be disclosed as optional. If a borrower refuses it, lender cannot include on LE. New Closing Disclosure Form This document will replace the HUD-1 and final TIL disclosure Must be delivered to the consumer at least 3 business days prior to the date of closing Bottom Line: closings will take a minimum of 10 days now and last minute changes will be kept to clerical in nature In other words, the days of let s get this closed tomorrow are completely over Contracts for purchase should always contemplate a day timetable Effective October 1, 2015

25 Disclosure Delivery Chart

26 Loan Estimate Page 1

27 Loan Estimate Page 2

28 Loan Estimate Page 3

29 Closing Disclosure Page 1

30 Closing Disclosure Page 2

31 Closing Disclosure Page 3

32 Closing Disclosure Page 4

33 Closing Disclosure Page 5

34 Questions?