The Naked Gun: Real Stories from the Files of the CFPB

The Naked Gun: Real Stories from the Files of the CFPB American Land Title Association March 19, 2015 Benjamin Olson, Esq. Buckley Sandler LLP 1250 24th Street NW, Suite 700 86 Willow Street Washington, DC 20037 Yarmouthport, MA 02675 Ruth A. Dillingham, Esq. First American Title Insurance Company 202.349.7924 (774) 251-3031 E-mail: bolson@buckleysandler.com E-mail: rdillingham@firstam.com Loretta Salzano, Esq. Franzén and Salzano, P.C. 40 Technology Parkway South, Suite 202 Atlanta, Georgia 30092 (770) 248-2881 E-mail: lsalzano@franzen-salzano.com These materials are presented for informational purposes only and are not intended to constitute legal advice. COPYRIGHT 2015 ALL RIGHTS RESERVED

Agenda Laying Down the Law Recent Enforcement Actions YOU Be the Judge! 2

Laying Down the Law

RESPA 101 Prior to the CFPB (2010), RESPA was governed by HUD Wrote the rules Enforced through prudential regulators Now enforced by CFPB (remember Consumer is our first name) Can investigate ANY person who engages in potential violations of Federal consumer financial law. Can bring administrative enforcement action or file suit against ANY person for violations found during an examination or investigation.

New Regulator Same old rule RESPA Section 8(a) prohibits anyone from: giving or accepting a fee, kickback or thing of value pursuant to an agreement in exchange for referrals of settlement service business RESPA Section 8(b) prohibits: fee splitting receiving unearned fees for services not actually performed

Let s Break it Down: Part I Thing of Value : any payment, advance, funds, loan, service or other consideration Money Discounts Credit Services at a special or free rate Lease or rental payments based on the amount of business referred Trips Payments of another person s expenses

Let s Break it Down: Part II Agreement or Understanding Does not have to be in writing verbalized Can be established by practice course of conduct

Referral Oral or written action Let s Break it Down: Part III Directed to a person Affirmatively influences the selection by any person of a provider of settlement service Includes when the person paying for the settlement service is required to use a particular provider.

Settlement Services Let s Break it Down: Part IV any service provided in connection with a prospective or actual settlement Includes mortgage broker services attorney services real estate broker services appraisals title services

Lets Break it Down: Part V RESPA allows payments within affiliated business arrangements if referral is: For settlement services Disclosed (on the mandated form); Not a required use; and Payments are limited to The cost of the service provided and/or A return on investment

Statement of Policy 1996-2 Acknowledges the 3 requirements in statute: Disclosure Form No Required Use No payment beyond Service Cost and/or Return on Investment Notes that the service must be provided by an bona fide service provider Not a sham business

10 Factor Test Bona Fide settlement service provider review: 1. Is a capital investment made by parties? 2. Is staff doing the work? 3. Is management of the business at the business? 4. Is office space separate from parent? 5. Are actual services conducted? 6. Are all of the services normally offered provided? 7. Are subcontracted services done by independents? 8. Are subcontracted services paid for? 9. Is it competitive in the marketplace? 10. Is it providing service beyond just parent?

Payments among Participants Primary Inquiry for Sham Is the payment to parent only a return on investment/ownership? Is parent investment actual rather than a loan? Is return a fair value based on profit? Is return proportional to investment? Is return not tied in to referrals?

Abuse of Structure HUD goes after violators; Consumers sue for damages; Businesses respond that they are in compliance Format of Detection? HUD administrative actions Settlement agreements and fines Law suits under private rights of action Class action law suits

RESAP Enforcement Actions

CFPB Focus on RESPA Total CFPB Enforcement Actions* RESPA Actions (15) Non-RESPA Actions (36) * As of Feb. 20, 2015 Approximately 30% of all CFPB enforcement actions have been based, at least in part, on alleged violations of RESPA. Four RESPA-based enforcement actions (~27%) have named individuals: Paul Taylor (May 2013): President Fidelity Mortgage (January 2014): President Amerisave (August 2014): Owner Wells Fargo/Chase (January 2015): Employee/wife

Marketing and Advertising: Defrayed Costs Payment for normal promotional and educational activities are permissible But cannot condition on referrals or defray expenses that would otherwise be incurred by a person in a position to refer settlement services Defrayed Advertising Costs CFPB v. Wells Fargo/Chase (January 2015) Complaint alleged title co. sold leads at discount to LOs and paid for LOs mailers to leads in exchange for referrals Wells to pay $10.8MM in restitution and $24MM in CMPs. Chase to pay $900,000 total restitution and CMPs.

Marketing and Advertising: Joint Advertising HUD FAQs: Nothing in RESPA prevents joint advertising as long as each party pays its pro-rata share. Example: Cost of brochure containing equal amounts of information about two settlement service providers may be split 50/50. CFPB has not provided additional guidance specific to joint advertising. Online advertising presents new challenges with respect to calculating pro-rata share of advertisements. Zillow whistleblower suits: Plaintiffs allege that in some cases lenders paid the majority of real estate agents costs for advertising on Zillow s website.

Marketing and Advertising: Marketing Services Agreements MSAs are generally agreements between two entities typically both settlement service providers under which one company is paid to advertise the other company s settlement services to its customers. Widely used but not expressly contemplated under RESPA or Reg. X. CFPB v. Lighthouse Title (September 2014) Allegations: Title co. entered into MSAs but did not pay fair market value. Instead, MSA fees set, in part, on: (1) number of referrals and revenue from referrals; (2) how much competitors were willing to pay. Statistically significant increase in referrals under MSAs. Title company did not diligently monitor performance under MSAs. Penalties: $200,000 CMP; termination of MSAs plus 5-year ban

Marketing and Advertising: MSAs After Lighthouse Are MSAs per se illegal? CFPB: Entering a contract is a thing of value within the meaning of Section 8, even if the fees paid under that contract are fair market value for the goods or services provided. However, no express statement that MSAs are not permitted under RESPA. Is successful marketing evidence of a RESPA violation? CFPB: The counterparties referred significantly more transactions to Respondent when they had MSAs with Respondent than when they did not. The differences are statistically significant and are not explained by seasonal or year-to-year fluctuations. Best way to avoid a similar finding is to ensure that MSA services do not resemble referrals (i.e., that they are not directed to specific borrowers or applicants).

Marketing and Advertising: MSAs After Lighthouse What documentation is required to support a fair market value determination? CFPB: Respondent did not document how it determined the fair market value for the specific services allegedly received under the MSAs. Documentation should be more than a single statement in the MSA that the fees represent the fair market value of the services provided. Consider obtaining an independent valuation for MSA services. Takeaway: Increased scrutiny of MSAs underway; bona fide non-referral services are critical as is proper vendor management and records of compliance

Affiliated Business Arrangements (AfBAs) Referrals to AfBAs fall within Section 8(c) safe harbor exception if: Proper AfBA disclosure provided Customer not required to use AfBA Only thing of value exchanged is a return on ownership interest CFPB v. Amerisave (Aug. 12, 2014): Complaint alleged defendant did not disclose affiliation with appraisal management company before scheduling appraisal and/or charging fees and did not allow consumers to choose their own appraiser or AMC. RESPA allegation one element of broader case $14.8 million in refunds; $4.5 million CMP for Amerisave; $1.5 CMP to Markert with managerial responsibility who participated in the alleged conduct CFPB v. RealtySouth / TitleSouth (May 24, 2014): Complaint alleged RealtySouth agents were encouraged or required to use TitleSouth as the title insurance provider. Initial form purchase contract did not offer consumers a choice of title insurance provider. After the contract was changed, used improper AfBA disclosure form. $500,000 CMP Takeaway: Use the Form AfBA Disclosure in Reg X.

Affiliated Business Arrangements: Sham AfBAs 1996 HUD Policy Statement established 10-factor test indicating whether an entity is bona fide provider, including whether the entity: Performs settlement services Has its own employees Competes in the marketplace for business, rather than relying solely on referrals from an affiliate CFPB v. Paul Taylor (May 2013) Consent order referenced the HUD Policy Statement Carter v. Welles-Bowen (Nov. 2013) Sixth Circuit holds HUD Policy Statement not entitled to judicial deference. CFPB v. Borders & Borders (Oct. 2014) Complaint does not reference HUD Policy Statement but nevertheless relies on factors. Takeaway: CFPB will scrutinize the structure and operations of JVs.

Space Sharing Agreements 1996 HUD Policy Statement 1996 provides that entities should pay the general market value of office rental, rather than the value of the rented property to the service provider. CFPB v. Fidelity Mortgage Corp./Mark Figert (Jan. 15, 2014) Allegation: Rent was disguised referral fee because: Fidelity did not use rented space at bank. Rent based on revenues received by Fidelity from bank. Fidelity paid the bank monthly amounts averaging $1,350; monthly rents for comparable space were $600 - $900. Agreement also included an exclusive promotion (referral) provision. Penalties: $54,000 CMP; forfeit $27,076 in origination fees; Owner/President also liable. Takeaway: For space-sharing agreements, need actual use of space, payments limited to FMV, and records to show both.

Employee Compensation Exception Section 8(c) exception for bona fide salary or compensation. Regulation X states that [a]n employer s payment to its own employees for any referral activities is permitted under RESPA. HUD Statement: [I]dentifying who is a bona fide employee is very important in determining what is and is not permitted under the RESPA regulations in this regard. CFPB v. Stonebridge Title (June 12, 2014): Consent order against title co. that paid compensation for referrals to non-bona fide employees associated with referral sources Title co. paid commission to its employees for each title order. Company did not have the power to control these employees, who actually operated as independent salespeople (though they received W-2s). $30,000 CMP (based on ability to pay) Takeaway: The CFPB will not take W-2s at face value; employee exemption to be carefully scrutinized.

Lead Generation The act of selling or purchasing leads is not necessarily prohibited by RESPA if there is no accompanying referral. HUD Informal Guidance: [T]here is no objection to such payment [for a customer list], so long as the payment is for the use of the list and is not further conditioned upon the number of closed transactions resulting from the list Most recent CFPB enforcement action illustrates the line between permissible lead generation and impermissible payment for referrals. NewDay Financial (Feb. 10, 2015) Lender paid a $75 lead generation fee to a veterans org. for each inquiry the lender received after sending advertisements to the org. s members. Advertisements were identified as coming from the veterans org., rather than from the lender, and recommended that members use the lender for mortgage lending services. Members who called the veterans org. for information on mortgage products were referred to the lender. $2 million CMP

YOU Be the Judge!

You Be the Judge! 1. Real Estate Broker asks you to : Pay the band for office party Sponsor golf tournament Bring breakfast once a month rotating with other settlement agents Provide continuing education Guilty or Innocent? 28

You Be the Judge! 2. You form a title agency with broker which is a joint venture/aba. Broker and broker s agents want title company to: Host lunches Pay for pizza pool parties Provide continuing education Guilty or Innocent? 29

You Be the Judge! 3. Real Estate Broker wants to promote you as its preferred settlement agent in its office, on its website and in all other marketing and asks you to pay $5,000 a month. Guilty or Innocent? 30

You Be the Judge! Guilty or Innocent? 4. You host monthly lunch and learns and invite all clients and referral sources. Invite all brokers and agents in your city Promote them through local Board of Realtors on a first come first serve basis. 31

You Be the Judge! 5. An agent asks you to: Cater open house Sponsor caravan Enter into an MSA Pay for Zillow Share leads Buy its leads Guilty or Innocent? 32

You Be the Judge! 6. A broker and lender want to develop an office occupied by various settlement service providers and ask you to: Lease space from lender Be the main/lead tenant to lease space to broker, lender and others Buy the building to lease space to broker, lender and others Guilty or Innocent? 33

Questions? 34