In order to create an environment that epitomizes responsibility, trust and honesty in an industry that can be easily marred by dishonest practices, the National Association of REALTORS® has been enforcing stricter mandates on real estate referral practices.
Recently, the Consumer Financial Protection Bureau (CFPB) found that RealtySouth, a large Alabama real estate broker, failed to comply with referral provisions laid out in the Real Estate Settlement Procedures Act (RESPA), resulting in disciplinary action being taken very seriously for the violation.
According to the CFPB, RealtySouth was found guilty of violating RESPA through a number of referral practices that were deemed unethical. This includes strongly encouraging its agents to use companies affiliated with RealtySouth and, in some cases outright forcing agents and clients to use one of the affiliated companies for title and closing services.
In addition to these practices, RealtySouth also failed to provide its clients with a RESPA that specifically stated that the client has the right to shop for a business to complete its title and closing services. This is usually provided in the Required Disclosure portion of the document, which states that although a provider may be recommended to a client they are by no means required to use their services.
RESPA does have a safe harbor for affiliated businesses that allows for referrals between the two, however the relationship between the businesses as well as an outline of cost and services needs to be provided in order to comply with the Code of Ethics. The safe harbor still does not allow businesses to force their clients into using affiliates.
Real Estate Broker Pays for Violation
While RESPA does allow for certain occurrences to happen between affiliated businesses, the idea behind the act is to ultimately shut down practices that unlawfully edge out competition. Under section 8(a), RESPA prohibits the exchange of a “fee, kickback or thing of value” in return for business referrals.
It was under this provision that the CFPB again found RealtySouth guilty of violating RESPA as the company participated in “giving and receiving a thing of value pursuant to an agreement or understanding” in its referral practices by “affirmatively influencing the selection” of its affiliated companies.
As a result of this violation, RealtySouth and its affiliated companies were ordered to pay a civil penalty of $500,000. More importantly, however, may be the enhanced education and familiarization that RealtySouth and its affiliates had to give to its agents, which in turn will help to make the rules of the real estate road clearer and the path along safer for clients and agents alike.
The CFPB ordered that RealtySouth emphasize to its agents that no affiliate is required in any real estate transaction, a proper disclosure statement allowing clients to shop around for services must be provided to clients and all other violations of RESPA must be halted immediately to avoid further disciplinary action.