The Consumer Financial Protection Bureau (CFPB) released a policy statement on abusive acts or practices, where the agency provided insight into how it analyzes the elements of abusiveness.
The statement was published in April, with a request for industry participants to submit comments by July 3 for the bureau’s consideration. The analysis it provides summarized the CFPB’s actions under its authority to address abusive acts or practices and explains how it analyzes these elements. The goal was to offer a framework for fellow government enforcers and the market on how to identify problematic practices.
The Consumer Financial Protection Act (CFPA) defines an abusive act or practice as one that either materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service, or an action that takes unreasonable advantage of a consumer’s lack of understanding of the material risks, costs, or conditions of the product or service; the inability of the consumer to protect the their own interests in selecting or using a consumer financial product or service; or the reasonable reliance by the consumer on a covered person to act within the consumer’s interest.
“Unlike with unfairness but similar to deception, abusiveness requires no showing of substantial injury to establish liability, but is rather focused on conduct that Congress presumed to be harmful or distortionary to the proper functioning of the market,” the bureau stated. “An act or practice need fall into only one of the categories above in order to be abusive, but an act or practice could fall into more than one category.”
While the CFPA is usually of little concern to real estate agents, some experts state this policy statement may be worth consideration by those agents who participate in joint ventures (JVs) with mortgage or title companies.
“[W]hen real estate agents enter into joint ventures with mortgage or title companies, they expose themselves to the CFPA,” Jeffrey Ehrlich, Erin Ashwell, Kevin Frankel, and Ashley Matthews, partners at McGuireWoods LLP, wrote in one of the company’s Consumer FinSights. “The joint ventures, themselves, are ‘covered persons’ under the CFPA because they offer credit or title services.
“And joint-venture partners who materially participate in the affairs of their covered-person entity are ‘related persons’ and are thus deemed to be ‘covered persons.’ One way that real-estate agents ‘materially participate’ in the affairs of their joint ventures is by referring their real-estate customers to the joint ventures for mortgage or title services. This same conduct might qualify a real-estate agent as [a] ‘service provider,’ which the CFPA defines to mean ‘any person that provides a material service to a covered person.’”
Because of this interpretation, the experts stated, real estate agents should be paying attention to this statement, especially what it says about reasonable reliance.
As stated above, the bureau defines abusiveness to include taking unreasonable advantage of the consumer’s reasonable reliance on a covered person to act in the consumer’s interest. This is because when people reasonably expect a covered entity to act in their interests when making decisions for them, or are advising them on a decision, there is a possibility for betrayal or exploitation. This possibility is the one of the reasons Congress prohibited taking unreasonable advantage of reasonable consumer reliance.
To establish whether a consumer had reasonable reliance, the bureau considers whether the covered person or entity communicated that it would act in the customers’ best interest, or otherwise touted itself as doing so, or where an entity assumed the role of acting on behalf of consumers or helping them to select providers in the market. This can apply to homebuyers and their real estate agents, as there is a reliance on the agent when selecting providers in the market, such as a mortgage or title company.
The bureau stated the agent in these instances is potentially acting as an intermediary and can “function as a broker or other trusted source” for a homebuyer as they select, negotiate for, and otherwise procure financial products or services. Those agents who engage in certain forms of steering or self-dealing by referring business to a JV in which they have an interest in, may be considered taking unreasonable advantage when a consumer should be able to rely on an agent to do so in manner “free of manipulation,” the bureau added.
“Real-estate agents who refer their customers to the agents’ own joint ventures risk violating the CFPA’s prohibition on abusive conduct in a number of ways,” they stated. “For example, when an agent refers their real-estate customer to a mortgage broker, the consumer might reasonably believe that the agent is acting in the consumer’s interest – i.e., referring the consumer to someone who will help the consumer get the best mortgage for the consumer – while the agent might be acting in their own interest by steering the consumer to a mortgage company that the agent partly owns and from which the agent would share in profits derived from providing a mortgage to the referred consumer.
“Might the bureau or a state attorney general consider this to be ‘steering or self-dealing’ that is ‘abusive’ under the CFPA?” they asked.
The CFPB’s statement also brought questions about when an agent refers customers looking for title services to the agent’s own JV. In most jurisdictions, the McGuireWoods LLP partners pointed out, a title agent is a neutral third-party with fiduciary obligations to both buyer and seller. But when the title company is a JV between a sponsoring title company and the buyer’s real estate agent, the statutorily required neutrality is absent, potentially to the detriment of the seller, who is also a protected consumer.
Some states have recognized this conflict and have enacted laws precluding real estate agents from receiving compensation or profits from a title company JV to which they refer their real estate customers, the McGuireWoods partners stated. They also noted none of these state laws carve out a disclosure exemption, where disclosing the conflict of interest would protect an agent from enforcement. It would be unlikely for a disclosure to dissuade the CFPB from taking action as well, particularly when the disclosure is made after the referral and amongst the volume of paperwork required at the signing of the purchase agreement.
“Real-estate agents who participate in joint ventures subject themselves to the authority of the Consumer Financial Protection Bureau, state attorneys general, and other state regulators, all of which may enforce the CFPA’s prohibition on abusive conduct,” the partners concluded. “And given the bureau’s aggressive interpretation of this statute, real estate agents participating in joint ventures might reconsider their involvement, particularly in states like Arizona and New York and in the District of Columbia, where existing laws already forbid joint-venture title companies from compensating real estate agents.”