A powerhouse of compliance experts – Foley and Lardner, LLP Partner Jennifer Keas, Franzén and Salzano President Loretta Salzano, Mayer Brown Partner Holly Bunting, Katten & Temple, LLP Of Counsel Brian Levy of, and CEO and founder Mark Meyer of MLinc Solutions – shared their insights at RESPRO into RESPA compliance challenges and what the industry can glean from lessons learned.

In today’s environment, regulators have been scrutinizing joint ventures and other affiliated business arrangements for RESPA compliance. Over the last few years, entities like the Consumer Financial Protection Bureau (CFPB) and states attorneys general have renewed their interest in identifying “sham” operations that could be a front for a kickback scheme, rather than a joint venture designed to add value to a consumer’s settlement services.

“It’s not enough to just look at a given advertising services agreement or operating agreement, give a thumbs up and say, ‘Looks good,’ if your RESPA review doesn’t include the unpacking of how you intend to do things, what the referral pattern is, when disclosure is going to be given out, or how core services are going to be performed,” Keas said. “If you’re not doing that, you probably have a fairly significant blind spot in your risk assessment.”

Meyer, whose company values services performed by potential business sources in the industry to help ensure clients are not overpaying for those services  and thereby maintain RESPA compliance, said his company looks at the market cost of the offered service or office space without taking into account business benefits the company being advertised  or the lessee  may receive in return.

“There is no consideration of conversion rates, profit margins or anything like that,” he explained. “That’s to stay consistent with current RESPA guidelines and interpretation.”

Bunting provided an overview of RESPA’s prohibition on kickbacks – no thing of value in return for the referral of settlement service business. While a straight-forward statement, like most real estate and financial regulations, there are exceptions that allow business practices such as affiliated business arrangements (AfBA), marketing services agreements, and joint ventures. Of note, the exemption allows for providing payment for services provided, so long as payments are fair market value.

“The statutory exemption for services provided is really the basis for the employer-employee payments exception and also normal promotional and educational activities – that’s something we get tons of questions on, especially when it comes to normal day-to-day marketing and what you can do to comply with RESPA,” Bunting said.

Keas reminded that in addition to the statutory criteria, the U.S. Department of Housing and Urban Development, the former enforcer of RESPA, issued a policy statement in the ’90s that provided 10 factors the agency considered when validating the legitimacy of an AfBA. When the CFPB took over RESPA enforcement, it stated this policy statement was still “in play.”

“Regulators are going to be looking at the way value flows, essentially,” Keas said. “You can’t just say, ‘well, it’s an AfBA,’ or ‘it’s a dividend’ and that’s all there is to it. The regulators really look at how payments are being made. So, if you do things like adjust ownership shares based on historic referral patterns, or kick someone out of an AfBA because they’re not hitting metrics, those kinds of things can quickly become problematic. It all has to do with the facts when you apply the law.”

The experts then applied their knowledge to some scenarios where RESPA considerations may apply.

The first fact pattern featured a mortgage company offering to employ real estate agents as mortgage loan originators (MLOs), where the real estate agents were required to satisfy license requirements and sign an employment agreement with the mortgage company. The mortgage company also required the agents to attend regular sales meetings, and the real estate agents generally would originate loans only for their real estate deals. The RESPA issue identified here was whether the real estate agents would be “bona fide” employees as defined by the exception in 12 USC §2607(c)(2).

Levy noted state law analysis would also need to be consulted to determine whether this was a bona fide employment relationship. One question he had for the fact pattern was whether the real estate agents were directly hired as employees by the mortgage company, or if they operated as a 1099 independent contractor. Levy explained that RESPA’s exception for payments to bona fide employees might not cover the company if it hired the real estate agents as contractors.

“It’s very important your compliance narrative is that you are paying somebody a reasonable amount and you’re not overpaying them for the work that they’re doing,” Levy said about this fact pattern. “And while the exception doesn’t require it, I think if you’re keeping things in line and know what the compensation for that kind of a position should be, then you’re going to be on safer ground.”

Salzano said she would look at how the mortgage company’s other MLOs operate, as it would be unusual for them to be restricted to only one channel, and whether they are going to be subject to same type of control and supervision as other MLOs.

“[The real estate agent] needs to be doing something actually necessary and distinct, like we think of with other 8(c)(2) activities,” Salzano said. “I think that when you’re looking at this, if they’re maybe not even doing anything different than they would otherwise be doing, and then they kick it over to another licensed MLO who is doing the bulk of the work, which is what we often see in these arrangements – they’re really not engaged in the mortgage loan origination. They’re simply referring over, and it could be a ruse to compensate them under the exception.”

Salzano said the more arrangements like this fact pattern continue to form, the more investigation and enforcement the industry will see in this area. The facts may differ slightly – instead of hiring real estate agents as MLOs, they hire them as a business development associate or representative – but that could make the situation even more tenuous, especially if that real estate agent is just working in their real estate office conducting business they would usually do while getting paid for whatever their branch or team sends over to the mortgage company.

Another scenario involved a real estate investment trust (REIT) that referred all of its transactions and title insurance work to a specific title agency, including when the REIT is purchasing the property, as well as when it is selling the property to a consumer. The title agency is affiliated with a real estate company that lists all of the REIT’s properties. The real estate company is planning to rebate a portion of its commission back to the REIT, but only in those transactions where the REIT is the purchaser, it’s a commercial purpose transaction, and the affiliated title agency handles the transaction.

Bunting said the issue here is that it is not just commercial business being referred, but residential as well. While the thing of value is not being provided directly in connection with the residential business, if commercial is being “siloed off” as a way to ultimately reward the residential portion of the business, there could be a RESPA violation.

“The argument is that it’s commercial and not subject to RESPA,” Bunting said. “But I think there’s outstanding risk, notwithstanding the state law anti-inducement issues, where residential business is also in the mix.”

Want the latest information on RESPA compliance? Keas will be speaking at the National Settlement Services Summit next week in Naples, Fla., with Saul Ewing, LLP Partner Francis “Trip” Riley on May 22 at 1:45 p.m. ET. For more information on NS3 2024, including the agenda for all three days, click here. You can register for NS3 online or click here to get information on how to register offline.