The CFPB once again has taken aim at affiliated business arrangements (“AfBAs”), only this time, it is targeting AfBA disclosures. In prior enforcement actions, the CFPB focused on the validity of the AfBA, bringing actions against alleged “sham” AfBAs. However, in its most recent enforcement action, the CFPB entered into a consent order with a real estate brokerage company, alleging that it referred consumers to its affiliate, but failed to provide an adequate AfBA disclosure. The CFPB also alleged that the brokerage company improperly required the use of its affiliate title insurance agency.
RESPA requires that an AfBA meet a statutory safe harbor to avoid violations of Section 8 of RESPA. The safe harbor consists of a three-part test, each part of which must be satisfied to claim the safe harbor protection. Under the safe harbor, a person may refer consumers to an affiliated company and legally receive profit distributions from the affiliate provided: (1) a disclosure concerning the affiliation is provided to the consumer; (2) the consumer is not required to use the affiliated entity; and (3) the only payments made under the arrangement are returns on ownership interest or other permissible payments under RESPA. With respect to the AfBA disclosure, RESPA requires that the disclosure include:
- A statement of the existence of the affiliated business relationship;
- An explanation of the nature of the relationship among the parties, including an explanation of the referring party’s ownership and financial interests in the referred affiliated business entity;
- An estimate of the charge or range of charges generally imposed by the referred affiliated business entity;
- A statement that the consumer is not required to use the referred affiliated business entity and may elect to use any entity providing the requisite settlement services of his or her choice; and
- An acknowledgement line where the consumer must sign and date the disclosure as evidence of his or her receipt.
The AfBA disclosure also must be on a separate sheet of paper and be provided either with the Good Faith Estimate or no later than the time of each referral. Appendix D to RESPA’s regulations contains a model disclosure.
The CFPB’s consent order alleges that the real estate brokerage company did not satisfy the first two prongs of the test. With regard to the AfBA disclosure, the CFPB alleges that the disclosure did not comply with the format of the model disclosure in Appendix D. In support of these allegations, the consent order states that:
- The AfBA disclosure did not use capital letters or otherwise highlight that consumers had a right to shop for the settlement services with service providers other than the affiliate, but rather hid the language within a description of other affiliated businesses and a description of the real estate brokerage.
- The disclosure contained marketing statements touting the benefits and value of using the real estate brokerage’s affiliates. For example, the disclosure stated, “We . . . believe affiliates provide superior service, value, and convenience.”
With regard to allegations of required use, the consent order asserted that the brokerage company, through its sales contract, required consumers to use its affiliate title insurance agency for title and closing services. Specifically, the consent order states:
- Between March 2011 and May 2012, the real estate brokerage used preprinted purchase contracts that contained the following language, effectively requiring consumers to use its affiliate:
- “Title Insurance. Seller agrees to furnish Buyer a standard form owner’s title insurance policy issued by [title company] in the amount of the purchase price . . .”
- “Selection of Closing Agent . . . Buyer and Seller hereby agree that the closing of this transaction shall be conducted by the [title company] and agree to share equally the closing fees for this transaction.”
- The purchase contracts were revised in May 2012 to include checkboxes for the selection of the affiliate title insurance agency or “other.”
- The real estate brokerage encouraged and sometimes directed its agents that they had to use an affiliate for certain settlement services.
To settle these allegations, and without admitting any wrongdoing, the real estate brokerage agreed to: (1) modify its AfBA disclosures to ensure that they comply with the model disclosure in Appendix D, including omitting any marketing (or other) statements that may “materially detract, contradict or obscure required disclosures”; (2) ensure that its training materials and guidance documents expressly state that agents cannot require consumers use an affiliate; and (3) pay $500,000 in civil money penalties. The consent order also provides that, at the CFPB’s request, the real estate brokerage must provide the HUD-1 Settlement Statements for all real estate transactions involving the 2011 and 2012 purchase contracts.
This most recent enforcement action is one to watch, as it demonstrates that the CFPB intends to focus on all aspects of an AfBA for RESPA enforcement, even if those AfBAs meet the standards for bona fide entities. In our October 2013 blog entry regarding RESPA enforcement by the CFPB, we questioned whether changes to the typography and formatting of the model disclosure in Appendix D could place an AfBA outside of the statutory safe harbor and subject an AfBA’s payments to its owners to Section 8’s prohibitions. With this most recent enforcement action, we echo those concerns. Now is the time for AfBAs and their owners to closely review deviations in their disclosures to ensure that they satisfy RESPA’s requirements. Owners of AfBAs also may want to review their policies and contract documents to ensure consumers are not required to use AfBAs.