Our recent discussion of RESPA, like similar discussions before it, prompts more questions than answers. Perhaps it will always be so. When talk of RESPA enforcement arises, it seems there is always someone who can figure out an exception or some way to work around the rules as they have been understood.
A recent U.S. District Court ruling (Henson and Turner v. Fidelity National Financial, Inc., United States District Court Central District of California, March 21, 2014) moves the ball forward toward achieving understanding regarding two issues: (1) What sorts of entities are covered by RESPA regulations? and (2) can payments be considered (referrals) even if they are not tied to particular transactions?
We remind ourselves that RESPA does not prohibit referrals per se. Rather, it prohibits certain people from getting paid, or paying, for referrals where the referral is for "business incident to or a part of a real estate settlement service involving a federally related mortgage loan..." This prohibition applies only to transactions involving residential properties up to and including four units. Moreover, referrals between real estate brokerages are exempted.
So, to whom does RESPA apply? It is clear that real estate agents and brokerages, title companies, escrow companies, and mortgage lenders are covered; but questions have been raised about providers of services that seemed less central. In 2010, HUD responded to a request from the National Association of REALTORS (NAR) asking for clarification regarding referral compensation being paid to agents and brokers by home warranty companies. HUD's position was that the provision of a home warranty policy is a settlement service, and it would, therefore, be illegal under RESPA to receive payment for referring such business. (A subsequent attempt, in 2012, to have Congress declare that home warranty companies were not covered settlement service providers passed the House as H.R. 2446, but died in the Senate.)
In the case at hand, plaintiffs contended that the defendant's subsidiaries (title company escrows) were receiving prohibited kickbacks from delivery services UPS, Federal Express, and OnTrac. In its motion to dismiss, defendant Fidelity argued that " it would 'produce absurd results' to subject companies like Kinko's and Staples to RESPA regulation for tangential services they might provide in real-estate settlements."
But the Court said, "There is no serious dispute that the overnight delivery services were 'provided in connection with a real estate settlement..." Moreover, it went on to assert, "Neither would it be 'absurd' to subject companies like the Delivery Companies, Staples, and Kinko's to RESPA regulations. Congress has not exempted delivery and office-supply companies from the prohibition against kickbacks and unearned fee-splitting. It is therefore not up to the courts to engraft such an exemption onto the statute."
The defendants also argued that the fees it received were not referrals but, rather, were marketing fees. However, the plaintiffs had argued that the periodic fees received by the defendant fluctuated and were based on the volume of business referred.
The Court agreed with plaintiffs that "a prohibited referral agreement need not be connected to a particular transaction..." It said, " when 'a thing of value is received repeatedly and is connected in any way with the volume or value of the business referred, the receipt of the thing of value is evidence that it is made pursuant to an agreement or understanding for the referral of business.'" "The prohibited referral agreement need not be linked to each particular real-estate settlement..."
The points made in Henson and Turner v. Fidelity won't settle all the questions about RESPA; but they have provided more clarity than we had before.
Bob Hunt is a director of the California Association of Realtors. He is the author of Real Estate the Ethical Way.