The latest in a number of high-profile fines for illegal kickbacks in real estate was announced a few weeks ago. A title company had allegedly entered into agreements with real estate practitioners and others in the industry for marketing their title services. The Consumer Financial Protection Bureau (CFPB) says the agreements amounted to a cover for referral fees.
Real estate practitioners entering into marketing agreements with real estate settlement service providers is well-established in the industry, and this latest enforcement action doesn’t take aim at that; it takes aim at agreements that the CFPB thinks are really something else in disguise.
How do you ensure a marketing agreement you enter into is appropriate under federal anti-kickback rules? Well, you can’t go wrong clearing it first with an attorney who’s familiar with the Real Estate Settlement Procedures Act, or RESPA. For a general idea, though, there are two tests you can apply:
1.Is the marketing fee you receive based on the number of referrals you make to the company, whether it’s a title company, a lender, or another service provider? If the fee corresponds to the number of referrals, you could be inviting a close look by the CFPB.
2. If you have an arrangement to split costs on a joint project, like a newspaper ad, is the split reflective of what each of you get in return? For example, if you and the title company are splitting the cost of the ad down the middle, then half the ad should go to the title company and half should go to you. If the title company is covering 75 percent of the cost of the ad but only taking up 25 percent of the space, that split makes it look like the company is subsidizing 50 percent of the ad cost. Again, you could be inviting a close look by the CFPB.
The video also looks at a law that was just enacted that could be helpful if you sell new condos. Practitioners have had a particular problem in recent years with buyers purchasing a unit while the condo project is still under development and then backing out of their purchase contract as the project nears completion. It’s not that hard for them to do that because there’s a disclosure provision in federal law (the Interstate Land Sales Full Disclosure Act) that let’s them rescind their contract if the condo project isn’t exactly the way it was earlier disclosed by the developer. Small differences in what was earlier disclosed and what actually gets built are typically numerous in a new project, because it’s hard if not impossible for the developer to anticipate every variable while the project is still in its early stages. This disclosure issue opens the door for buyers to use what amounts to a technicality to rescind their contract.
The new law simply aligns the disclosure requirement for new projects with those that apply to existing projects, for which disclosures are less detailed. That makes it more difficult for buyers to back out at the last minute on the basis of a technicality.
The law is mainly of importance to practitioners who sell units in large-scale condo projects, particularly in once-hot markets where a lot of projects were started during the housing boom only to see prices fall in the downturn. In some cases, prices have yet to return to the level at which some units were bought. But the law shows that Congress can work together and get things done when the issue is bipartisan, as real estate matters generally are.