Technology creates challenges for law
WASHINGTON — You probably know federal law prohibits kickbacks among brokers and others in home real estate deals. You can't give money to someone for steering a home buyer or refinancer to a particular title agency, mortgage lender or escrow company without providing any services to the consumer.
Yet recent legal settlements suggest technology and creative arrangements are raising new questions about what's permissible and what's not.
Take the multimillion-dollar settlement July 11 between the Department of Housing and Urban Development and Fidelity National Financial, the country's highest-volume title insurance and settlement services company. HUD charged that Fidelity and its affiliates have "engaged in a widespread and years-long campaign to pay real estate brokers kickbacks for the referral of real estate services, including home warranties and title insurance." As part of the settlement, Fidelity denied any wrongdoing but agreed to pay $4.5 million.
How was the company paying kickbacks to brokers? According to HUD, it was done with the help of the Internet: Brokers were given access to a Web-based Fidelity portal that automates home real estate transactions "from listing to closing," and also enables agents to select title insurance and other services for the transaction.
Realty brokers signed "sub-license agreements" with Fidelity subsidiaries to enable them to be listed on the portal as providers of services. Then, as part of the deal, HUD said, Fidelity subsidiaries paid participating real estate brokers for referrals of customers they provided.
It was high-tech and sophisticated and may have involved large numbers of realty offices around the country and thousands of transactions. Fidelity insisted in the settlement that the payments it made were not for referrals but for giving brokers access to its automated "TransactionPoint" platform. Dan Murphy, a Fidelity spokesman, declined to comment.
In another new case alleging kickbacks, HUD settled for $3.1 million with Prospect Mortgage LLC, a national home lender based in Sherman Oaks, Calif. According to HUD, Prospect "created sham affiliated business arrangements for the purpose of paying improper kickbacks" to real estate brokers, mortgage brokers and other providers.
Prospect denied that it violated federal law but agreed to dismantle the network, which had involved creation of large numbers of limited liability companies that purported to be legitimate joint ventures with Prospect but were shells that "had little or no employees, capital and/or offices," according to HUD.
"In return for the referral of business, Prospect shared 50 percent of its profits with these entities," HUD said.
Ron Bergum, chief executive of Prospect, said that although the same business-generation model "is currently being used by several of our competitors," the company has "respect" for HUD's position.
Another issue emerged in recent settlements in New Jersey: The charging of "admin" fees on top of standard commissions. Weichert South Jersey Inc. and Prudential Fox & Roach Realtors settled class-action suits challenging their collection of extra money from thousands of clients at closings for which no additional services were provided. Both firms denied the allegations but agreed to cease the fees, generally from $150 to $275.
A lawyer for the plaintiffs in both cases, Stephen DeNittis, said the class-action suits alleged violations of state laws that track federal law on realty broker compensation. "You can call it whatever you want — an admin fee or added commission or some other name, but if you charge money for it you have to do something" to justify the fee, DeNittis said.
Bottom line: You have no obligation to pay extra fees in home purchases or sales if nobody provides additional services to you.
Correction: In the July 10 column, I misidentified the Independent Community Bankers of America as the Independent Community Bankers Association.
Kenneth R. Harney can be reached at firstname.lastname@example.org.