Maryland Legal Alert for Financial Services
RESPA Enforcement Action Involving Affiliated Business Arrangements
The Pennsylvania Attorney General (AG) recently took action against a mortgage lending enterprise and its principals concerning alleged violations of Section 8(a) of the Real Estate Settlement Procedure Act (RESPA) and its implementing regulation, Regulation X. RESPA prohibits giving things of value or “illegal kickbacks” in exchange for business referrals for a settlement service involving federally related mortgage loans. In this case, a licensed mortgage broker/lender set up affiliated mortgage brokerage entities that were part-owned by real estate brokers who referred loan business to the affiliated entity. While RESPA contemplates (and permits) certain affiliated business arrangements, compliance requirements include: (a) provision of specific consumer disclosures; (b) the affiliated entities must be legitimate providers of actual settlement services; and (c) owners of the affiliated entities must buy into the entities on fair market value terms and only receive ownership distributions in relation to their ownership interests in the affiliated entities.
The AG’s action contends that the price that real estate brokers paid to buy into the affiliated mortgage brokerage entities were too low in relation to the ownership distributions that were then paid to the real estate broker owners. The AG also faulted the mortgage lending enterprise for providing other incentives to real estate brokers related to the referral of settlement service business, including tickets to expensive sporting events.
Practice Pointer: The recent enforcement action serves as a reminder of the requirements of RESPA concerning affiliated business arrangements. Regulated institutions should review company policies and practices regarding affiliated entities to ensure that the affiliated entities perform compensable services, that owners purchase interests in the entities on a fair market value basis, and that owners receive nothing other than actual ownership distributions in proportion to their ownership interests.
For more information, contact Christopher R. Rahl.
Contact Christopher R. Rahl | 410-576-4222