The Consumer Financial Protection Bureau has long urged state regulators to assist in RESPA enforcement, and the states are stepping up.
Sterbcow Law Group Managing Attorney Marx Sterbcow and RESPRO President and Executive Director Ken Trepeta spoke at RESPRO’s fall seminar in Bachelor’s Gulch, Colo., about the uptick in RESPA enforcement actions instigated by state attorneys general (AGs).
Trepeta kicked off the session by establishing the lay of the land. Certain state AGs, mostly in the mid-Atlantic and District of Columbia (D.C.) areas (though Arizona was also mentioned) have taken interest in joint ventures (JVs). Be it between a title company and real estate agents, or a title company and real estate brokers, the AGs are looking to root out bad actors who are using JVs to conceal illicit referral arrangements.
“Early in 2023, a number of state AGs and other regulators got together and looked at title joint ventures,” Sterbcow said.
A particularly aggressive approach, he noted, can be seen in D.C., where the AG sent dozens of subpoenas to different title agencies in that marketplace, and the Department of Insurance, Security, and Banking sent additional letters of inquiry. These documents contained “very, very thorough questions” inquiring about any operating agreements, distributions, each agent’s capitalization, and even software licenses.
“The regulators in some areas are looking at consumer pricing, which seems to be a real problem for them,” Sterbcow said. “They are under the impression that title insurance premium pricing for affiliated business is more expensive than independent companies.”
States are looking at the same considerations under the U.S. Department of Housing and Urban Development’s (HUD), like whether the JV has its own employees. Sterbcow said sharing employees between the parent company and the JV can be a “real sticking point” for state regulators. State regulators are also considering whether JVs have an independent website and social media presence. The lack of these marketing avenues may send a message the JV isn’t advertising externally, and for some regulators, is a red flag.
“Something regulators are suggesting is that they want to see a portion of your annual budget dedicated toward non-referral source advertising in the operating agreements for joint ventures,” he mentioned.
The D.C. AG’s office seems to be making up rules as they go, with no rhyme or rational target in their quest to enforce, he observed. The DC Attorney General’s Office is implementing unknown rules which are so broad that all affiliated businesses and wholly owned subsidiaries involving title, no matter how RESPA compliant they are, would be illegal, Sterbcow said. For example, if a law firm opens an affiliated title agency, under the AGs enforcement rationale it would be illegal in D.C.
“The end result is we have regulators who have gone so over the top in D.C. that everyone in the title industry who is licensed there is now at risk of future enforcement,” he added.
The AG is arguing RESPA’s Section 8(c) safe harbor does not apply in the district, thus taking the position that any affiliated operations or subsidiary where title insurance is involved is now prohibited in D.C.
However, this message has been inconsistent, Sterbcow said. The D.C. Department of Insurance, Securities, and Banking has an explicit statement on its website that real estate agents, teams, and brokers can invest in ABAs, and the department’s response to a past National Association of Insurance Commissioners’ (NAIC) survey indicated there were no restrictions on ABAs and they were effectively allowed.
“There’s this evolution of more radical views, that would normally be dismissed, and regulators are running with it,” Trepeta observed. “They’ll take a statute out of context, run with it – as we’re seeing in D.C. – and try to shut everyone down because they think they’re helping consumers.”
Trepeta added that for the last 10 years or so, the industry has been fortunate to work with regulators and explain that the good actors in the industry, those following the restrictions of the Section 8(c) exceptions and HUD’s 10-part test, are just as interested in getting rid of bad actors. Businesses that operate compliantly lose business to those engaging in “sham JVs” and put the industry in a bad light, making it more difficult to maintain legitimate arrangements shown to be a better value and a better product for consumers. Ferreting out those using RESPA’s ABA exception to disguise illicit activities is a win for everyone.
Trepeta pointed out another issue adding to the confusion in states targeting JVs are conflicting legal provisions. He pointed to the NAIC model code that was adopted by states related to title insurance. States adopted the model in different ways, either opting to adopt the whole thing or only certain provisions. This has resulted in potential conflicts between RESPA (either state or federal) and the title code in those jurisdictions.
Historically when this occurred, RESPA was the governing provision. More recent trends are showing regulators looking at those conflicting statutes and attempting to ban RESPA-compliant activities in a way that goes against precedent.
When discussing ways to demonstrate a JV is compliant, Sterbcow recommended title JV businesses join RESPRO and your “local state” land title association. Not only does this help establish the legitimacy of the JV, he noted, the more JVs and ABAs that join these groups, the more these trade associations actually advocate for JVs and ABAs in order to keep those members.
“I’m seeing companies and each of their joint ventures across the country really focus on joining a national trade association like RESPRO and their local state land title association to help protect them from regulators running amuck and from bad legislation,” he said.
Other things to keep in mind when forming a new JV:
- Keep separate office space, leased at a fair market value, with clear indicators it is a separate business from its parent companies.
- When performing back-office services (human resources, information technology), ensure there are administrative and managed services agreements in place and that these agreements do not include transactional data. Confirming the appropriate prices for these services is also recommended.
- Provide RESPA training for investors and agents.
“I cannot overemphasize how important [that last factor is],” Sterbcow said. “The investors or employees are your weakest link in the whole thing. You’re relying on real estate agents to say and do the right thing, and oftentimes you have a middleman come in and put things in writing, or say something that is highly inappropriate, and that can sink the whole show.”