They are known as HUD's "RESPA police" and they have struck again -- this time targeting four real estate brokerage firms in the Detroit area. The allegations involve what HUD called "excessive" fee payments by a title agency for space rentals in the realty brokers' offices. The firms agreed to pay the U.S. Treasury $80,000 and to change their rental fee arrangements to comply with HUD's interpretations of the Real Estate Settlement Procedures Act's prohibitions against kickbacks for referrals of business.
The RESPA police are the federal government's real estate industry gumshoes -- often former FBI, Treasury, Customs and federal financial investigators -- who follow up on hundreds of tips HUD receives every year about alleged referral payment schemes, "sham" affiliated business arrangements, and creative kickbacks among mortgage, title, and real estate companies. Most of the tips come from industry players and employees of firms involved in alleged violations of RESPA. HUD also makes extensive use of state attorneys general, and state financial and real estate regulators, to identify potential RESPA violations.
HUD did not reveal where it first received information that led to the latest settlements, but here is what the department alleged: The four Detroit area brokerage firms were paid excessive fees from Metropolitan Title Company in exchange for rentals of conference room space inside the brokers' offices.
The realty firms involved were RE/Max Masters; RE/Max in the Hills; Hometown One Associates (Remerica Hometown One); and Schweitzer Real Estate Inc. (Coldwell Banker Schweitzer Real Estate). All four firms admitted no wrongdoing as part of the settlements. Coldwell Banker Schweitzer agreed to pay the government $45,000; Remerica Hometown One $15,000; RE/Max in the Hills $12,000, and RE/Max Masters $8,000.
Under HUD's RESPA rules, charging or paying room rental fees do not necessarily violate the law in and of themselves. But HUD views "excessive" fees -- rental payments beyond the going market costs for leasing comparable office space -- to be tantamount to illegal referral fees or kickbacks. A title agency's presence inside the Realtor's office, in rented conference room space, gives the agency first crack at signing up new purchasers for title insurance and settlement services. It also virtually guarantees the title agency a steady flow of new business -- a benefit the title agency is willing to pay money to obtain. The same holds true, according to HUD, for mortgage lenders or brokers who rent space in realty brokers' offices.
Last July, HUD unveiled a settlement with Metropolitan Title Company, charging the firm with paying referral fees to unidentified Detroit-area real estate brokers. The latest settlement identifies the four firms as the recipients of Metropolitan's alleged excess payments.
Washington RESPA expert, Phillip Schulman of Kirkpatrick & Lockhart Nicholson Graham LLP, says the targeting of recipients of alleged referral fees is highly significant because in recent years HUD has mainly focused its enforcement efforts on providers of fees. Now it is shifting its attention to the other side of the ledger -- the people who allegedly accept payments or "things of value" in exchange for referrals of business. RESPA prohibits both paying or receiving referral fees in connection with real estate and mortgage transactions.
In a policy statement, HUD defined the basic rules for space rentals by settlement service providers in realty agents' offices. Tops on HUD's list: the lease payments must conform to "general market" norms. That means "the rent that a non-settlement service provider would pay for the same amount of space and services in the same or a comparable building. A general market value standard allows payments for facilities and services actually furnished, but does not take into account any value for the referrals (of consumer business) that might be reflected in the rental payment."
All four brokers, plus Metropolitan Title, agreed that in the future, any conference room rentals will adhere to a general market value standard. Schulman says that before entering into space-rental arrangements, realty, title and mortgage companies should "survey the market to obtain an estimate for comparable conference room space … . If HUD or a court then examines the arrangement, (the firms) should be able to defend how they arrived at the fees paid" and prove that they represent prevailing market values, not kickbacks.
In an advisory to realty, title and mortgage clients after the latest settlement by the RESPA police, Schulman warned against rentals of space for more than one-hour blocks of time. Anything beyond that could "raise a red flag" for HUD investigators, who might assume that excessive compensation is being paid for customer referrals.