Sometimes even the Big Boys don’t get the word.
Every REALTOR® and every Board Affiliate knows that it is illegal to refer real estate closing business and get compensation back. It is an improper practice under RESPA and other laws. If you know anyone doing it, tell them to stop.
In a recent federal court case in Maryland, the judge has turned a regular lawsuit into a huge, class-action suit, giving buyers since January 2008 the possible right to sue a huge realty company and the title company with which they did many closings.
The federal suit will involve treble damages; the actual damages being sought are over $11 million. And now it looks like the Consumer Financial Protection Bureau is probing marketing agreements and affiliated business arrangements between the real estate industry and the title insurance industry.
Here is what is alleged to have happened in Maryland:
In the case of Patrick Baer, et al, v. The Creig Northrop Team PC, et al, it is alleged that the Northrop group received more than $600,000 in compensation from Lakeview Title Company. RESPA prohibits gifts, payments, compensation—anything of value—in return for the referral of business. You cannot refer RESPA deals in return for free services, discounts to you, gifts to or for you.
Northrop is no little, uninformed entitity. Creig Northrop Team, PC, is affiliated with Long & Foster Real Estate, Inc. Northrop was ranked No. 2 in the U.S. last year and No.1 the year before in transaction volume by The Wall Street Journal.
According to the suit, Patrick and Christian Baeher purchased a home through Northrop in 2009. They were referred to Lakeview Title for title insurance and settlement services. The suit alleges that a sham employment agreement existed between the title agency and Carla Northrop, wife of Creig Northrop, and that was for the purpose of funneling funds back to Northrop in return for title closing referrals.
Mrs. Northrop, it is alleged, was shown as an employee of the title company but did not actually perform any work there, did not have an office, an email address there, nor a telephone there. Her actual employment was generally kept a secret.
Northrop and Lakeview also created a marketing agreement under which Northrop would designate Lakeview as its “exclusive provider of title and settlement services.” Lakeview then paid $6,000 to $12,000 a month for mostly unspecified marketing services. The Federal Court has already ruled that there is no record of real, joint marketing services reasonably related to the actual amounts paid by Lakeview.
So what may be a fake employment to funnel back money to a realty company, or a meritless marketing agreement to funnel back money to a realty company, all in return for referring RESPA related closing business, now has one of the largest realty firms looking at a huge class action suit.
And it is not like no one saw this coming. Ten years ago Florida attorneys for Boards of REALTORS® began preaching that the “I will rent a desk in your office” scheme was illegal. The same with “I will provide you cell phones but I get to advertise on your voicemail or website or email”; i.e., all where the RESPA service provider gives the REALTOR® something of value, in return, implied or expressed, for the return of referral of title business.
It has to be arms-length, or the REALTOR® has to cut out the practice of referring any buyer in a RESPA related matter. The latter is just unprofessional. Buyers want and need help. But if it looks, smells, and tastes like it might be an illegal referring arrangement, it should be avoided.
Joe R. Boyd
TBR Legal Counsel
Board Certified Real Estate Attorney
Boyd & DuRant, P.L.