Real-Estate Agents Who Participate in Joint Ventures Should Be Wary of the CFPB’s Recent Policy Statement on Abusive Conduct
(re-posted with permission of JD Supra)
You may direct questions or comments to Jeff Ehrlich at McGuireWoods LLP
Much has been written about the Consumer Financial Protection Bureau’s recent “Policy Statement on Abusive Acts or Practices,”[1]
in which the Bureau analyzed the prohibition on abusive conduct in the
Consumer Financial Protection Act of 2010 (CFPA). In response to the
statement’s publication in the Federal Register, comments were submitted
by banks, credit unions, debt collectors, and others.[2]
But the Bureau’s policy statement should be of particular interest to
another class of persons: real-estate agents who participate in joint
ventures with mortgage or title companies.
Mortgage and title companies arrange joint ventures as a means of
rewarding real-estate agents for referrals. Real-estate agents enter
into these joint ventures because they allow the agents to share in the
profits derived from providing mortgage and title services to the
agents’ customers.
I. The CFPA applies to these real-estate agents.
Ordinarily, the CFPA’s prohibition on abusive conduct might be of
little concern to real-estate agents, as the CFPA applies only to
“covered persons” and “service providers,”[3]
and real-estate agents are not “covered persons” or “service
providers,” at least to the extent that they act as agents or brokers
for buyers and sellers of real property. Moreover, § 1027(b) of the CFPA
prohibits the Bureau from exercising “any rulemaking, supervisory,
enforcement, or other authority . . . with respect to a . . . real
estate agent,” unless the agent is “engaged in an activity of offering
or providing any consumer financial product or service.”[4]
But when real-estate agents enter into joint ventures with mortgage
or title companies, they expose themselves to the CFPA. The joint
ventures, themselves, are “covered persons” under the CFPA because they
offer credit or title services.[5] And joint-venture partners who materially participate in the affairs of their covered-person entity are “related persons”[6] and are thus deemed to be “covered persons.”[7]
One way that real-estate agents “materially participate” in the affairs
of their joint ventures is by referring their real-estate customers to
the joint ventures for mortgage or title services.[8]
This same conduct might qualify a real-estate agent as “service
provider,” which the CFPA defines to mean “any person that provides a
material service to a covered person.”[9]
Because the Bureau—or a state attorney general or other regulator, for that matter[10]—might
conclude that the CFPA applies to real-estate agents who participate in
joint ventures, agents should be wary of the Bureau’s expansive policy
statement, particularly its discussion on “reasonable reliance.”
II. Consumers reasonably rely on their real-estate agents.
As the Bureau noted, the CFPA defines abusiveness to include taking
unreasonable advantage of “the reasonable reliance by the consumer on a
covered person to act in the interests of the consumer.”[11] The Bureau explained that
“sometimes people are in a position in which they have a reasonable
expectation that an entity will act in their interest to make decisions
for them, or to advise them on how to make a decision. Where people
reasonably expect that a covered entity will make decisions or provide
advice in the person’s interest, there is potential for betrayal or
exploitation of the person’s trust. Therefore, Congress prohibited
taking unreasonable advantage of reasonable consumer reliance.”[12]
The policy statement identified two ways that a government enforcer
might establish reasonable reliance. “First, reasonable reliance may
exist where an entity communicates to a person or the public that it
will act in its customers’ best interest, or otherwise holds itself out
as acting in the person’s best interest.”[13]
“Second, reasonable reliance may also exist where an entity assumes the
role of acting on behalf of consumers or helping them to select
providers in the market.”[14]
A. Buyers reasonably rely on their agents to be trusted intermediaries.
Real-estate buyers, in particular, often rely on their agents for
help with selecting “providers in the market.” A buyer might ask their
agent to recommend a mortgage or title company, for example. “In these
situations,” the Bureau noted, “the entity [here, the real-estate
agent], acting as an intermediary, can function as a broker or other
trusted source that the person uses in selecting, negotiating for, or
otherwise facilitating the procurement of consumer financial products or
services provided by third parties.” In the Bureau’s view, “people
should be able to rely on the entity to do so in a manner that is free
of manipulation,” and those “that engage in certain forms of steering or
self-dealing may be taking unreasonable advantage of the consumers’
reasonable reliance.”[15]
Real-estate agents who refer their customers to the agents’ own joint
ventures risk violating the CFPA’s prohibition on abusive conduct in a
number of ways. For example, when an agent refers their real-estate
customer to a mortgage broker, the consumer might reasonably believe
that the agent is acting in the consumer’s interest—i.e.,
referring the consumer to someone who will help the consumer get the
best mortgage for the consumer—while the agent might be acting in their own
interest by steering the consumer to a mortgage company that the agent
partly owns and from which the agent would share in profits derived from
providing a mortgage to the referred consumer. Might the Bureau or a
state attorney general consider this to be “steering or self-dealing”
that is “abusive” under the CFPA?
B. Sellers reasonably rely on joint-venture title companies to be neutral third parties.
And what about when an agent refers their customer, who is looking
for title services, to the agent’s own joint venture? In most
jurisdictions, a title agent is a third-party neutral, with fiduciary
obligations to both the seller and the buyer.[16] Indeed, as the Arizona Association of REALTORS® recently observed,
“[a] title company is a neutral third party employed to insure the
title to the home and issue title-insurance policies to the buyer and
mortgage lender.”[17]
The title company’s duties include researching “the history of the
property to identify potential problems, claims, or discrepancies that
may interrupt the transaction.”[18]
Because “the title company is charged with formally transferring
ownership from the seller to the buyer, it is critical that they serve
in an impartial manner.”[19]
But when the title company is a joint venture between a sponsoring
title company and the buyer’s real-estate agent, it lacks the
disinterestedness that the law requires, potentially to the detriment of
the seller, who, like the buyer, is a “consumer,” entitled to the
CFPA’s protections.
Some states, undoubtedly recognizing this conflict of interests, have
enacted laws that preclude real-estate agents from receiving
compensation or profits from a title-company joint venture to which they
refer their real-estate customers. Arizona law, for example, provides
that “no title insurance agent shall pay or give to any . . . person who
is acting as agent . . . of the owner . . . or of the prospective owner
. . . of the real property[,] either directly or indirectly, any
commission or any part of its fees or charges[,] including . . . fees
for escrow services performed by a title insurer or title insurance
agent, or any other consideration or valuable thing, as an inducement
for, or as compensation for, any title insurance business.”[20]
New York law likewise makes it unlawful for a “title insurance agent . .
. to . . . pay or give to . . . any person . . . acting as agent . . .
of the owner . . . or the prospective owner . . . of the real
property[,] either directly or indirectly, any . . . consideration or
valuable thing, as an inducement for, or as compensation for, any title
insurance business.”[21]
New York also makes it unlawful for “any person . . . acting as agent .
. . of the owner . . . or of the prospective owner . . . of the real
property [to] knowingly receive, directly or indirectly, any such . . .
consideration or valuable thing.”[22]
And the District of Columbia Code provides that “[a] title insurer or
other person shall not give or receive, directly or indirectly, any
consideration for the referral of title insurance business or escrow or
other service provided by a title insurer.”[23]
C. Disclosing the conflict is unlikely to dissuade the Bureau from bringing a CFPA claim for abusive conduct.
None of these state laws makes an exception for when real-estate
agents disclose their conflicts, and it is unlikely that an agent’s
disclosure of a conflict would dissuade the Bureau from enforcing the
CFPA. This is particularly true when the purported disclosure is made,
as it often is, after the referral—for example, when it is buried among
the dozens of pages that the parties must sign when ratifying the
purchase agreement— and in language that is impenetrable to the average
consumer. Indeed, the Bureau has previously brought claims for abusive
conduct despite disclosures that consumers had little time to review and
were unlikely to understand.[24]
And the Bureau’s policy statement cites favorably to a Treasury
Department report that observed that consumers “may retain faith that
[an] intermediary is working for them and placing their interests above
his or her own, even if the conflict of interest is disclosed.”[25]
In those situations, the Bureau seems to believe, “consumers may
reasonably but mistakenly rely on advice from conflicted
intermediaries.”[26]
Conclusion
Real-estate agents who participate in joint ventures subject
themselves to the authority of the Consumer Financial Protection Bureau,
state attorneys general, and other state regulators, all of which may
enforce the CFPA’s prohibition on abusive conduct. And given the
Bureau’s aggressive interpretation of this statute, real-estate agents
participating in joint ventures might reconsider their involvement,
particularly in states like Arizona and New York and in the District of
Columbia, where existing laws already forbid joint-venture title
companies from compensating real-estate agents.
(https://www.jdsupra.com/legalnews/real-estate-agents-who-participate-in-8281165/)
[1] CFPB, Policy Statement on Abusive Acts or Practices, (April 3, 2023), https://www.consumerfinance.gov/compliance/supervisory-guidance/policy-statement-on-abusiveness/.
[2]
Statement of Policy Regarding Prohibition on Abusive Acts or Practices,
88 Fed. Reg. 21,883 (Apr. 12, 2023),
https://www.regulations.gov/document/CFPB-2023-0018-0001/comment.
[3] See 12 U.S.C. § 5536(a)(1)(B).
[4] See 12 U.S.C. § 5517(b).
[5] See 12 U.S.C. § 5481(6), (15)(A)(i) & (iii).
[6] See 12 U.S.C. § 5481(25)(C)(ii).
[7] See 12 U.S.C. § 5481(25)(B).
[8] CFPB v. D & D Mktg.,
CV 15–9692 PSG (Ex), 2016 WL 8849698 (C.D. Cal. Nov. 17, 2016) (holding
that a company that provided leads to lenders could be a “service
provider”).
[9] See 12 U.S.C. § 5481(26).
[10] See 12 U.S.C. § 5552(a)(1) (authorizing state attorneys general and regulators to enforce the CFPA).
[11] See 12 U.S.C. § 5531(d)(2)(C).
[12] 88 Fed. Reg. at 21,889.
[13] Id.
[14] Id.
[15] Id. at 21,889–90.
[16] See, e.g., Straight v. Approved Fed. Sav. Bank,
No. 05-5187, 2005 WL 1288091, at *2 (W.D. Wash. May 27, 2005) (“An
escrow agent serves [as] a neutral depository for the monies and
documents involved in a real estate deal.”); In re Davis, 172
B.R. 437, 452 (Bankr. D.C. 1994) (holding that “the settlement agent . .
. had a fiduciary responsibility to each of the parties to the
transaction”); Red Lobster Inns v. Lawyers Title Ins. Corp.,
492 F. Supp. 933, 941 (E.D. Ark. 1980) (“Where a person acts as escrow
agent for parties to a land sale, he becomes agent of both buyer and
seller and this agency creates a fiduciary relationship.”), rev’d in part on other grounds, 656 F.2d 381 (8th Cir. 1981); Aranki v. RKP Invs., Inc.,
979 P.2d 534, 536 (Ariz. Ct. App. 1999) (recognizing that “escrow
agents . . . act as fiduciaries for buyers and sellers alike”); Donovan v. Kirchner,
641 A.2d 961, 969 (Md. Ct. Spec. App. 1994) (“The third party, or
escrow agent, is uninterested in the transaction and acts as a fiduciary
to both the grantor and the grantee.”); Zimmerman v. First Am. Title Ins. Co.,
790 S.W.2d 690, 695 (Tex. App. 1990) (observing that “[a]n escrow agent
is in a fiduciary relationship with the contracting parties” to a
real-estate transaction); Wagman v. Lee, 457 A.2d 401, 404
(D.C. 1983) (acknowledging the “unique position” that an escrow agent
occupies “in the ‘triangular’ relationship between purchaser and
seller”) (citation omitted).
[17] See S. Drucker, “Disclosure of Common Ownership Interest Between Agent and Title Company,” Nov. 13, 2020, https://www.aaronline.com/2020/11/13/disclosure-of-common-ownership-interest-between-agent-and-title-company/.
[18] Id.
[19] Id.
[20] Ariz. Rev. Stat. § 20-1585.
[21] N.Y. Ins. Law § 6409(d).
[22] Id.
[23] D.C. Code § 31–5031.15.
[24] CFPB v. Freedom Stores, Inc., 2:14-cv-643 (E.D. Va., filed Dec. 18, 2014), Compl. ⁋⁋ 51, 72–78, https://files.consumerfinance.gov/f/201412_cfpb_complaint_freedom-stores_va-nc.pdf.
[25]
88 Fed. Reg. 21,883, 21,890 n.76 (citing to U.S. Department of
Treasury, Financial Regulatory Reform, A New Foundation: Rebuilding
Financial Supervision and Regulation 68 (June 2009), https://fraser.stlouisfed.org/title/financial-regulatory-reform-5123).
[26] Id.
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