Did you pay attention to the Consumer Financial Protection Bureau (CFPB) policy statement on abusive acts and practices? If you are a real estate agent in a joint venture (JV) with a mortgage or title company, you should take a second look.
Here’s why: the CFPB statement applies to companies that offer credit or title services, and thus to these JVs.
What Are Abusive Acts and How Do They Apply to Real Estate JVs?
The Consumer Financial Protection Act (CFPA) defines an abusive act as those that:
- materially interfere with the ability of a consumer to understand a term or condition of a consumer financial product or service
- take unreasonable advantage of a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service, the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.
When real estate agents refer clients to the JV title or mortgage service, they can be considered service providers under the CFPA, because they materially participate or provide a material service to consumers.
One factor the CFPB looks at is if a covered entity, in this case the real estate agent, is assumed to act on behalf of consumers in selecting providers in the market. When real estate agents steer clients to a mortgage or title company in which they have an interest as a JV, the bureau may consider this unreasonable advantage.
How to Avoid Abusive Acts Risks
Since we’re talking about mortgage companies, Real Estate Settlement Procedures Act (RESPA) may come to mind. RESPA ensures that borrowers are fully informed about all lending costs and disclosing any business relationships between various parties in a transaction. (More on RESPA and mortgage brokers.) While it is not a RESPA violation to participate in joint marketing efforts with other service providers, you should not have a “preferred provider” list, but should allow your clients to do their own due diligence and select service providers on their own.
The CFPB statement on abusive practices brings more risks for real estate agents in JVs to light. While we always recommend erring on the side of disclosure, you should note that some states, including Arizona, New York, and the District of Columbia prohibit real estate agents from benefiting from joint-ventures with title companies.
States with such laws generally don’t have exceptions for disclosure. Because disclosure often comes after the referral is made, and can get lost in the bulk of paperwork that is part of the process, agents may still be seen as taking unreasonable advantage of clients. That means, even if you disclose, you can be penalized for abusive practices.
Abusive acts and practices are getting a hard look. Real estate agents involved in JVs with mortgage or title companies would do well to take a close look at their practices. It’s worth getting legal advice about your involvement in these JVs before there’s a problem.
Wondering if you should be concerned? All CRES Real Estate E&O + ClaimPrevent® policies include expert Legal Advisory Services 7 days a week. So, you can get answers to all your legal questions before they become insurance claims.
As part of one of the largest insurance brokers in the world, CRES has access to more real estate Errors and Omissions options than just about anyone else. Let us do the shopping for you to find the best protection for the best price.