No AfBA disclosure — no safe harbor!

By Consent Order dated September 27, 2017, the Consumer Financial Protection Bureau took action against Meridian Title Corporation for violating Section 8 of the Real Estate Settlement Procedures Act of 1974 by failing to furnish affiliated business arrangement (AfBA) disclosures to consumers. Meridian, an Indiana title and settlement agent, referred over 7,000 customers to its affiliated title insurer, Arsenal Insurance Corporation, without providing written AfBA disclosures notifying consumers of the entities’ affiliation and consumers’ rights. It also received compensation above and beyond its standard allowable commission set forth in the companies’ agency agreement. Under the Consent Order, Meridian agreed to disclose its affiliation with Arsenal, implement certain compliance measures, and set aside $1.25 million for affected consumers, with any portion of that amount not ultimately provided to consumers to be paid to the CFPB.

As indicated above, the underlying basis for action in this case was Meridian’s failure to provide written AfBA disclosures to consumers it referred to Arsenal. The disclosure requirement is black and white – payments under an AfBA cannot qualify for RESPA’s Section 8(c)(4) exception to the anti-kickback and fee-splitting provisions unless the referring entity provides written disclosures to customers meeting certain form and content requirements. Failure to furnish the disclosures leaves payments between the entities subject to scrutiny to determine whether they constitute payments for referrals or qualify for some other exception, such as the Section 8(c)(1)(b) exception for payments by a title insurer to its duly appointed title agent, or the Section 8(c)(2) exception for reasonable compensation in return for actual goods, facilities, or services provided. Here, as three individual owners of Meridian are also owners and executives of Arsenal, the companies have an AfBA as RESPA defines that term. According to the Consent Order, Meridian regularly referred its customers to Arsenal for title insurance but did not provide AfBA disclosures to them, and Meridian received compensation above and beyond the commission it was entitled to collect under its agency contract with Arsenal. The CFPB concluded that because Meridian had not provided AfBA disclosures, it did not meet the AfBA safe harbor exception and the additional funds it received constituted impermissible payments for referrals in violation of Section 8 of RESPA. While the CFPB did not specifically mention the title agent or reasonable compensation exceptions, it presumably determined that Meridian did not qualify for those exceptions because the additional amounts Meridian received “fell outside the contractually-outlined commission structure” and “were not reasonable compensation for services actually performed in the issuance of Arsenal’s title insurance policies, nor were they a return on an ownership interest or franchise relationship.” It also is important to note that the CFPB limited its action to Meridian’s conduct from 2014 through 2016, perhaps relying on the decision of a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit last year rejecting the CFPB’s claim that its administrative enforcement actions are not subject to any statute of limitations and holding that the CFPB is bound by RESPA’s three-year statute of limitations in enforcement proceedings.

The CFPB has emphasized the importance it places on AfBA disclosures in at least two prior cases. First, in October 2013, the CFPB filed a complaint against the law firm of Borders & Borders, PLC in federal court alleging that the firm operated nine AfBAs in violation of RESPA because, among other things, proper AfBA disclosures were not provided. Although the law firm ultimately prevailed against the CFPB in court this summer, the case demonstrates the significance that the CFPB imposes on the disclosure requirement. Second, in May 2014, the CFPB imposed a $500,000 penalty on JRHBWRealty, Inc. d/b/a RealtySouth for, among other things, its alleged failure to provide conspicuous AfBA disclosures. In this recent Meridian case, the CFPB once again highlighted the importance of the AfBA disclosure. According to the agency’s press release, “Meridian Title illegally steered consumers into purchasing a product from an affiliated company to add to its bottom line,” “failed to disclose its relationship with the title insurer and illegally benefitted from the referrals for title insurance.” It directs Meridian to “[s]top violating the law and start providing disclosures.”

Over the past six years, the CFPB has demonstrated that RESPA enforcement is a priority and that AfBAs raise a red flag for compliance. Responding to the agency’s inquiries and charges is costly and time-consuming. Accordingly, it is critical that settlement service providers stay up-to-date on CFPB examination findings and enforcement matters shared in the CFPB’s Supervisory Highlights and elsewhere, and heed the CFPB’s concerns and warnings in its published Consent Orders.