Broker referrals coming under scrutiny

You probably know that federal law prohibits kickbacks among brokers and others in
residential real estate deals. That sounds pretty straightforward: You can’t give money
to someone simply for steering a homebuyer or refinancer to a particular title agency,
mortgage lender or escrow company without providing any actual services to the

Yet as four recent legal settlements suggest, there is still plenty of action underway at the
fringes of the law, where technology and creative financial arrangements are raising new
questions about what’s permissible and what’s not.

Take the multimillion-dollar settlement July 11 between the Department of Housing and
Urban Development and Fidelity National Financial, the country’s highest-volume title
insurance and settlement services company. HUD charged that Fidelity and its affiliates
have “engaged in a widespread and years-long campaign to pay real estate brokers
kickbacks for the referral of real estate settlement services, including home warranties and
title insurance.” As part of the settlement, Fidelity denied any wrongdoing but agreed to
pay the government $4.5 million.

How was the company allegedly paying kickbacks to brokers? According to HUD, it was
done with the help of the Internet: Participating real estate brokers were given access to a
Web-based portal created by Fidelity that automates home real estate transactions “from
listing to closing,” and also enables agents to select title insurance and other services for
the transaction.

Real estate brokers signed “sub-license agreements” with Fidelity subsidiaries to enable
them to be listed on the portal as providers of services. Then, as part of the deal, HUD said,
Fidelity subsidiaries paid participating real estate brokers for referrals of customers they

It was high-tech and sophisticated and may have involved large numbers of realty offices
around the country and thousands of individual transactions. For its part, Fidelity insisted
in the settlement that the payments it made were not for referrals but rather for giving
brokers access to its automated “TransactionPoint” platform. Dan Murphy, a Fidelity
spokesperson, declined to comment.

In another new case alleging kickbacks, HUD settled for $3.1 million with Prospect
Mortgage, a national home lender based in Sherman Oaks, Calif. According to HUD,
Prospect “created sham affiliated business arrangements for the purpose of paying
improper kickbacks” to real estate brokers, mortgage brokers and other service providers.

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Prospect denied that it violated federal law but agreed to dismantle the network it set up to
pay the referral fees alleged by HUD. The network itself involved creation of large numbers
of limited liability companies that purported to be legitimate joint ventures with Prospect
but that in fact were shells that “had little or no employees, capital and/or offices” — key
tests of whether an affiliate is legal under federal law or exists solely to make referrals in
exchange for payments, according to HUD.

“In return for the referral of business,” the agency said, “Prospect shared 50 percent of its
profits with these entities which HUD determined were not bona fide.”

Ron Bergum, chief executive of Prospect, said in a statement on the company’s website that
although the same business-generation model “is currently being used by several of our
competitors,” the company has “respect” for HUD’s position. Bergum did not identify the
competing firms still using what HUD considers kickback schemes.

Still another issue involving controversial fees flowing to realty brokers emerged in
two recent settlements in New Jersey: The charging of “admin” fees on top of standard
commissions. Weichert South Jersey and Prudential Fox & Roach Realtors settled class-action suits challenging their collection of extra money from thousands of clients at
closings for which no additional services were provided. Both firms denied the allegations
but agreed to cease charging the fees, which generally ranged from $150 to $275.

A lawyer for the plaintiffs in both cases, Stephen DeNittis, said the class-action suits alleged
violations of state laws that track federal law on realty broker compensation in home sales
and purchases. “You can call it whatever you want — an admin fee or added commission or
some other name, but if you charge money for it you have to do something” to justify the
fee, DeNittis said in an interview.

A spokesperson for Weichert had no comment on the settlement. An attorney for
Prudential Fox & Roach, Jay Varon, said the company “believes that its charging of
administration fees was perfectly lawful,” but settled to avoid additional litigation costs.

Bottom line: While you’re not likely to detect some of the most sophisticated referral games
being played behind your back — that’s a job for federal regulators — you have no obligation
to pay extra fees in home purchases or sales if nobody is providing additional, valuable
services to you.

Ken Harney is a syndicated real estate columnist.