Corrupt Joint Ventures in the Market for Residential Real-Estate-Settlement Services

Abstract

Closing costs in residential-real-estate sales have long acted as a significant barrier to American home ownership. In the Real Estate Settlement Procedures Act of 1974 (RESPA), Congress attempted to limit these costs by prohibiting referral fees, or “kickbacks,” between the various settlement-services providers. In 1983, Congress adopted an exception to its kickback prohibition for what are now known as “affiliated-business arrangements.” For over 40 years, courts have struggled to determine the circumstances under which these arrangements are permissible. In the last few years, the real-estate-settlement-services market has experienced a proliferation of joint ventures attempting to facilitate referral payments through the affiliated-business-arrangement exception. In these joint ventures, typically between real-estate agents, on the one hand, and mortgage brokers or title-insurance companies, on the other, the real-estate agent takes a sizable ownership share in the joint venture without contributing significant capital. Mortgage brokers and title companies arrange these joint ventures as a means of rewarding real-estate agents for referrals. Real-estate agents enter these joint ventures to earn ancillary profits from the mortgage and title costs that are paid by homebuyers and sellers. But these joint ventures are a bad deal for consumers because they stifle competition and increase homebuying costs, including “junk fees.” We argue that (1) forming joint ventures by offering discounted investment opportunities violates RESPA’s kickback prohibition, and (2) when real-estate agents steer their customers toward settlement-services providers that the agents co-own, they may be violating the prohibition on abusive conduct in the Consumer Financial Protection Act of 2010. We conclude with proposed compliance principles and policy recommendations.

Keywords: RESPA, Real estate, closing costs, housing, mortgages, mortgage loans, Real Estate Settlement Procedures Act, Real Estate Agent, Agency costs, Title insurance, Title company, CFPB, Consumer Financial Protection Bureau, Abusive, joint venture, affiliated business arrangements, Truth in Lending Act

JEL Classification: R20, R21, R28, R30, R31, R38, G20, G21, G28