Using RESPA to rat on competitors
January 6, 2004
Industry whistleblowers biggest source of investigator leads
When mortgage lenders and real estate brokers are making money hand over fist, their competitors notice. And if there is a suspicion of a Real Estate Settlement Procedures Act violation, envy can lead to the U.S. Department of Housing and Urban Development being tipped off. That's what happened earlier this year to Atlanta-based lender Znet Financial and RE/MAX of Atlanta.
"In the Znet case, a competitor tipped off HUD," a representative of the housing agency said.
The ensuing HUD investigation found that Znet Financial, RE/MAX of Atlanta and 14 RE/MAX agents violated RESPA's anti-kickback and unearned fee provisions. The companies were engaged in a relationship whereby Znet labeled participating RE/MAX agents as "employees" and paid them $400 for each consumer the agent referred to Znet.
HUD said the arrangement was bogus because the Znet/agent employees did little or no loan origination work. The investigation resulted in a settlement in which the companies agreed to stop the sham employee compensation program, the RE/MAX agents agreed to refund a total of $9,200 to the consumers referred to Znet, and Znet agreed to make a settlement payment of $15,000 to the U.S. Treasury.
There are a lot of ways an industry insider could get popped for violating RESPA, a federal law that aims to protect consumers from realty-related kickbacks and other closing table shenanigans. Consumers aware of the law could blow the whistle, or any number of government agencies, including the FBI, Federal Trade Commission, Internal Revenue Service or state attorney generals' offices, can trigger a RESPA investigation. But most likely it's a local competitor stinging from a lack of business who reports suspicious business arrangements.
"It's usually about the loss of money or loss of competition—fear that the violator will gain a competitive edge because of the violation," said a HUD representative.
In its effort to beef up RESPA enforcement, HUD earlier this year tripled the number of staff in its RESPA enforcement division and the agency is nearly mid-way through a three-year, $1.5 million contract with Technical Analysis Center, a Virginia-based private investigator firm.
HUD wouldn't disclose how many tips it receives annually, but noted that the number of RESPA investigations has been steadily growing. During the federal fiscal year 2001, HUD opened 570 RESPA cases. In 2002 that number grew to 901, and in 2003 HUD opened more than 956 cases.
"We've been very busy," said HUD spokesperson Brian Sullivan. He estimated last month that the total number of RESPA cases for the year would exceed 1,000.
Sullivan said record home sales and refinance activity is in part responsible for the growing number of RESPA cases. But he also credited HUD's beefed up RESPA enforcement efforts.
"People who might be inclined to violate the law, do they have anything to worry about? The answer is yes. We mean business and we're tough," Sullivan said.
Tipsters report suspected RESPA violations to HUD via e-mail, snail mail and telephone calls, said HUD. Tips that come with documented evidence supporting a violation or those submitted by an identifiable source can be especially helpful. But an anonymous caller who drops dime on a brokerage or financial services company can be enough to launch a full-scale investigation, according to HUD.
Once an investigation has been launched, HUD collects background information on the target company, including the details of its business plan and its marketing materials. The target company may also receive a formal letter or a subpoena requesting additional information. In certain cases, HUD may send an investigator into the field to conduct an on-site investigation and, depending on the circumstances, HUD may turn to other government agencies for help.
A joint effort between HUD and the FTC earlier this year netted the largest RESPA violation settlement on record when the two agencies nailed Utah-based Fairbanks Capital Corp. for a "laundry list" of unfair and deceptive trade practices and illegal loan servicing activity. The investigation revealed that Fairbanks violated RESPA, the Federal Trade Commission Act, the Fair Credit Reporting Act and the Fair Debt Collection Practice Act.
The settlement required Fairbanks to establish a $40.4 million fund to compensate the consumers injured by the firm's loan servicing activity, according to HUD.
Sullivan said the Fairbanks settlement netted a lot of attention because of its size. Other RESPA settlements that have captured a lot attention include those that have nailed title companies for giving free virtual home tours to agents in exchange for business referrals. The cases were novel because the prohibited "thing of value" wasn't cash, it was a virtual home tour. The settlements put a new spin on an otherwise old kickback scheme, he said.
"We tend to get a lot of phone calls no matter what (type of RESPA violation the agency reports), whether it's weird or run-of-the-mill. When (HUD) comes down on (a business) to protect consumers, it resonates," Sullivan said.
Copyright: Inman News Features