Last month, RealtySouth, an Alabama brokerage and subsidiary of HomeServices of America, Inc., defeated claims that it violated the Real Estate Settlement Procedures Act (RESPA). RealtySouth supposedly pays incentive fees to its brokers who steer business to its affiliated title company, TitleSouth. Whether this represents a lawful means of encouraging referrals among related entities remains to be seen. At the very least, affiliated real estate companies should be aware of the decision.
In 2013, Plaintiff Chase White bought a home though RealtySouth. The parties bought title insurance from that company’s affiliate, TitleSouth. During the deal, the corporate relationship was disclosed, and White was notified of his right to use a different title company. He later sued both entities, alleging RESPA violations for allegedly faulty disclosures and for payments that RealtySouth supposedly made to its brokers who sent work to TitleSouth. After White amended his complaint and RealtySouth compelled arbitration, TitleSouth was the only defendant.
There must be some connection between the thing of value given and received and the agreement to refer business to allege a violation of RESPA. The existence of a shared corporate parent does not establish this connection[.]
—White v. JRHBW Realty, Inc. (N.D. Ala. Sept. 16, 2015)
A federal district court in Alabama had little difficulty dismissing the amended complaint. For the disclosures, the court found that TitleSouth’s failure to use the exact forms recommended in federal regulations did not mean that the documents were inadequate. Rather, because White did not identify any substantive problems with TitleSouth’s forms, he could not assert a claim for failing to comply with RESPA’s requirements for affiliated businesses.
The court sidestepped a related question that has sharply divided numerous other tribunals: whether a company’s failure to comply with affiliated-business requirements in RESPA is itself a violation of that statute. The answer to that question will evidently have to wait for another day.
The most interesting part of the decision, however, involved RealtySouth’s incentive payments to its brokers. That practice, the court held, did not violate RESPA because no additional money was paid to TitleSouth, the only remaining defendant. (RealtySouth exited the case through arbitration.) And the mere “existence of a shared corporate parent does not establish” an unlawful connection, the court ruled. That means TitleSouth was neither the giver nor receiver of any alleged kickback.
How viable is this sort of incentive payment? It’s too early to say. White has appealed the ruling to the United States Court of Appeals for the Eleventh Circuit, which may have a different view. On a broader level, it is hard for me to articulate exactly which aspect of RESPA those sorts of payments might violate. So maybe the practice is viable. But I’ll leave it to the plaintiffs’ bar to solve that riddle.