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

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 affiliated-business arrangements, where residential-real-estate service providers jointly own a business and the only thing of value received by a referring party from the arrangement is a proportional return on its ownership interest in the affiliated business. 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 closing 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) the common practice of forming joint ventures by offering discounted investment opportunities violates RESPA’s kickback prohibition, and (2) many joint ventures violate the prohibition on abusive conduct in the Consumer Financial Protection Act of 2010 (CFPA) when real-estate agents take advantage of consumers by steering them into co- owned settlement-services providers. We conclude with proposed compliance principles and policy recommendations.