Kenneth Harney

If your real estate agent requires you to get a mortgage pre-approval from one specific lender as a condition of submitting an offer to buy a house – even if another lender already pre-approved you – would you think something is fishy?

If an agent offered discounts off the price of the house you want to buy – but only if you used a designated lender for your mortgage – would you be suspicious? What if the agent’s sales contracts had the name of a lender “written in” to the deal? What if you could be charged higher transaction fees for not using the preferred lender?

Would you wonder, just a little, whether kickbacks could be in play?

You might, and a set of new federal actions against real estate and mortgage companies would give you good reason. In landmark settlements with one of the country’s largest retail mortgage lenders plus two real estate brokerages and a home loan servicing company, the Consumer Financial Protection Bureau alleged that they participated in illegal referral schemes aimed at homebuyers and sellers.

Persistent Problem

The settlements shed fresh light on what realty industry and legal experts say is a persistent problem: Brokers and agents continue to pocket cash and other compensation for steering business to lenders and title companies in violation of federal anti-kickback rules, as interpreted and enforced by the CFPB. The new actions are a signal to realty firms that they are not exempt from penalties for taking payments for referrals. Earlier cases primarily targeted lending or title firms, not the brokers and agents who actually took the kickbacks.

Prospect Mortgage LLC, a California lender active nationwide, had “improper” agreements with more than 100 realty firms designed to “funnel payments to brokers and others in exchange” for mortgage referrals, according to government consent order documents. The arrangements took varied forms, but all had the effect of steering buyers to obtain mortgages from Prospect. The government said “thousands of consumers” were illegally referred to the lender through under-the-table arrangements.

The CFPB also moved against two realty brokerage firms – Re/Max Gold Coast of Ventura, California, and Keller Williams Mid-Willamette of Corvallis, Oregon – for allegedly accepting illegal payments for referrals from Prospect. Dozens of other realty firms that CFPB investigators found had referral deals with Prospect elsewhere in the U.S. were not identified and were not part of the settlements. The bureau would not tell me why they were omitted. The CFPB also took action against Connecticut-based Planet Home Lending, a loan servicer.

All the companies denied wrongdoing as part of their consent orders, but agreed to pay penalties. Prospect was fined $3.5 million and the two realty brokerages and Planet Home Lending agreed to pay a combined $495,000 in consumer redress or fines.

The consent order with Prospect detailed a laundry list of alleged referral schemes, including:

Payments to brokers for hot “leads” – names, addresses, phone numbers – of prospective buyers who would then be solicited by loan officers. Brokers “passed on some of the spoils” to individual agents for supplying the leads. One broker openly handed out cash to agents during company meetings.

Compensation to agents for their marketing expenses on an unnamed “third party website” in exchange for referrals of shoppers.

Allowing some listing agents to impose “per diem” penalties on buyers who used competing lenders and failed to close their sales on time.

Having agents insist that home shoppers pre-qualify or be approved by Prospect if they wanted to submit an offer on any house the agent showed them.

Inserting Prospect into the “agents only,” non-public comments section on local Multiple Listing Service (MLS) entries of properties for sale as the exclusive lender. Only Prospect-approved buyers could write contracts on houses the agents showed them.

Marx Sterbcow, an attorney based in New Orleans and an expert on the federal law that prohibits kickbacks in home mortgage and real estate transactions, said consumers typically “are completely unaware” of these illegal arrangements. Often they are difficult to detect because they are carefully hidden from buyers and sellers.

Despite that stealth, here’s a key fact for you to know to avoid being shunted to a lender or other vendor who may not have the best rates or service in your area: You are guaranteed the right under federal law to shop for the best deals on your financing and settlement services, even if your realty agent seems to be pushing you toward one source in particular.