A federal district court recently refused to dismiss a complaint alleging that a real estate marketing company operated its “co-marketing program” among real-estate agents and mortgage lenders in a manner that violated the anti-kickback provision of the Real Estate Settlement Procedures Act (“RESPA”). In particular, the court concluded that plaintiffs in the case had plausibly alleged that:
lenders paid into the co-marketing program more, and sometimes much more, than the reasonable market value of their share (versus their partner agents’ share) of joint costs for leads and advertising services actually provided; and
the excess amount paid was in fact a benefit to the real estate agents in exchange for the agents’ agreement to refer customers to the lenders.
2019 WL 1755293 (W.D. Wa. Apr. 19, 2019).
The court reached the first conclusion, regarding whether lenders paid more than reasonable market value, in part by relying on allegations about what lenders paid the real estate marketing company for similar services that did not involve participating real estate agents. More generally, the court relied on confidential witness statements from former employees of the company put forward by plaintiffs, including allegations in those statements and in separate employment-discrimination lawsuits against the company, that the company ignored or retaliated against employee whistle-blowers who reported that illegal referral payments were being made through the co-marketing program.
The court does appear to have made one legal error, though it likely did not affect the holding that plaintiffs had plausibly alleged payments by the lenders in exchange for referrals by the agents. The court viewed as RESPA “referrals” not only alleged attempts by the real estate agents to influence customers to select the participating lender, but also instances in which agents only passed to lenders the name and contact information of customers that had chosen to have such information go only to the agent. 2019 WL 1755293, at *4-5. While providing a lender with a lead in spite of the customer’s wishes may be problematic for other reasons, doing so is not a “referral” under RESPA, which instead requires that the referring party either (i) affirmatively influence the selection by the customer of a provider, or (ii) require the customer to use that provider. (12 C.F.R. § 1024.14(f).) The mere purchase of leads, or prospects, that the purchaser may then contact on its own has long been viewed as permissible under RESPA, at least where the seller of the leads does not endorse the purchaser or its product or services.
Lenders and other companies involved in real estate transactions should regularly review and monitor their provision and receipt of fees and other benefits in connection with the transactions, to ensure that those benefits are not being provided in exchange for referrals of customers.
Review and monitoring should include periodic determinations that even where benefits are provided in exchange for advertising, lead generation or other goods or services, those benefits approximate the reasonable market value for the goods or services. Providers of settlement services must assess in particular whether more than market value is provided, in which case the excess may be a disguised payment for referrals. This value standard sometimes also is described as whether payments are reasonably related to the value of the goods or services.
Determining fair market value can be challenging, but some good faith attempt must be made. In this case, there was an allegedly very easy comparison to be made, between the lenders’ co-marketing payments and lenders’ payments for services not involving real-estate agents.
Charges that a company received but ignored whistle-blower reports about illegal activity have a profound influence on courts. Companies must continue to take such reports seriously, to conduct a reasonable review or investigation, and to document the results.
Employees must be properly trained to understand RESPA’s anti-kickback, including the reasonable market value standard.
See below for more details on this case.
Although RESPA is at the core of the case, the case is in fact a typical securities class action. Plaintiffs allege that the company’s representatives made materially misleading public statements (with scienter), which in turn caused plaintiffs to purchase stock at a price that was artificially inflated by the statements. When the truth of the statements were called into question, plaintiffs allege, the resulting drop in the stock price caused them losses. RESPA’s anti-kickback provision is at issue because the allegedly false statements were that the real estate marketing company operated its co-marketing program in compliance with RESPA, when in fact the company allegedly operated it in a manner that violated RESPA. The company’s statements about RESPA compliance were called into question as a result of disclosures about a CFPB investigation of the company.
The threshold issue in the lawsuit, therefore, is whether the defendants’ statements of RESPA compliance were true; that is, whether the real estate marketing company’s operation of its co-marketing program did, in fact, comply with RESPA. In an earlier opinion, the court found that plaintiffs had not adequately alleged a RESPA violation, but gave them leave to re-plead with more particular allegations. Plaintiffs then did so, setting up the court’s decision in the later decision.
The Co-Marketing Program
The real estate marketing company launched a co-marketing program in 2013 that allowed a participating lender to pay a portion of a participating real estate agent’s advertising costs directly to the company in exchange for appearing on the agent’s listings on the company’s website and receiving from the company at least a portion of the leads it would send to the agent. How many of the agent’s leads would also go to the lender would depend on whether the user “opted out” from her information going to both parties.
CFBP Investigation and This Lawsuit
Beginning in 2015, the real estate marketing company received inquiries from the CFPB regarding its co-marketing program. In February 2017, the company received a Notice and Opportunity to Respond and Advise letter from the CFPB, stating the CFPB was considering whether to recommend legal action against the company for violation of RESPA’s anti-kickback provision. In May 2017, the company publicly disclosed the CFPB’s investigation, but executives allegedly stated to investors that the co-marketing program complied with RESPA.
In August 2017, the company publicly disclosed that the CFPB had concluded its investigation, but wanted to discuss settlement or pursue further action. The company’s stock price fell as a result of that last disclosure. Shortly thereafter, investors filed a class action suit against the company and two executives, alleging that the investors purchased shares before the last disclosure at a price that was inflated by the executives materially misleading statements about RESPA compliance. Ultimately, in June 2018, the company reported that the CFPB determined not to take any enforcement action.
This Opinion Denying the Motion to Dismiss
In denying defendants’ motion to dismiss the complaint that plaintiffs had amended, the Court concluded that:
The new complaint pled facts sufficient to allow the Court to infer that the real estate marketing company designed its co-marketing program to allow agents to provide referrals to lenders in violation of RESPA, and that such referrals were occurring. The pertinent facts contained in the complaint included:
Two anonymous-witnesses statements, made by prior employees of the company. In essence, the statements reported that there was an understanding and practice among the company, the agents, and the lenders that lenders were paying for agents’ referrals of customers.
The allegations were sufficient to infer that the company designed the co-marketing program to allow lenders to pay more than fair market value for their share of marketing services. The pertinent alleged facts included:
Several indications that the co-marketing program’s prices were more expensive for lenders than comparable programs with the company not involving real-estate agents.
An anonymous witness statement by a former employee of the company describing how in practice lenders were able to make payments of up to 90% of co-marketing costs, which was corroborated by allegations in a wrongful termination suit filed in 2015.