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HUD Settles Lawsuit With California Hazard Reporting And Real Estate Brokerage Firms

August 11, 2008

The U.S. Department of Housing and Urban Development has settled its federal lawsuit under the Real Estate Settlement Procedures Act (RESPA) against Property I.D. Corporation, a large hazard reporting company in California, Realogy Corporation, Cendant Corporation (now known as Avis Budget Group, Inc.) and Coldwell Banker Residential Brokerage Corporation.

The settlement will conclude with the filing of Consent Orders in the Central District of California that will require the companies to treat hazard disclosure reports as settlement services and not resume operations of any hazard report companies alleged by HUD to be shams.

Reflected in the settlement is a landmark ruling by the judge in the case that HUD has the authority to seek a permanent injunction and disgorgement of illegal profits from the companies under RESPA.

A settlement in a related federal class action lawsuit requires the companies to pay up to a combined $35 million dollars, much of it to California consumers who purchased hazard disclosure reports as far back as 1996. HUD determined that its request for an accounting and disgorgement of illegal profits in its lawsuit will be satisfied through the defendants' payments to consumers in the settlement of this private action filed under RESPA. As part of the settlement with HUD, Property I.D. and the Realogy-related companies agree that they will pay $7.5 million and up to $27 million, respectively.

HUD alleged that Property I.D. Corporation of Los Angeles made improper payments to large real estate brokers in California based on the referral of consumers to Property I.D. Such referral-based payments are kickbacks and prohibited under Section 8 of RESPA.

"I am extremely pleased the court agreed that HUD has the authority to seek injunctive relief and disgorgement of profits illegally received through kickback schemes in violation of RESPA." said Brian Montgomery, HUD's Assistant Secretary for Housing and Federal Housing Commissioner. "This settlement should be a warning to anyone who sets up sham affiliated business arrangements designed to collect improper referral fees, that HUD is willing and able to seek these remedies in federal court."

RESPA was enacted in 1974 to provide consumers advance disclosures of settlement charges and to prohibit illegal kickbacks and unearned fees in the homebuying process. Section 8 of the law prohibits a person from giving or accepting anything of value in exchange for the referral of settlement service business.

California state law requires home sellers or their agents to disclose whether property is located within hazardous areas including those prone to flooding, fires or earthquakes. Consequently, California companies today provide "Natural Hazard Disclosure Statements" to meet this state requirement.

Last year, HUD initiated this lawsuit after HUD's investigation found that Property I.D. formed a number of sham affiliations with real estate brokers. These joint ventures did not actually produce hazard disclosure reports and appeared to exist solely for the purpose of funneling payments in exchange for the brokers' referrals of business. The joint ventures were all located at the hazard reporting company's Los Angeles address, had no employees of their own, and shared bank accounts.

The Department further discovered that the referring brokers used a variety of methods to get their agents and franchisees to refer customers to Property I.D. including:

  • Providing pre-printed listing contracts with Property I.D. pre-selected as the provider of the hazard disclosure report;
  • Giving branch managers a portion of the referral fee in their bonuses;
  • Implementing a mandatory policy that advised buyers to purchase Property I.D. hazard disclosure reports even though the buyer has no liability under California law;
  • Paying a portion of agent liability insurance when Property I.D. hazard disclosure reports were used.
In return for these referrals, the brokers were paid through quarterly payments, $25 per report, or one-quarter of the total report's cost. The sham affiliated businesses did not provide hazard disclosure reports to non-referred customers and shared in profits based solely on the number of referrals made to Property I.D.

Source: HUD



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