CFPB is still Targeting Affiliated Business Arrangements
The Indiana-based Meridian Title Corp was recently fined $1.25 million by the Consumer Financial Protection Bureau (CFPB). They were fined for violating Section 8 of the Real Estate Settlement Procedures Act (RESPA) by failing to provide Affiliated Business Arrangement (AfBA) disclosures to consumers.
The consent order, which was issued on September 27, 2017, states that Meridian Title referred over 7,000 customers to its affiliated title insurer, Arsenal Insurance Corporation, between 2014 and 2016. Meridian apparently failed to disclose the affiliation in writing to those consumers. Three owners of Meridian Title are also owners and executives for Arsenal. Therefore, the CFPB asserts the companies are AfBAs under RESPA and subject to the fine. Meridian Title responded with the statement that they worked cooperatively with the CFPB during the investigation and appreciated their guidance. Meridian Title noted the applicable statutory and regulatory landscape is very complex and welcomed the clear direction provided by the CFPB.
Under RESPA, a company may make referrals to an affiliated business, but they are required to disclose the relationship to the consumers. Further, RESPA prohibits anyone from receiving a kickback, a fee, or "anything of value" as part of a real estate settlement service. The CFPB concluded that Meridian Title did not provide the AfBA disclosures, and therefore did not meet the safe harbor exception. This means the additional funds it received were impermissible payments for referrals and therefore in violation of Section 8 of RESPA. What is new for this situation is that the CFPB applied the RESPA affiliated business provisions to the title agent/underwriter relationship.
Meridian Title is not alone. In 2013, the CFPB filed a complaint in federal court again a Kentucky-based law firm name Borders & Borders. The suit alleged Borders & Borders were in violation of RESPA because proper AfBA disclosures were not provided. Borders & Borders did prevail against the CFPB in court, but the cases showed the significance the CFPB imposes on the disclosure requirement.
An Alabama-based real estate firm named RealtySouth reached a settlement with the CFPB in May 2014. RealtySouth was accused of not using capital letters in their AfBA disclosure, and not properly highlighting the consumers' right to shop around, among a few other items. RealtySouth immediately changed its disclosures once it was contacted by the CFPB.
It is very clear by the actions of the CFPB over the past few years that they are making RESPA enforcement a high priority, including the area of AfBAs. It is imperative that settlement service providers stay up to date on what the CFPB is doing in this arena and ensure they are in compliance.
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Case of the Month
RSB Vineyards, LLC v. Bernard A. Orsi et al.
RSB Vineyards, LLC ("RSB") purchased a vineyard, including a winery and a tasting room, from the Defendants ("Defendants") in August 2011. After the purchase, RSB had someone in to repair the stairs to the tasting room. His inspection of the stairs led the repairman to suspect other items were damaged as well. After a closer inspection, it was determined that the tasting room had major structural and other problems. It was deemed more cost effective to raze the entire building and build a new one instead of repairing the existing structure.
The structural issues were not disclosed at the time of the sale. Therefore, RSB sued the Defendants for many actions, including breach of contract, intentional misrepresentation, negligent misrepresentation, fraud, and negligence. The Defendants had acquired the property in 2009. It had a single-family home on the property during their purchase. They decided to turn the single-family home into a winery and tasting room. They filed for a commercial use permit, which was issued in spring of 2010. The Defendants hired an architect and submitted the plans to the county. After some changes, the plans were approved by the county and the construction was completed.
Since the Defendants hired a professional architect and had permits from the county, RSB reasoned that the Defendants knew the structural issues existed and failed to disclose them. However, the Defendants countered that they hired professionals because they did not know enough about construction to complete any of the work themselves. The drawings were completed by an architect. The plans were approved by county officials. The Defendants hired a licensed contractor to complete the actual construction. The Defendants relied on the professionals they hired and therefore had no knowledge of any deficiency. Since they had no knowledge of the existing condition, they could not have disclosed the information.
The Defendants filed for summary judgment less than seven months after RSB filed for suit. Since RSB could not provide any information that the Defendants actually knew about the structural issues, they argued that the professional hired by the Defendants should have known and that the knowledge was imputed to the Defendants. The Trial Court granted the summary judgment, reasoning the Defendants could not be liable for nondisclosure in the absence of any evidence that they had and actual knowledge of the facts to be disclosed.
RSB appealed the decision. The appellate court noted that RSB had the burden to provide sufficient evidence that the Defendants had knowledge of the structural issues in order to create a triable issue of fact. It is rare for a plaintiff to be able to provide any direct evidence. However, actual knowledge can, and often is, shown by inference from circumstantial evidence. Only where the circumstances are such that the defendant "must have known" or "should have known" will an inference of actual knowledge be permitted. Since most of the structural issues were discovered after RSB's contractor started to tear down the structure, and were not readily apparent to the average person, the court reasoned they were not something the Defendants must have or should have known. As such, the appellate court affirmed the decision of the trial court.
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State Fire Responsibility Area Fee Suspended
Many people don't realize it, but for several years now certain property owners within California's determined "fire responsibility area" have been charged a fire prevention fee for each habitable structure on their property. This was changed recently with the passage of AB 398. AB 398 was signed by Governor Brown on July 25, 2017. Part of AB 398 states that effective on July 01, 2017, the Public Resources Code section 4213.05 is suspended. That code section is the fire prevention fee, and AB 398 effectively suspended the fee indefinitely. Section 4213.05 expires on January 01, 2031.
For those worried about the Great State of California not getting enough money, they are still getting a fee via a market-based compliance system under the California Global Warming Solutions Act of 2006.
On a related note, we were saddened to see all the devastation of the wildfires in Northern California and other regions. Our hearts, thoughts, and prayers go out to all the people effected recently by the wildfires.
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Upcoming Speaking Engagements
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In November 2017:
Jennifer will be teaching a class for the Escrow Training Institute on Saturday, November 11, 2017, in Costa Mesa on Escrows in Probate, Bankruptcy, Divorce and More. For more information on the class or to register please visit:
Jennifer is also speaking at the Santa Clarita Valley Escrow Association dinner meeting on Wednesday, November 8, 2017.
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