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  • FinCEN Expands Reach of Real Estate Geographical Targeting Orders

    Consumer Finance

    On July 27, FinCEN issued temporary Geographical Targeting Orders (GTO) requiring certain U.S. title insurance companies to identify and report the natural persons behind shell companies used to conduct “all-cash” purchases of high-end real estate in six major metropolitan areas. The GTOs cover the following areas: (i) all boroughs of New York City; (ii) Miami-Date, Broward and Palm Beach Counties in South Florida; (iii) Los Angeles County; (iv) San Francisco, San Mateo, and Santa Clara counties; (v) San Diego Country; and (vi) Bexar County, Texas, which includes San Antonio. FinCEN simultaneously released a table outlining the monetary thresholds that trigger the identification and reporting requirements in each jurisdiction. Upon taking effect, the GTOs will remain effective for 180 days absent an extension. As previously covered in InfoBytes, FinCEN remains concerned that all-cash purchases conducted through LLCs or other “opaque structures,” may be conducted by natural persons trying to hide their assets and identity. According to FinCEN’s Acting Director Jamal El-Hindi, “[b]y expanding the GTOs to other major cities, we will learn even more about the money laundering risks in the national real estate markets, helping us determine our future regulatory course.”

    Anti-Money Laundering Title Insurance FinCEN GTO

  • U.S. FinCEN Issues Geographical Targeting Orders Requiring Reporting of High-End Cash Purchases and Buyers of Residential Real Estate in Manhattan and Miami

    Consumer Finance

    On January 13, FinCEN issued two Geographical Targeting Orders (GTO) requiring certain U.S. title insurance companies to provide identification for certain “all-cash” buyers of high end real estate, and to report such transactions. One GTO focuses on the Borough of Manhattan in New York City, New York and the other focuses on Miami-Dade County, Florida.

    According to FinCEN, natural persons may be purchasing real estate without bank financing and through LLCs or “other opaque structures” in an attempt to hide their assets and identity. FinCEN commented: “Having prioritized anti-money laundering protections on real estate transactions involving lending, FinCEN’s remaining concern is with money laundering vulnerabilities associated with all-cash real estate transactions.” The two GTOS will be effective from March 1, 2016 through August 27, 2016, and will require certain title insurance companies to “record and report to FinCEN the beneficial ownership information of legal entities purchasing certain high-value residential real estate without external financing.”

    The GTOs are identical with the exception of the purchase price value applicable to the different locations. For purchases exceeding $3 million in the Borough of Manhattan, or $1 million in Miami-Dad County, that are made by a legal entity (as defined in the GTO), “without a bank loan or other similar form of external financing,” where “the purchase is made, at least in part, using currency or a cashier’s check, a certified check, a traveler’s check, or a money order in any form,” a title insurance company, and any of its subsidiaries and agents, is required to file a Form 8300 within 30 days of closing.

    Among other information, the Form 8300 must:

    • Contain information about the identity of the individual primarily responsible for representing the Purchaser, including a copy of this individual’s driver’s license, passport, or other similar identifying documentation.
    • Contain information about the identity of the Purchaser.
    • Contain information about the identity of the Beneficial Owner(s) of the Purchaser. The Covered Business must obtain and record a copy of the Beneficial Owner’s driver’s license, passport, or other similar identifying documentation. A “Beneficial Owner” means each individual who, directly or indirectly, owns 25% or more of the equity interests of the Purchaser.
    • If the purchaser involved in the Covered Transaction is a limited liability company, then the Covered Business must provide the name, address, and taxpayer identification number of all its member

    This development is consistent with FinCEN’s long-term trend of pushing for greater transparency, exemplified by its pending proposed rule that would mandate enhanced customer due diligence related to beneficial ownership. See prior InfoBytes Alert and our description of the proposed rule.

    Anti-Money Laundering Title Insurance FinCEN GTO

  • NYDFS Releases New Title Insurance Rates for Refinancings; Consumers Save Up to 65 Percent

    Consumer Finance

    On May 12, the NYDFS announced newly approved title insurance industry rates for mortgage refinancing transactions, which is just one of the steps the NYDFS is planning to take to reform and lower title insurance rates. The new rates vary depending on the term, size, and duration of the loan, and they are anticipated to provide significant savings to New York homeowners.

    Title Insurance NYDFS

  • NY Proposes New Title Insurance Regulations To Help Reduce Closing Costs

    Consumer Finance

    On April 29, New York Governor Andrew Cuomo unveiled new title insurance regulations aimed at reducing title insurance closing costs of up to 20 percent for new homebuyers by eliminating kickbacks and other improper expenditures within the title insurance industry. The new regulations follow an NYDFS investigation which revealed that title insurance companies and their agents routinely spent excessive amounts on meals and entertainment for attorneys, real estate professionals and others in exchange for referrals on new business, passing along the costs to consumers’ insurance premium. In addition, the regulations also impose a cap on fees charged for searches and other services associated with the issuance of a title insurance policy, and requires title companies to submit filings, once every three years, affirming that the title insurance rates are not excessive or discriminatory.

    Title Insurance NYDFS

  • Latest CFPB RESPA Enforcement Action Targets Employee Referrals

    Lending

    Last week, the CFPB announced its latest RESPA enforcement action, adding to one of the CFPB’s most active areas of enforcement. In this case, the CFPB required a New Jersey title company to pay $30,000 for allegedly paying commissions to more than twenty independent salespeople who referred title insurance business to the company. The matter was referred to the CFPB by HUD.

    The CFPB asserts that from at least 2008 to 2013, the title company offered commissions of up to 40% of the title insurance premiums the company received. The CFPB explained that paying commissions for referrals is allowed under RESPA if the recipient of the payment is an employee of the company that is paying the referral, but claimed in this case that the individuals involved were actually independent contractors and not bona fide employees. The CFPB determined that although the individuals received W-2 forms from the title company, the company “did not have the right or power to control the manner and means by which the individuals performed their duties.”

    In determining the penalty amount, the CFPB took into consideration the company’s ability to pay and remain a viable business. Notably, the consent order removes the “employer-employee” exception for this company on a going forward basis, including under existing employment contracts.  The order prohibits the company from paying any employee “any fee, kickback, or thing of value that is contingent on the referral of title insurance business or other settlement services, notwithstanding the ‘employee exception’ contained in 12 C.F.R. §1024.14(g)(vii).” The order also establishes certain compliance, record keeping, and reporting requirements.

    CFPB HUD RESPA Title Insurance Enforcement

  • CFPB Files Brief In Long-Running RESPA Case

    Lending

    On October 30, the CFPB filed an amicus brief in Edwards v. First American, a long-running case concerning the anti-kickback provisions of the Real Estate Settlement Procedures Act (RESPA) that is currently pending in the U.S. Court of Appeals for the Ninth Circuit. The case revolves around allegations that the defendant-title insurer purchased interests in title insurance agencies in order to secure referrals of insurance business from those agencies. The consumer-plaintiffs alleged that these arrangements constituted illegal kickback agreements under Section 8 of RESPA, even though they did not suffer any actual damages.

    At issue before the Ninth Circuit is whether a private plaintiff must specifically allege an overcharge in order to have standing under RESPA. The district court held that (i) to constitute a “thing of value” exchanged for a referral in violation of RESPA, the putative class must show that the defendant overpaid for the interests in the title insurance agencies in exchange for referrals of settlement service business, and (ii) all members of the class must prove not only that they were referred to the title company but also that the referral influenced their selections of a settlement service provider.

    The Bureau disagrees that proof of an overpayment for the interests in the title companies is required to establish that the referrals violated RESPA.  Instead, the CFPB’s brief argues that the “thing of value” exchanged includes the value of the transaction itself and that the plaintiffs need only show that the defendant-company purchased the ownership interests in order to ensure the referral of future settlement business, even if the price paid was fair. The CFPB also disputes the district court’s conclusion that violations require proof of referral and influence on a plaintiff-by-plaintiff basis, arguing that under the plain language of the statute, the level of influence on a consumer is irrelevant in cases of explicit referrals.

    The CFPB filed an amicus brief in the same case in October 2011, when a separate standing issue was appealed to the U.S. Supreme Court.  The Supreme Court heard the case but declined in June 2012 to issue an opinion, stating that certiorari was “improvidently granted.”

    CFPB U.S. Supreme Court Mortgage Origination RESPA Title Insurance

  • CFPB Sues Law Firm Over Alleged RESPA Violations

    Lending

    On October 24, the CFPB announced the filing of a lawsuit against a Kentucky law firm and its principals for allegedly violating Section 8 of RESPA by operating a network of affiliated companies in order to pay “kickbacks” for referrals of mortgage settlement business. The CFPB claims, among other things, that from 2006 until 2011 the law firm established nine joint ventures (JVs) with owners and managers of real estate and mortgage brokerage companies. According to the CFPB, when a JV partner or an agent or employee of the JV made an initial referral of closing or other settlement services to the law firm, the law firm arranged for the title insurance for the underlying transaction to be issued through the co-owned JV in exchange for the settlement business. The parties subsequently split profits generated by the JVs as a result of the title insurance referrals, the CFPB alleges. The CFPB is seeking to enjoin the defendants from the alleged activity, and disgorgement of all income, revenue, proceeds, or profits received in connection with settlement services provided as a result of or in connection with a referral made in violation of RESPA.

    The CFPB supports its claims in part by referencing certain factors first established in a HUD policy statement for use in determining whether a controlled business arrangement is a “sham.” For example, the CFPB alleges that (i) in most instances, the initial capitalization for the JV was provided by the law firm and comprised of only enough funds to cover the JV’s Errors and Omissions insurance, (ii) each JV had only one staffer—a single independent contractor simultaneously shared by all nine JVs and concurrently employed by the law firm, (iii) the law firm principals and employees or agents of the law firm managed the business affairs of the JVs, (iv) the JVs did not have their own office spaces, email addresses, or phone numbers and could not function independently from the law firm, (v) the JVs did not advertise themselves to the public, and (vi) all of the JV’s business was referred by the law firm.  However, the CFPB never characterizes the business arrangements in this case as a “sham” and does not explicitly cite HUD’s policy statement.

    This is at least the sixth RESPA action publicly announced by the CFPB and the second involving allegedly improper affiliated business arrangements. As with the other RESPA actions it has announced to date, the investigation that led to the current lawsuit originated with HUD and transferred to the CFPB when authority for RESPA transferred in July 2011. The CFPB appears to be exercising for the first time in a RESPA case its independent civil litigating authority to pursue the allegations, whereas HUD lacked such litigating authority and typically would have resolved the investigation through a negotiated settlement or a referral to the DOJ for litigation. The announcements, combined with the prior actions, suggests that the Bureau remains focused on enforcing Section 8 of RESPA—including through litigation—even as it focuses substantial attention on implementing extensive revisions to RESPA and other mortgage rules.

    CFPB HUD RESPA Title Insurance Enforcement

  • Seventh Circuit Rejects Class Certification for RESPA Section 8 Action

    Lending

    On March 6, the United States Court of Appeals for the Seventh Circuit concluded that borrower claims against a title insurance company for alleged kickbacks and fee splitting, in violation of Section 8 of the Real Estate Settlement Procedures Act (RESPA), were not appropriate for class treatment because an individual determination of liability would be required for each class member.  Howland v. First American Title Ins. Co., Nos. 11-1816, 11-1817, 2012 WL 695636 (7th Cir. Mar. 6, 2012). The case involves the sale of title insurance in Illinois by First American Title Insurance Company. First American typically sells title insurance to borrowers by contracting with the borrower’s real estate attorney to conduct a title examination. As part of that contract, First American provides the real estate attorney with a substantial amount of information about the property, including a summary sheet that includes legal description of the property, the last known grantee, and any open liens. The borrowers alleged that this summary sheet was itself a preliminary title examination. Because much of the title examination work was provided by First American to the attorney as title agent, the borrower sought to certify a class based on two related alleged violations of RESPA: (i) that the fees charged were excessive and unreasonable given the small amount of work performed and (ii) that the attorney title agents were paid to compensate for referrals and not actual services. The court concluded class certification was not appropriate in this instance. It held that while kickbacks and referral fees to the real estate attorney title agents based on compensation for nominal or duplicative services were banned by Section 8 of RESPA, “the existence or the amount of the kickback in these cases generally requires an individual analysis of each alleged kickback to compare the services performed with the payment made.” Furthermore, the court found that claims attorney title agents were being overcompensated for a pro forma clearance of the title based on the title company’s property summary sheet required a specific case-by-case inquiry. The court concluded that “RESPA Section 8 kickback claims premised on an unreasonably high compensation for services actually performed are inherently unsuitable for class action treatment.”

    RESPA Title Insurance

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