In 1983, Jim Campbell launched what was likely the first joint venture experiment between a real estate broker and a title and settlement company.
Campbell said there were a number of reasons for this, primarily that Pennsylvania real estate brokers and lenders were looking for a more effective way to manage the home buying and selling process. Mr. Campbell and his business partners argued that problems often arose when using unfamiliar title or escrow companies. Why not create one entity to make the process smoother?
Mr. Campbell has now completed more than 80 joint ventures with real estate and financial companies, making him something of a JV guru.In fact, it’s all his company based in Pennsylvania title alliance that’s right.
Chief Operating Officer Mike LaRosa said: florida agency networkwill also follow the JV playbook.
“I know it’s a cliché to be a one-stop-shop, but when done right, it’s not just a side income for real estate agents and title companies, but also for consumers who benefit from efficiency and efficiency. That could be a huge benefit.” Economies of scale improve pricing,” LaRosa said.
However, the joint venture model may soon be phased out.
February 2023 Law Office McGuire Woods The business model of joint ventures between title insurance companies and real estate brokerages “increases costs and inhibits competition” and violates the Real Estate Settlement Procedures Act of 1974 (RESPA) and the Real Estate Settlement Procedures Act of 2010. published a white paper claiming that Consumer Financial Protection Act (CFPA).
The paper’s authors include former deputy law enforcement chief Jeff Ehrlich. Consumer Financial Protection Bureau (CFPB) has requested that the CFPB and state regulators investigate title and real estate joint ventures for potential violations of RESPA, CFPA, and state regulations.
“To qualify for safe harbor, a related business arrangement must meet three statutory conditions,” the authors argue. “First, certain disclosures must be made to the referred consumer. Second, the consumer is not required to use a particular payment service provider. And third, the referrer must receive The only thing of value that can be done is an interest in ownership. Since a joint venture does not meet (at least) this third condition, it is not subject to the safe harbor.”
According to the paper, when forming joint ventures, real estate agents and brokers “provide no nominal capital or any capital in exchange for ownership of the joint venture,” while title companies also “make little investment and exit. ”. This joint venture is severely undercapitalized for the amount of payment services it purports to provide. ”
The authors also claim that the profit dividends that title companies and real estate agents receive are “grossly disproportionate” to their respective investments.
Francis Riley is an attorney focused on RESPA issues. Saul Ewing Law Officestates that while these claims may apply to a small number of title joint ventures, it is not the norm.
“They’re asking why an investor received $5,000 in dividends last quarter when they only invested $2,000. And the same could be said for early investors. microsoft or Facebook “People bought stocks for $100 and now they’re worth thousands of dollars,” Riley said. “I think it’s being driven by competitors who don’t like the business model of going out and acquiring referral investors.”
Riley added: “They’re making these claims about how bad it is and how non-compliant it is. What investigators are finding is that in most, but not all cases, In these cases, the investment is appropriate and you are paying fair market value for the investment.”
Regulators are reducing pressure
The stakes are high for title insurance companies operating joint ventures in legal gray areas.
“The environment we’re in now is probably the toughest enforcement we’ve seen in 20 years, and it’s definitely on the state side,” said RESPA lawyer Markus Stabkow. Star Cow Law Groupsaid in an interview. housing wire. “There are companies that actually follow the plan, and they follow the uber. They don’t want any misconceptions about what their company is doing, and they don’t want everything to be on the straight and narrow. But there are competitors in the market who are doing things that are completely illegal.”
In addition to RESPA, McGuire Woods alleges that the joint venture violates the CFPA, which prohibits abusive acts and practices between “subjects” and “service providers.”
“Joint venture partners are ‘related parties’ and are considered ‘targeted persons’ if they ‘substantially participate in the conduct of the operations’ of the target,” the paper said. “Here, the real estate agent is an “associated party” because he or she materially participates in the joint venture’s operations by referring customers to the joint venture for title services, but does not provide real estate. Therefore, the joint venture itself is a “target party”.” -Payment services. Therefore, the real estate agent could be considered a “covered person” subject to her CFPA. ”
Ehrlich said that’s not the only possible violation in some states.
“Many states have their own laws prohibiting kickbacks for referrals, similar to RESPA. Most state laws, such as RESPA, have exceptions for legal joint ventures. However, a few jurisdictions have no exceptions. We prohibit kickbacks,” Ehrlich said. “For example, Section 31-5031.15 of the D.C. Code makes it unlawful for any person to “directly or indirectly give or receive consideration for the introduction of title insurance business, escrow, or other services provided by a title insurance company.” That’s what I mean. And that’s no different for joint ventures, even joint ventures, which are okay under RESPA. This provision essentially prohibits all title company joint ventures in Washington, DC. ”
Ehrlich attributes the increased scrutiny on joint ventures to the proliferation of joint ventures over the past few years and the growing challenge of housing affordability.
“Prices are going up. Interest rates are going up. Closing costs are going up. Fake joint ventures distort competition and cause consumers to pay more for payment services,” Ehrlich said. he wrote in an email. “So, to the extent that the CFPB or state attorneys general want to address this housing issue, one of the first places they will go is with a deal with a sham JV.”
Stabkow acknowledges that housing affordability is a challenge for many, but believes there are several additional factors at play. Stabkow believes that the CFPB’s stagnation in RESPA enforcement actions from 2017 to 2023 gave real estate and title professionals the impression that RESPA was no longer a priority. This, combined with a slowing housing market, created a perfect storm for some questionable business practices that drew the attention of regulators.
“What happens is that when market conditions decline and revenues start to decline, people get so panicked that they start making all sorts of crazy, cockamamie plans to encourage business to come in. It loses its legitimacy and affects the markets in which they are “companies operating,” Stabkow said.
Arizona, in particular, closely monitors joint ventures between title insurance companies and real estate brokerages.
“We are looking at how they are structured and whether they are genuine joint ventures and not just sham organizations created to give kickbacks to agents.” said James Knapp, the association’s deputy director. Arizona Real Estate Board, Said. “We want to ensure that agents and title companies operate within the legal limits of what they can do, and it all comes back to consumer protection and affordable housing. ”
Knupp said he is also looking into the neutrality of escrow agents and the disclosures real estate agents make to customers about the nature of their relationships with title joint ventures.
To conduct the investigation, Knupp’s department Arizona Department of Insurance and Financial Institutions (Diffi).
“We want consumers to be fully aware of the choices they are making. Purchasing a home may be the biggest transaction of a consumer’s lifetime. We don’t want these joint ventures to work together to narrow consumer choice,” said Arizona DIFI spokesperson James McGuffin.
It is unclear how many joint ventures between real estate brokers and title insurance companies exist across the United States. Experts told HousingWire that there is no single authority that tracks such groups.
Riley said local regulators in Pennsylvania, Maryland and Washington, D.C., have also begun considering title joint ventures. (None of the local regulators responded to requests for interviews.)
Despite Mr. Ehrlich’s claims and the doubts of state regulators, industry experts maintain that the joint venture is consumer-friendly.
“Having these joint ventures and related businesses creates more of a closed loop,” said Aaron Davis, CEO of Florida Agency Network. “Anytime a buyer gets out of the loop, there is a chance of poor service being provided. When I am a buyer and go to a real estate office that has a joint venture title company, each business is working together. , brokers have the ability to have greater control over the buyer’s overall experience.”
LaRosa added, “Creating that closed-loop environment increases our ability to integrate systems, allows transactions to flow more naturally, and reduces friction from order entry to completion.”
Gretchen Pearson, Broker Owner Berkshire Hathaway Home Services Drysdale PropertiesThis is part of our collaborative business agreement. orange coast titleThe firm also has similar transactions with two of the region’s largest competing brokerages.
“The main reason for forming the joint venture is to create a better experience for consumers,” Pearson said. “It sucks when something goes wrong with a title and you try to close the deal with a buyer and it takes forever. But if the title company is your business partner, you can still They may issue it sooner rather than later, and we are taking therapeutic steps to help the buyer close the deal.”
In addition to increased interest from state regulators, the CFPB launched its first RESPA enforcement action in six years earlier this year, making it clear that RESPA is becoming more of a focus for the real estate industry. But for LaRosa, at least for now, this is less of a concern.
“We welcome the scrutiny,” LaRosa said. “We don’t want to badmouth anyone, so I think anyone who does things the way we do would welcome it. But there are people who have bad intentions, and I don’t want any more crackdowns. I don’t think they’re necessarily trying to arrest people. I think they’re trying to provide some guidance and make sure there’s a level playing field.”