Improper Referral Guidance

2020 Improper Referral & Affiliate Business Debate

A blank placeholder was inserted at subsection 21(a)(5.1) of the initial 2020 amendment legislation, where the improper referral language was placed last year in the Illinois Land Title Association's initiative, in order to highlight a desire for at least one more attempt at compromise. However, the ILTA board also wanted to offer an attempt at compromise that both "sides" may be able to live with by including a demonstrative example at the end of subsection 21(a)(5) as to what the industry could potentially agree is an improper referral violation of state and federal law:

On page 36, lines 15-26 of the amendment, you will see this language stating "...[it is a] violation of this Act if [an entity certified, licensed, or registered under the Act]...has paid any commissions, discounts or any part of its premiums, fees or other charges to any person in violation of any State or federal law or regulations or opinion letters issued under the federal Real Estate Settlement Procedures Act of 1974, including if a producer of title business requires the use of a title insurance company, title insurance agent, or independent escrowee in exchange for continued title insurance business referrals where an individual with a financial interest in the producer of title business also has a financial interest in the title insurance company, title insurance agent, or independent escrowee;"

(note: as detailed further below, 12 CFR Part 1024.2 of federal law Regulation X defines "required use" as "a situation in which a person must use a particular provider of a settlement service in order to have access to some distinct service or property, and the person will pay for the settlement service of the particular provider or will pay a charge attributable, in whole or in part, to the settlement service. However, the offering of a package (or combination of settlement services) or the offering of discounts or rebates to consumers for the purchase of multiple settlement services does not constitute a required use. Any package or discount must be optional to the purchaser. The discount must be a true discount below the prices that are otherwise generally available, and must not be made up by higher costs elsewhere in the settlement process.")

Click Here for SB3193 Committee Amendment No. 1 Filing

Illinois Improper Referral Reform Background

ILTA's prior 2019 attempt at addressing improper referral reform language relied in part on a past ethics initiative of the Illinois State Bar Association, see ISBA Ethics Opinion 10-02 (Oct. 2009).

In response to last year's improper referral provision in Section 21(a)(5.1) of the legislation, requests from Attorneys' Title Guaranty Fund, Inc. (ATG) and Real Estate Services Providers Council, Inc. (RESPRO) generally represented two "sides" of the longstanding affiliated business debate with other related interests and entities tending to identify with one of the two entities. During the course of legislative negotiations, ATG introduced language through Senate Bill 2262 and RESPRO sought inclusion of qualifying language regarding Section 8(c) of the Real Estate Settlement Procedures Act, see also 12 CFR Part 1024.15.

In reviewing potential language compromises, IDFPR's use of Sections 5 and 24 of the Title Insurance Act, 215 ILCS 155, regarding improper referrals in its disciplinary actions (click here) may also be instructive.

For reference, a "producer of title business" under the Title Insurance Act "is any person, firm, partnership, association, corporation or other legal entity engaged in this State in the trade, business, occupation or profession of (i) buying or selling interests in real property, (ii) making loans secured by interests in real property, or (iii) acting as broker, agent, attorney, or representative of natural persons or other legal entities that buy or sell interests in real property or that lend money with such interests as security." 215 ILCS 155/3(4).

Federal Law Affiliate Business Background

Section 8(c) of the Real Estate Settlement Procedures Act

Central to the discussion of potential legislative language regarding improper referrals, is whether modification to the Illinois Title Insurance Act is seeking to clarify vague state or federal law, or seeking to make a currently legal act something that is no longer legal under state law. Underlying this central discussion is the "safe harbor" provided by Section 8(c) of RESPA, 12 U.S.C. 2607(c), which states in part:

Nothing in this section shall be construed as prohibiting...

(1) the payment of a fee
- (A) to attorneys at law for services actually rendered or
- (B) by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance or
- (C) by a lender to its duly appointed agent for services actually performed in the making of a loan,
(2) the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed,
(3) payments pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and brokers,
(4) affiliated business arrangements so long as
- (A) a disclosure is made of the existence of such an arrangement to the person being referred and, in connection with such referral, such person is provided a written estimate of the charge or range of charges generally made by the provider to which the person is referred
  - (i) in the case of a face-to-face referral or a referral made in writing or by electronic media, at or before the time of the referral (and compliance with this requirement in such case may be evidenced by a notation in a written, electronic, or similar system of records maintained in the regular course of business);
  - (ii) in the case of a referral made by telephone, within 3 business days after the referral by telephone, (and in such case an abbreviated verbal disclosure of the existence of the arrangement and the fact that a written disclosure will be provided within 3 business days shall be made to the person being referred during the telephone referral); or
  - (iii) in the case of a referral by a lender (including a referral by a lender to an affiliated lender), at the time the estimates required under section 2604(c) of this title are provided (notwithstanding clause (i) or (ii)); and any required written receipt of such disclosure (without regard to the manner of the disclosure under clause (i), (ii), or (iii)) may be obtained at the closing or settlement (except that a person making a face-to-face referral who provides the written disclosure at or before the time of the referral shall attempt to obtain any required written receipt of such disclosure at such time and if the person being referred chooses not to acknowledge the receipt of the disclosure at that time, that fact shall be noted in the written, electronic, or similar system of records maintained in the regular course of business by the person making the referral),
- (B) such person is not required to use any particular provider of settlement services, and
- (C) the only thing of value that is received from the arrangement, other than the payments permitted under this subsection, is a return on the ownership interest or franchise relationship,...

For purposes of the preceding sentence, the following shall not be considered a violation of clause (4)(B):

(i) any arrangement that requires a buyer, borrower, or seller to pay for the services of an attorney, credit reporting agency, or real estate appraiser chosen by the lender to represent the lender’s interest in a real estate transaction, or
(ii) any arrangement where an attorney or law firm represents a client in a real estate transaction and issues or arranges for the issuance of a policy of title insurance in the transaction directly as agent or through a separate corporate title insurance agency that may be established by that attorney or law firm and operated as an adjunct to his or its law practice.

Regulation X Affiliate Business Safe Harbor

Safe harbors provided by Regulation X, see 12 CFR Part 1024.15(b), are also necessary to understand when determining whether modification to the Illinois Title Insurance Act is seeking to clarify vague state or federal law, or seeking to make a currently legal act something that is no longer legal under state law. Relevant to this understanding is the 12 CFR Part 1024.15(b) provisions that state in part:

An affiliated business arrangement is not a violation of section 8 of RESPA (12 U.S.C. 2607) and of § 1024.14 if the conditions set forth in this section are satisfied. Paragraph (b)(1) of this section shall not apply to the extent it is inconsistent with section 8(c)(4)(A) of RESPA (12 U.S.C. 2607(c)(4)(A))

(1) The person making each referral has provided to each person whose business is referred a written disclosure, in the format of the Affiliated Business Arrangement Disclosure Statement set forth in appendix D of this part, of the nature of the relationship (explaining the ownership and financial interest) between the provider of settlement services (or business incident thereto) and the person making the referral and of an estimated charge or range of charges generally made by such provider (which describes the charge using the same terminology, as far as practical, as section L of the HUD-1 settlement statement). The disclosures must be provided on a separate piece of paper no later than the time of each referral or, if the lender requires use of a particular provider, the time of loan application, except that:
- (i) Where a lender makes the referral to a borrower, the condition contained in paragraph (b)(1) of this section may be satisfied at the time that the good faith estimate or a statement under § 1024.7(d) is provided; and
- (ii) Whenever an attorney or law firm requires a client to use a particular title insurance agent, the attorney or law firm shall provide the disclosures no later than the time the attorney or law firm is engaged by the client.
- (iii) Failure to comply with the disclosure requirements of this section may be overcome if the person making a referral can prove by a preponderance of the evidence that procedures reasonably adopted to result in compliance with these conditions have been maintained and that any failure to comply with these conditions was unintentional and the result of a bona fide error. An error of legal judgment with respect to a person's obligations under RESPA is not a bona fide error. Administrative and judicial interpretations of section 130(c) of the Truth in Lending Act shall not be binding interpretations of the preceding sentence or section 8(d)(3) of RESPA (12 U.S.C. 2607(d)(3)).
(2) No person making a referral has required (as defined in § 1024.2, “required use”) any person to use any particular provider of settlement services or business incident thereto, except if such person is a lender, for requiring a buyer, borrower or seller to pay for the services of an attorney, credit reporting agency, or real estate appraiser chosen by the lender to represent the lender's interest in a real estate transaction, or except if such person is an attorney or law firm for arranging for issuance of a title insurance policy for a client, directly as agent or through a separate corporate title insurance agency that may be operated as an adjunct to the law practice of the attorney or law firm, as part of representation of that client in a real estate transaction.
(3) The only thing of value that is received from the arrangement other than payments listed in § 1024.14(g) is a return on an ownership interest or franchise relationship.
- (i) In an affiliated business arrangement:
  - (A) Bona fide dividends, and capital or equity distributions, related to ownership interest or franchise relationship, between entities in an affiliate relationship, are permissible; and
  - (B) Bona fide business loans, advances, and capital or equity contributions between entities in an affiliate relationship (in any direction), are not prohibited - so long as they are for ordinary business purposes and are not fees for the referral of settlement service business or unearned fees.
- (ii) A return on an ownership interest does not include:
  - (A) Any payment which has as a basis of calculation no apparent business motive other than distinguishing among recipients of payments on the basis of the amount of their actual, estimated or anticipated referrals;
  - (B) Any payment which varies according to the relative amount of referrals by the different recipients of similar payments; or
  - (C) A payment based on an ownership, partnership or joint venture share which has been adjusted on the basis of previous relative referrals by recipients of similar payments.
- (iii) Neither the mere labeling of a thing of value, nor the fact that it may be calculated pursuant to a corporate or partnership organizational document or a franchise agreement, will determine whether it is a bona fide return on an ownership interest or franchise relationship. Whether a thing of value is such a return will be determined by analyzing facts and circumstances on a case by case basis.
- (iv) A return on franchise relationship may be a payment to or from a franchisee but it does not include any payment which is not based on the franchise agreement, nor any payment which varies according to the number or amount of referrals by the franchisor or franchisee or which is based on a franchise agreement which has been adjusted on the basis of a previous number or amount of referrals by the franchiser or franchisees. A franchise agreement may not be constructed to insulate against kickbacks or referral fees.

Federal Court Opinions Regarding Affiliate Business Arrangements

Although federal court opinions may not be settled throughout each federal circuit, some federal courts have recently provided more interpretations of affiliate business arrangement provisions in the Real Estate Settlement Procedures Act, see e.g. review of 2013 and 2017 Sixth Circuit Court holdings (click here), and review of a 2018 D.C. Circuit Court holding (click here).

When determining whether modification to the Illinois Title Insurance Act is seeking to clarify vague state or federal law, or seeking to make a currently legal act something that is no longer legal under state law, consideration of whether there is agreement with federal circuit court holdings is necessary.