12 Dec California Regulatory Update
On December 5, 2012, the California Department of Corporations (the “Department”) issued a Bulletin addressing business arrangements that involve unlawful referral fees to third-party risk management companies.
CALIFORNIA DEPARTMENT OF CORPORATIONS COMMISSIONER’S BULLETIN No. 001-12
Third-party risk management companies provide supervised banks and nonbanks with a screening service to pre-screen potential service providers. Some third-party risk management companies require potential service providers to pay a fee in order to be pre-screened by the companies and to appear on a list of “approved” service providers. In addition, some supervised banks and nonbanks have been advising potential service providers that the service providers must be on the third-party risk management company’s “approved list” in order to receive business.
Lenders regulated by the Department should be cautious of delegating their responsibility to screen service providers to third parties, and are responsible for such companies’ compliance with the law. Escrow agents should be cautious of subscribing to the screening services of third party companies for a fee in order to get on a list provided to lenders, as these actions may be unlawful. All parties should take necessary precautions prior to sharing personal and confidential information with third parties.
Except for the normal compensation of his or her own employees, a person subject to the California Escrow Law must not pay any other person any commission, fee, or other consideration for referring, soliciting, handling, or servicing escrow customers or accounts. The payment of fees to be on a referral list may also be a violation of such laws.
The practice of requiring the use of a service provider from a preapproved list may also violate the California Buyer’s Choice Act (the “Buyer’s Choice Act”). The Buyer’s Choice Act provides that certain “sellers” of real estate may not require, directly or indirectly, as a condition of selling property, that title insurance covering the property or escrow service provided in connection with the sale of the property be purchased by the buyer from a particular title insurer or escrow agent. For purposes of the Buyer’s Choice Act, a “seller” is defined to include a lender who obtains title to residential real property at a foreclosure sale.
A lender requiring the use of a particular service provider on a third-party risk management company’s list, or prohibiting the use of a service provider not appearing on such list, may be in violation of the Buyer’s Choice Act.
The Department defers to the Consumer Financial Protection Bureau on whether the referral fee arrangement of third-party risk management companies violates the Real Estate Settlement Procedures Act provision that prohibits the giving or receiving of any fee, kickback, or thing of value for the referral of settlement service business.
The practice of requiring a service provider, such as an escrow agent, to pay for the referral of business from a lender is prohibited under the Escrow Law and could be considered an unfair business practice under the Business and Professions Code.
The Department may bring an action against licensees that contract with third-party risk management companies or place restrictions on service providers in an unlawful manner.