An Ohio federal court has considered a buyer’s argument that a real estate firm violated the Real Estate Settlement Procedures Act (“RESPA”) by allegedly requiring a buyer to use an affiliated business for settlement services.

Sean McCullough (“Buyer”) retained Howard Hanna Company (“Brokerage”) to assist him with the purchase of a home. The Buyer purchased a home, and the settlement services for the transaction were provided by Barristers of Ohio, LLC (“Barristers”), which was owned by the same company that owned the Brokerage. The pre-printed sales contract provided by the Brokerage to the Buyer required the use of Barristers for settlement services, such as providing title insurance to the seller.

The Buyer brought a lawsuit against the Brokerage alleging that the Brokerage violated RESPA by requiring the Buyer to use Barristers for settlement services. The Brokerage paid its salespeople a bonus if Barristers provided settlement services in a transaction involving the salespeople’s clients. The Buyer sought to have the lawsuit certified as a class action, while the Brokerage sought to have the entire lawsuit dismissed. The court considered both arguments.

The United States District Court for the Northern District of Ohio, Eastern Division, ruled that the Buyer had failed to allege an improper payment in his lawsuit and so had not alleged a RESPA violation. Congress enacted RESPA in order to prevent consumers from paying unnecessarily high settlement costs in a real estate transaction. Section 8(a) bans the payment of “kickbacks” made for the referral of a customer to the settlement service provider.

RESPA contains an exception on its ban on referral payments when there is an “affiliated” business relationship. The RESPA statute states that RESPA does not prohibit these types of relationships, so long as the following conditions are met: a disclosure is made to the customer about the affiliated business relationship; a written estimate of the charges is provided prior to the time of referral; and there is no requirement that the referred party use the particular settlement service provider.

The parties agreed that the Brokerage and Barristers were in an affiliated business relationship, as the companies had the same owner; the question before the court was whether the payments made by the Brokerage to its salespeople violated RESPA. The Buyer argued that the Brokerage had not satisfied the disclosure requirements for an affiliated business relationship, as he claimed that he was required to use Barristers and that he had received a late disclosure of the costs.

The court ruled that the Buyer had failed to allege that Barristers had made any payment to the Brokerage for a referral and so there was no violation of RESPA. The RESPA regulations specifically state that RESPA permits an “employer’s payment to its own employees.” The only payment for a referral was the payment made by the Brokerage to its salespeople. Thus, there was no kickback payment and so there was no violation of RESPA.

The court also ruled that the Brokerage’s alleged failure to follow the affiliated business requirements alone did not violate RESPA. The Buyer had alleged that the Brokerage had failed to comply with those requirements, but the court found that failure to follow those rules alone did not constitute a RESPA violation. Instead, an improper payment had to accompany the alleged violation of the affiliated business relationship requirements. Since the Buyer had failed to allege an improper payment, the court dismissed the Buyer’s lawsuit.