Broker’s Worst Nightmare: California Brokers have been indicted; what’s next – preferred providers kickbacks?

The FBI and the Department of Housing and Urban Development (HUD) investigated a fraud scheme that defrauded lenders of more than $20,000,000.  As a result, ten people have been indicted. The indictment focused on David Marshal Crisp and Carlyle Lee Cole who owned and operated Crisp and Cole Real Estate. Along with another eight individuals, Crisp and Cole obtained real estate loans for borrowers by making false statements about their income, assets, employment and their intent to occupy those properties as their primary residence.

How many brokers do you know that have “helped” a borrower qualify – 1 out of 10, 9 out of 10 or none at all?  Unfortunately while it is unusual that the FBI and HUD get involved, this is old news when it relates to some brokers and some agents taking walks outside of the law.

This indictment shows a new trend of powerful government offices becoming active with questionable activities by real estate brokerages. While we believe that this is only the beginning of many more similar investigations, we also believe that the next hot button topic is real estate offices enforcing “Preferred Providers” programs. Are real estate brokers with “Preferred Providers” programs providing the FBI and HUD with a roadmap of their kickback schemes? Interestingly enough, not one of the brokers we called had the same explanation for their “Preferred Provider” programs. But all of them have one thing in common: induce their agents to select services from the broker’s list of providers.

The strategy is designed to block “Non Preferred Providers” from doing business with their agents. Why would real estate brokers take this risky road?  Is a couple of dollars in kickbacks worth the risk of potential indictment? A broker’s imposition of his or her own provider choices upon independent contractor agents violates California laws. Previously, we published an article about a threatening letter from a broker’s manager admonishing the agents that if they use anyone outside of the “Preferred Provider” list, that the agents would be forced to pay for the services out of their pocket.  Illegal? Yes!  

Why would a brokerage take this risk? Are they compensated? Look at the Transaction Point program we covered in a December article titled “Is TransactionPoint a Broker’s Worst Nightmare: Part II. This strategy was designed for the brokers to invite their selected vendors to become “Preferred Providers”. These selected vendors will pay the broker a pre-determined fee every time an order is place for their services. While we could not find a financial benefit for the agent engaging in a broker’s Preferred Providers program, in the end, the agent will be on the hook for failing to disclose to the client this obvious financial benefit to the broker.

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