Last week, the Consumer Financial Protection Bureau announced that it filed suit against a Kentucky law firm, Borders & Borders, PLC, and its principals, alleging that the defendants violated Section 8 of the Real Estate Settlement Procedures Act (RESPA) by creating a network of Affiliated Business Arrangements (ABAs) to pay illegal kickbacks for mortgage settlement referrals. The complaint, which is attached to the CFPB’s press release, was filed in federal court in the Western District of Kentucky.

According to the complaint, the ABAs involve nine title agency joint ventures started and owned by the defendants and local real estate and mortgage brokerage companies. The joint ventures are not named as defendants in the lawsuit. The CFPB alleges that all nine joint ventures shared a single employee, and all of the joint ventures’ business was referred by Borders & Borders. Most of the joint ventures were dissolved in 2011 after the U.S. Department of Housing and Urban Development (HUD) sent an information request providing a notice of pending investigation.

The CFPB alleges that the defendants used the joint ventures to disguise illegal referral fees and kickbacks as profit sharing, in violation of Section 8 of RESPA. The CFPB also alleges that the payments to the defendants and the joint venture partners “did not constitute bona fide returns on ownership interest.”

In addition, the CFPB alleges that the “safe harbor” in RESPA—the affiliated business arrangement exception—is inapplicable because the defendants revised the form disclosure provided in Appendix D of the applicable regulation. According to the complaint, the disclosure used by the defendants and the joint ventures failed to disclose ownership percentages, failed to include a customer acknowledgement section, and modified the language of the model form and "typography" from Appendix D. In addition, the CFPB alleges that the disclosure was not provided at the time of the referral, as required under RESPA, but rather was provided at closing.

The CFPB seeks to enjoin the defendants from creating or entering into new ABAs, restarting the joint ventures, distributing any remaining funds from the joint ventures, or violating Section 8 of RESPA. In addition, the CFPB seeks disgorgement of all income received in connection with referrals made in violation of RESPA.

Like settlements earlier this year with mortgage insurance companies and with a home builder, this matter also was not initiated by the CFPB. The matter was transferred to the CFPB from HUD when the CFPB assumed authority under RESPA, as were the matters involving the mortgage insurance companies. The matter involving the builder was referred to the CFPB by the Federal Deposit Insurance Corporation.

Ballard Spahr's Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions. It is part of the firm's Consumer Financial Services Group, which publishes CFPB Monitor, a blog that focuses exclusively on important CFPB developments. To subscribe, use the link provided to the right.

For more information, please contact Richard J. Andreano, Jr., at 202.661.2271 or andreanor@ballardspahr.com, or John D. Socknat at 202.661.2253 or socknatj@ballardspahr.com.


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