On October 24, the CFPB announced the filing of a lawsuit against a Kentucky law firm and its principals for allegedly violating Section 8 of RESPA by operating a network of affiliated companies in order to pay “kickbacks” for referrals of mortgage settlement business. The CFPB claims, among other things, that from 2006 until 2011 the law firm established nine joint ventures (JVs) with owners and managers of real estate and mortgage brokerage companies. According to the CFPB, when a JV partner or an agent or employee of the JV made an initial referral of closing or other settlement services to the law firm, the law firm arranged for the title insurance for the underlying transaction to be issued through the co-owned JV in exchange for the settlement business. The parties subsequently split profits generated by the JVs as a result of the title insurance referrals, the CFPB alleges. The CFPB is seeking to enjoin the defendants from the alleged activity, and disgorgement of all income, revenue, proceeds, or profits received in connection with settlement services provided as a result of or in connection with a referral made in violation of RESPA.
The CFPB supports its claims in part by referencing certain factors first established in a HUD policy statement for use in determining whether a controlled business arrangement is a “sham.” For example, the CFPB alleges that (i) in most instances, the initial capitalization for the JV was provided by the law firm and comprised of only enough funds to cover the JV’s Errors and Omissions insurance, (ii) each JV had only one staffer—a single independent contractor simultaneously shared by all nine JVs and concurrently employed by the law firm, (iii) the law firm principals and employees or agents of the law firm managed the business affairs of the JVs, (iv) the JVs did not have their own office spaces, email addresses, or phone numbers and could not function independently from the law firm, (v) the JVs did not advertise themselves to the public, and (vi) all of the JV’s business was referred by the law firm. However, the CFPB never characterizes the business arrangements in this case as a “sham” and does not explicitly cite HUD’s policy statement.
This is at least the sixth RESPA action publicly announced by the CFPB and the second involving allegedly improper affiliated business arrangements. As with the other RESPA actions it has announced to date, the investigation that led to the current lawsuit originated with HUD and transferred to the CFPB when authority for RESPA transferred in July 2011. The CFPB appears to be exercising for the first time in a RESPA case its independent civil litigating authority to pursue the allegations, whereas HUD lacked such litigating authority and typically would have resolved the investigation through a negotiated settlement or a referral to the DOJ for litigation. The announcements, combined with the prior actions, suggests that the Bureau remains focused on enforcing Section 8 of RESPA—including through litigation—even as it focuses substantial attention on implementing extensive revisions to RESPA and other mortgage rules.