A small, family run real estate law firm in Kentucky last week prevailed in a lawsuit filed by the Consumer Financial Protection Bureau. In 2013, the bureau alleged that the company, Borders & Borders, had woven a web of shell companies to cover illegal kickbacks given for referrals. A federal judge in the Western District of Kentucky held that Borders’ dealings were legitimate. The ruling can be found here.
The CFPB claimed that Borders created nine distinct joint ventures that served only to generate kickbacks to Borders. The initial complaint said that the joint ventures lacked the typical trappings of a true business, such as office space, phone numbers and email addresses. The companies shared an independent contractor who also worked for Borders, and each only issued title insurance to home buyers who had been referred to the firm. The bureau sought to enforce the anti-kickback provisions of the Real Estate Settlement Procedures Act.
Borders argued that its ventures had complied with applicable federal law because they qualified for a safe harbor provision in RESPA. That provision shelters “affiliated business arrangements” so long as those arrangements are disclosed to the consumer being referred to the partner company. The provision allows profit-sharing between entities. The court last week concurred.
“Given that Borders & Borders disclosed the relationship with the [joint ventures], the customers could reject the referral, and the bureau failed to show that the [joint ventures] received anything of value beyond their ownership interests, there is no genuine dispute of material fact that the [joint ventures’] arrangement with Borders & Borders qualifies as an affiliated business relationship protected” under RESPA, the judge wrote. “Borders & Borders is entitled to summary judgment as a matter of law.”
“We are very pleased that the court agreed with what we’ve been saying for six and a half years: our affiliated business arrangements were designed and operated to be fully compliant with RESPA,” Borders said in a statement.
This adverse ruling for the CFPB comes just nine months after a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit struck down another bureau interpretation of RESPA in its case against PHH. The Bureau fined PHH $109 million for referring borrowers to certain mortgage insurance companies in exchange for a percentage of the premiums those insurers received from the borrowers. Though the full D.C. Circuit vacated that panel decision and reheard the case in May, the judge in last week’s case was clear that his ruling was independent of the D.C. Circuit panel decision ruling in favor of PHH.