Sean McCullough bought a home using federally related mortgage services provided by Howard Hanna Co. McCullough alleged that he was told by Hanna that "we use" a particular settlement services and title insurance provider, and that this provider’s name and information was preprinted onto the purchase agreement form Hanna provided to McCullough to sign.

All told, McCullough paid the provider $1,000 for various settlement services and an owner’s title insurance policy. Hanna had a business relationship with this provider.

McCullough filed a complaint, claiming that Hanna required him and similarly situated buyer/borrowers to use this provider, and that Hanna benefited financially from requiring its clients to use this provider, in violation of the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. §§2601 et seq.

Specifically, McCullough claimed that Hanna violated RESPA by: "(1) requiring the use of Barristers; (2) providing kickbacks or anything of value to Hanna for requiring the use of Barristers’ settlement services; and (3) failing to qualify as an affiliated business arrangement pursuant to Section 8 of RESPA and 24 CFR 3500.15."

Hanna moved to dismiss the lawsuit, and the U.S. District Court for the Northern District of Ohio granted Hanna’s motion, dismissing McCullough’s claim.

RESPA prohibits vendors and service providers from requiring borrowers to use particular vendors, and from paying/receiving kickbacks in consideration for referring business or settlement services connected to a federally related loan to any one business or person. 12 U.S.C. §2607(a).

However, referrals arising from affiliated business relationships that are properly disclosed to the borrower in writing at the time of the referral are one exemption from RESPA liability.

McCullough’s key claims were that Hanna violated RESPA in that Hanna compensated its employees for making referrals to the particular settlement service provider at issue, that Hanna required McCullough to use the provider, and that Hanna failed to comply with the disclosure requirements of a proper affiliated business arrangement (AfBA).

On a motion to dismiss, the court is required to assume the facts are as stated by the plaintiff — McCullough, in this case. As a result, the court rejected Hanna’s first two arguments on this motion to dismiss.

Hanna argued that the seller, not the borrower, actually paid the settlement costs at issue. Hanna also argued that "Hanna informed plaintiff both of its affiliation with Barristers and that plaintiff had the option to use a different settlement services provider." Because these facts were disputed by the plaintiff, the court was not able to dismiss the suit on these grounds.

However, on Hanna’s third argument, the facts were not in dispute. McCullough and Hanna agreed that Hanna had paid its own employees bonus compensation for making the referral of business to Hanna’s affiliated service provider. As the court explained, an employer’s payments to their own employees are expressly permitted under RESPA, 24 C.F.R. §3500.14(g)(1)(vii) and, thus, do not violate the RESPA kickback prohibitions.

Additionally, because there was no kickback, the court found that McCullough had no cause of action arising from the RESPA AfBA provisions, even if Hanna had failed to properly disclose the AfBA.

Accordingly, Hanna’s motion to dismiss was upheld, and McCullough’s case was dismissed.

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