Prospect Mortgage LLC has agreed to pay $3.1 million to settle allegations by federal housing regulators that the company entered into sham affiliated business arrangements in order to pay kickbacks to real estate brokers, agents, banks, mortgage servicers and others who referred business to it.

Regulators had claimed Prospect operated as a "series limited liability company," a business structure unauthorized by the Federal Housing Authority (FHA).

According to the settlement agreement, Sherman Oaks, Calif.-based Prospect Mortgage denied the allegations. Prospect claimed it had disclosed its business structure to HUD in a previous audit and "therefore was under the assumption that its business structure did not violate HUD/FHA requirements" or the Real Estate Settlement Procedures Act (RESPA), the settlement said.

Prospect allegedly used its business structure to create "hundreds of sham joint ventures with real estate brokers, mortgage brokers, mortgage lenders, loan servicers and other settlement service providers and to share profits for the referral of real estate settlement services," the Department of Housing and Urban Development (HUD) said in announcing the settlement.

HUD alleged that Prospect entered into "series" or "subscription agreements" with real estate brokers, agents, banks, mortgage servicers and others to give the appearance that it was creating legitimate joint ventures to provide real and compensable services.

HUD said the "sham businesses" had few or no employees, capital, or offices and that all core mortgage origination services were performed by Prospect itself. Prospect, HUD said, allowed these affiliated businesses "to participate in the origination of FHA-insured loans out of branch offices registered with FHA as exclusive to Prospect."

In return for the referral of business, Prospect allegedly shared 50 percent of its profits with the "sham businesses," many of which were not FHA-approved lenders, HUD said.

"The real test for any bona fide affiliate business arrangement is whether the affiliate has sufficient capital and employees to stand on its own two feet," acting FHA Commissioner Carol Galante said in a statement. "In this case, it was clear that these sham companies had neither and were merely sharing profits for the referral of business."

Prospect agreed to dissolve the affiliated businesses and pay $3.1 million in fines.

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