Federal regulators have filed a lawsuit against a Kentucky law firm alleging the firm and its principals violated the Real Estate Settlement Procedures Act (RESPA) by operating a network of sham affiliated companies in order to pay kickbacks for referrals of mortgage settlement business.

RESPA prohibits giving and receiving kickbacks, fees, or any “thing of value” for referrals of settlement service business involving federally related mortgages. The CFPB took over RESPA enforcement from the U.S. Department of Housing and Urban Development (HUD) in July 2011, including this case.

“When companies pay kickbacks in exchange for referrals, it can hurt competition and inflate real estate settlement costs for consumers, while creating an uneven playing field that puts law-abiding businesses at a disadvantage,” the CFPB said in a statement.

The one-count complaint, filed by the Consumer Financial Protection Bureau, charges Louisville, Ken.-based Borders & Borders PLC and its principals — J. David Borders, and sons Harry Borders and John Borders, Jr. — with setting up nine joint title insurance ventures with the owners and managers of local real estate and mortgage broker companies who referred business to Borders & Borders.

According to the complaint, from at least 2006 until at least 2011, when the local real estate or mortgage brokers referred a homebuyer to Borders & Borders for closing or other settlement services, the real estate law firm would arrange for the title insurance to be issued by the  joint venture co-owned with the referring brokerage. The profits from the joint venture would then be split between the joint venture’s owners, the Borders principals and the referring broker, under the guise of legitimate profit sharing, the CFPB alleged.

“Today’s action sends a clear message that companies cannot design business structures to hide illegal kickbacks,” said CFPB Director Richard Cordray in a statement.

“The CFPB will continue to pursue companies that seek to profit from convoluted arrangements that limit competition and hurt honest businesses.”

In a statement provided to Inman News, Borders & Borders said “we would not and did not violate RESPA” and “we will certainly defend the case vigorously.”

“This case concerns a number of title agencies that were affiliated with our firm several years ago. The title agencies were ‘affiliated business arrangements’ that are expressly allowed by RESPA. There were disclosures to every consumer, as required by the statute, and in every instance in which title insurance was issued through the agencies, the consumer approved,” the firm said.

“We note that the CFPB does not allege that there was any consumer harm, or that any consumer paid a penny more for title insurance issued through the agencies in question.”

Furthermore, the firm said the CFPB was trying to enforce its own version of rules that are not in RESPA but rather in a 1996 HUD policy statement that lays out factors the agency uses to determine whether an affiliated business arrangement is a sham under RESPA or a bona fide provider of settlement services. A U.S. District Court has declared the policy unconstitutional,  a decision that’s under appeal.

“We are surprised and disappointed that the CFPB decided to file this lawsuit … instead of awaiting a determination by the Sixth Circuit Court of Appeals as to the constitutionality of the rules that it is trying to enforce,” Morgan Ward, the defendants’ attorney, told Inman News.

“We are also concerned that the CFPB seeks to change marketplace behavior through a singular action against our clients rather than rulemaking or changes in the law that apply across the board. We respectfully think that the CFPB is out on a limb with this lawsuit. It has made allegations that are simply not true from a factual standpoint, and its interpretation of the law is incorrect.”

Ward added that although the policy “is quite vague and subjective, we believe our clients complied with it. ”

In the complaint, the CFPB alleges the title insurance companies — Associates Home Title LLC; Catalyst Title LLC; East Title LLC; KMT Title LLC; Leo Title Services LLC; My Kentucky Home Title LLC; Opia Title LLC; TBD Title LLC; and WS Title LLC — were not bona fide companies and did not have their own office space, email addresses, or phone numbers, and that all nine companies shared a single staffer, an independent contractor who was also an employee of Borders & Borders.

Moreover, each LLC only issued title insurance policies for homebuyers that had been referred to and by Borders & Borders, and did no advertising to attract other business, the CFPB said. The LLCs also did not perform any “substantive title work,” all of which was instead performed by the staff at Borders & Borders, the bureau said.

The lawsuit did not name the real estate and mortgage brokers who were allegedly paid kickbacks for refering business to the joint ventures.

While the CFPB acknowledged that Borders & Borders sometimes provided disclosures notifying customers of its business affiliations with the LLCs and its joint venture partners, the bureau said the form used by the law firm included modified language and typography, was provided at closing and not at the time of the referral as required, “failed to disclose ownership percentages and failed to include a customer acknowledgement section as specified in the applicable RESPA regulation.”

The complaint said that when the firm received a pending investigation notice from HUD in 2011, the defendants dissolved most of the title insurance LLCs, and the LLCs stopped issuing title insurance policies.

The defendants remain settlement service providers in the position to refer and accept referrals of settlement services, however, and the complaint therefore seeks to permanently prohibit them from violating the anti-kickback provisions of RESPA, from creating and entering into new affiliated business arrangements, from restarting the title insurance LLCs, and from distributing any remaining title LLC funds to the joint venture partners or to defendants for any transactions covered by RESPA.

The CFPB claims Borders & Borders received “substantial fees” for closing services provided to consumers caught up in its referral arrangement and that the firms principals received “substantial distributions” from the nine title LLCs.

The complaint asks the court to order the defendants to surrender all income, revenue, proceeds, or profits received by the defendants in connection with settlement services provided as a result of or in connection with a referral made in violation of RESPA, including distributions paid by the title LLCs and fees paid by customers referred to the defendants for closing services.

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