CFPB Suffers Setback in RESPA Lawsuit

A District Court in Kentucky recently rejected the Consumer Financial Protection Bureau’s (“CFPB”) claim against a law firm brought under the Real Estate Settlement Procedures Act (“RESPA”), granting the law firm summary judgment in connection with its activities with nine real estate joint ventures surrounding the sale of title insurance policies because the Court found that the law firm’s activities fell within RESPA’s safe harbor provision.  The case is styled Consumer Fin. Prot. Bureau v. Borders & Borders, PLC, 3:13-cv-01047-CRS-DW, 2017 U.S. Dist. LEXIS 108384 (W.D. Ky. July 13, 2017).

RESPA Background

RESPA, 12 U.S.C. § 2601, et seq., enacted in 1974, regulates “settlement services” associated with the sale of real estate, e.g., title inspection, termite inspection, and the retention of an attorney to check for errors in the sales contract.  The CFPB is now responsible for RESPA public enforcement actions.

Section 8(a) of RESPA prohibits people from giving and receiving any “fee, kickback, or thing of value pursuant to any agreement or understanding” that pertains to real estate settlement services involving a federally-related mortgage loan.  Violators face up to one year in prison, civil liability, and/or public enforcement actions.

Safe Harbor Under RESPA

Congress enacted a safe harbor provision in 1983 that shelters “affiliated business arrangements.”  12 U.S.C. § 2607(c)(4).  To qualify for the safe harbor provision, (1) the business arrangement must be disclosed to the person being referred to an affiliated business, (2) the person being referred is not required to use the service, and (3) the only thing of value that is received from the arrangements is a return on the ownership interest or franchise relationship.  The safe harbor provision also shelters lenders who require a buyer, borrower, or seller to pay for the services of an attorney, credit reporting agency, or real estate appraiser chosen by the lender to represent the lender’s interest in the transaction.  Additionally, the safe harbor provision protects arrangements whereby attorneys or law firms represent clients in a real estate transaction and issue or arrange for the issuance of title insurance in the transaction directly as agent or through a separate corporate insurance agency that may be established by the attorney or law firm and operated as an adjunct to the attorney’s law practice.

CFPB v. Borders & Borders, PLC

In October 2013, the CFPB sued Borders & Borders, PLC, a family-owned law firm that performs residential real estate closings in Louisville, Kentucky.  Borders & Borders is often hired by lenders to prepare real estate conveyance and mortgage documents and to conduct real estate closings.  The firm is authorized to issue title insurance policies for various title insurance companies.

In 2006, Borders & Borders established joint ventures with nine real estate service providers in Louisville (the “Title LLCs”).  These joint venture partners were to provide title insurance when the lender did not maintain internal lender-owned title agencies.

Borders & Borders disclosed the relationship between itself and the Title LLCs to the borrowers and buyers when it referred them to the Title LLCs to obtain title insurance.  The borrowers and buyers had 30 days from the date of the closings to decide whether to purchase owner’s title insurance from the Title LLCs.  The Title LLCs issued more than 1,000 title insurance policies for more than 700 real estate closings between October 2009 and February 2011 (the Title LLCs were dissolved in 2011 when the investigation began).

Borders & Borders’ principals were 50% owners of the Title LLCs, and the venture partners held the remaining 50%.  The Title LLCs had written operating agreements, were authorized to conduct business in Kentucky, held insurance policies, were subject to audit, had separate operating bank accounts, had separate escrow bank accounts, made profit distributions, filed tax returns, and were solvent.

The CFPB’s suit against Borders & Borders alleged violations of section 8(a) of RESPA.  The CFPB claimed that Borders & Borders’ arranging for the Title LLCs to pay distributions to the joint venture partners for their participation as members constituted a fee, kickback, or thing of value, in contravention of the statute.  The CFPB further argued that the Title LLCs were not protected by the safe harbor provisions because they were not “providers of settlement services”; moreover, the language in the forms provided to potential buyers did not conform with the statutory requirements.

Both sides filed for summary judgment.

The Court’s Decision

In its decision, the Court denied Borders & Borders’ motion for summary judgment as to whether the CFPB had shown that it violated section 8(a) of the statute.  Indeed, the Court found that the CFPB had met its burden, demonstrating that: (1) the Title LLCs received a “thing of value” because they were compensated when business was referred to their LLC; (2) compensation was made pursuant to an agreement to refer settlement business to Borders & Borders; (3) actual referrals were made between Borders & Borders and the Title LLCs – as acknowledged by Borders & Borders; and (4) the transactions involved federally-related mortgages.

However, the Court found that Borders & Borders’ activities fell within the safe harbor of section 8(c)(4) because operation of the Title LLCs satisfied the elements of an “affiliated business arrangement” pursuant to the safe harbor provision.

First, the Court found that the disclosure forms were timely made because they were made at the time Borders & Borders referred title insurance work.  Court also found that the disclosures were sufficient under RESPA.  The Court reasoned that section 8(c)(4) does not specify what the disclosures must include – only that the disclosures explain the existence of the affiliated business arrangement.

Second, the Court found that Borders & Borders’ customers were not required to use the Title LLCs.

Third, the Court found that the only “thing of value” received by members of the Title LLCs was an ownership interest.

Accordingly, the Court granted Borders & Borders’ summary judgment motion on this basis, and conversely denied the CFPB’s motion for partial summary judgment.

In response to Borders & Borders’ argument that the CFPB’s request for disgorgement was improper, the Court concluded that the statute allows for the exercise of all inherent equitable powers, and since disgorgement is a traditional equitable remedy, CFPB could seek it.

Finally, the Court rejected Borders & Borders’s ultra vires act argument that the CFPB does not have the authority to make a complaint because its structure is unconstitutional under PHH Corp. v. CFPB, 839 F.3d 1 (D.C. Cir. 2016).  The Court concluded that, because the D.C. Circuit has yet to review the PHH Corp. decision en banc, and because Borders & Borders relied solely on that case to support its argument, the Court would decline to address this argument.

The Court’s decision to provide safe harbor status to Borders & Borders here may well implicate other cases the CFPB has brought under RESPA.  Time will tell whether CFPB will appeal this decision to the Sixth Circuit and to what extent the CFPB’s regulatory powers will be impacted by this ruling.

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