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From Banking and Finance Law Daily, March 23, 2018

Judgment for law firm accused by CFPB of receiving illegal kickbacks stands on reconsideration

By Nicole D. Prysby, J.D.

A federal district court in Kentucky found no reason to reverse its previous grant of summary judgment in favor of law firm Borders & Borders, accused of receiving illegal kickbacks in exchange for real estate settlement referrals made to joint venture partners (JVPs). The Consumer Financial Protection Bureau had requested reconsideration of the judgment. The court did modify its underlying rationale, concluding that the law firm did not pay its JVPs a "thing of value" and therefore there was no violation of the Real Estate Settlement Practices Act. And even if there had been a payment of a thing of value, the payment fell under the RESPA safe harbor provision for payment for services actually received (CFPB v. Borders & Borders, PLC, March 22, 2018, Simpson, C.).

Background. The CFPB filed a lawsuit against Kentucky law firm Borders & Borders, PLC, and its principals for illegally paying kickbacks for real estate settlement referrals through a network of shell companies, specifically Title LLCs used as title insurance agencies in real estate closings. The law firm allegedly referred consumers to affiliate title insurance companies, but told the consumers they had 30 days to decide whether they wished to use a different title insurance company. As previously reported (see Banking and Finance Law DailyJuly 18, 2017), the court granted Borders & Borders’ motion for summary judgment, finding that the law firm did not violate the anti-kickback provisions of RESPA through its use of affiliate title companies. The court agreed with Borders & Borders’ argument that the arrangement fell under the safe harbor provision found in Section 8(c)(4) of RESPA, because the firm disclosed the relationship with the Title LLCs, the customers could reject the referral, and the CFPB failed to show that the Title LLCs received anything of value beyond their ownership interests. The CFPB filed a motion for reconsideration of summary judgment, arguing that the court incorrectly concluded that the scheme fell within the safe harbor of RESPA.

RESPA claim. In its previous opinion granting summary judgment, the court had determined that Borders & Borders paid a thing of value by compensating the JVPs for their role in the management and ownership of the Title LLCs. However, on reconsideration, the court determined that Borders & Borders did not give the JVPs a thing of value. Rather, the consumers purchased title insurance from the Title LLCs, and the Title LLCs subsequently distributed profits from the sale of title insurance to the JVPs in accordance with their ownership interests. Because the consumers had the option to use a different title insurance underwriter, the referral was only a potential benefit, and was insufficient to constitute a thing of value.

Safe harbor. The court went on to point out that even if Borders & Borders did provide the JVPs with a thing of value, the conduct still did not constitute a violation of RESPA section 8(a) because of the safe harbor provisions. In the opinion granting summary judgment, the court had relied on the safe harbor for ‘affiliated business arrangements’ under RESPA section 8(c)(4). But on reconsideration, the court determined that the safe harbor for ‘payment for services actually performed’ under section 8(c)(2) was the correct provision. The consumers’ payments were not made in exchange for referrals, but in exchange for title insurance, which the consumers actually received. There was no evidence that the consumers paid above market value for the title insurance. Similarly, there was no evidence that Border & Borders charged above market rate for closing services. The consumers received the title insurance they paid for, and it was inconsequential whether the insurance came from a Title LLC co-owned by a JVP or from another title insurance company.

The case is No. 3:13-cv-01047-CRS-DW.

Attorneys: David M. Rubenstein for the CFPB. David B. Owsley, II (Stites & Harbison, PLLC) for Borders & Borders, PLC.

Companies: Borders & Borders, PLC

MainStory: TopStory CFPB EnforcementActions Loans Mortgages RESPA

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