The Consumer Financial Protection Bureau is going to allow the U.S. District Court for the Western District of Kentucky’s decision in its case against a law firm to stand. According to a report from the American Land Title Association, acting director Mick Mulvaney informed attendees at ALTA’s Advocacy Summit that the bureau has decided not to appeal the court’s decision finding that Borders & Borders PLC did not violate RESPA.
According to the report, Mulvaney said the decision does not mean that he agrees with everything in the opinion. He also reportedly assured attendees that the bureau will continue to enforce RESPA Section 8 when it finds a company has acted unlawfully.
A bureau spokesperson later shared this statement, "It is true that the Bureau did not appeal the Borders & Borders summary judgment ruling, but it is not the case that Acting Director Mulvaney agrees with everything in the district court’s opinion. The Bureau will continue to enforce Section 8 of RESPA when it encounters unlawful conduct that undermines the fair and transparent functioning of the market for real estate settlement services, or disadvantages businesses operating lawfully."
The bureau originally filed the suit, Consumer Financial Protection Bureau v. Borders & Borders PLC, et al. (U.S. District Court for the Western District of Kentucky, No. 3:13-CV-01047), in 2013 alleging that the law firm had established several affiliated title agencies with settlement service providers as the other partner and that these joint ventures’ profit distributions were not entitled to Section 8(c)(4)’s safe harbor and, thus, were Section 8(a) kickbacks for referrals to the joint venture title agencies. The district court disagreed and granted Borders & Borders’ motion for summary judgment.
The bureau moved the court to reconsider the decision, arguing that the court incorrectly granted summary judgment in Borders & Borders’ favor. It argued that although the court correctly concluded that Borders & Borders’ referral scheme violated Section 8(a) of RESPA, it incorrectly concluded that this referral scheme fell within the safe harbor afforded to affiliated business arrangements under section 8(c)(4).
Senior U.S. District Judge Charles Simpson III denied the bureau’s motion for reconsideration, yet provided reasoning that was completely different than he used in reaching his original decision.
“This court previously determined that Borders & Borders paid the JVPs [the title joint venture real estate brokerage partner] a ‘thing of value’ by ‘compensat[ing] [them] for their role in the management and/or ownership of the title LLCs,’ ” Simpson stated. “Upon review of the facts and the parties’ briefing, the court now believes that Borders & Borders did not give the JVPs any ‘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 in those title LLCs.
“Because the bureau fails to demonstrate that Borders & Borders paid the JVPs a ‘thing of value,’ it is unnecessary to consider whether an agreement existed or whether there was an actual referral,” Simpson added. “The bureau’s claim that Borders & Borders violated section 8(a) of RESPA is not shown by the undisputed facts.”
Simpson also found that even if Borders & Borders did provide the joint venture partners with a thing of value, their conduct was covered by the safe harbor provisions in 8(c).
Simpson said that the D.C. Circuit Court’s recent decision in PHH Corp. v. CFPB is instructive because that court found that PHH did not violate section 8(a) because section 8(c)(2) applied. It found that the mortgage insurer in that case was not providing payments in exchange for referrals, but in exchange for reinsurance, which it actually received.
“The present case is analogous to PHH,” he stated. “Here, consumers made payments to the title LLCs, which subsequently distributed profits to the JVPs in accordance with their ownership interest. However, these payments were not made in exchange for referrals, but in exchange for title insurance, which the consumers actually received. These payments are presumed to be bona fide because there is no evidence that the consumers paid above market value for the title insurance. Moreover, this arrangement is less controversial than the arrangement in PHH, because a third party, rather than the party receiving the consumer referrals, made the payment. The section 8(c)(2) safe harbor therefore applies.
“Finally, the court notes that application of the section 8(c)(2) safe harbor in this case does not contravene the purpose of RESPA,” Simpson stated. “As previously stated, RESPA was enacted to prevent ‘kickbacks and referral fees that tend to increase unnecessarily the costs of certain settlement services.’ 12 U.S.C. § 2601(b)(2). Here, there were no kickbacks or referral fees. There was only payment by consumers for title insurance that they actually received. Further, the cost of settlement services for consumers was not increased. There is no evidence that Borders & Borders charged above market rate for their closing services, or that the title LLCs charged above market rate for the provision of title insurance. In short, the consumers received exactly what they paid for. It makes no difference whether they received title insurance from a title LLC co-owned by a JVP or from another title insurance agency.”
After the decision was handed down, Francis X. Riley III, partner, Saul Ewing Arnstein & Lehr LLP., said that although an appeal of the original decision to the Sixth Circuit based on the court’s initial analysis would have been unlikely, the new underlying legal analysis made an appeal more likely.
He said that in determining that Borders & Borders did not provide the real estate company partners in the joint venture with a thing of value, the court missed “the obvious fact that by doing the joint venture’s work at no cost, Borders & Borders was giving both the joint venture and the other member a thing of value to induce the referral of business to the joint venture.”
He also noted that “[i]n analyzing whether Borders & Borders had provided a thing of value in violation of Section 8(a), the court switched from a review of Section 8(c)(4) to that of Section 8(c)(2). In so doing the court took great pains to figure out a way that the PHH decision, which had nothing to do with affiliated business arrangements between two settlement service providers who have the ability to refer work to the affiliated business, could be applied to the facts of the case.”