On July 12, 2017, a federal district court in Kentucky issued a summary judgment ruling for the defense in the ongoing Borders & Borderscase¹ brought by the Consumer Financial Protection Bureau (CFPB or Bureau).  In this long-running case, the Bureau alleged that profit distributions paid to joint venture partners constituted illegal kickbacks in violation of Section 8(a) of the Real Estate Settlement Procedures Act (RESPA),² and that the defendants could not rely on the safe harbor provision for “affiliated business arrangements” (ABAs) in Section 8(c)(4) of RESPA.³

The court, however, ruled that the defendants were entitled the protection of the ABA exemption as a matter of law, and dismissed the Bureau’s case.

The Borders & Borders investigation: the CFPB picked up where HUD left off

Borders began in early 2011, when U.S. Department of Housing and Urban Development (HUD, which administered RESPA until July of that year) began investigating a Kentucky law firm, Borders & Borders PLC, for potential Section 8 violations.  The genesis of HUD’s inquiry was a series of title joint ventures (Title LLCs), entered into between various local real estate and mortgage companies (Joint Venture Partners) and Borders & Borders PLC.

In 2012, the Bureau took over the investigation and in October 2013, the Bureau filed a lawsuit against Borders & Borders PLC and its principals (collectively, Borders).  The Bureau alleged that profit distributions made by the Title LLCs to the Joint Venture Partners were disguised kickbacks designed to compensate for referrals (i.e., the referral of real estate closing business to Borders & Borders PLC).  The Bureau further alleged that the distributions:

are not subject to the “safe harbor” for affiliated business arrangements in [RESPA Section 8](c)(4) – which authorizes certain referrals to providers of settlement services – because the Title LLCs did not constitute bona fide “providers of settlement services” within the meaning of RESPA. The payments they made to the Individual Defendants and the Joint Venture Partners did not constitute bona fide returns on ownership interest . . .

The complaint set forth numerous allegations regarding the formation, ownership, and operation of the Title LLCs, which were staffed by a single independent contractor agent simultaneously shared by all of the Title LLCs and concurrently employed by Borders & Borders PLC.

When it oversaw RESPA, HUD had successfully entered into various consent orders relating to ABAs that were alleged to have shared common employees and/or have lacked the indicia of a genuine settlement service provider.⁴  HUD based these actions on a 1996 RESPA policy statement,⁵ which set forth factors that HUD would consider in determining whether an ABA constituted a “bona fide” provider of settlement services under RESPA (the Sham Guidelines).  While the Bureau’s Borders complaint did not expressly reference the Sham Guidelines, its theory and allegations were consistent with HUD’s prior enforcement actions applying them.

The Sixth Circuit Court of Appeals throws in a monkey wrench with its Carter decision

The Bureau’s loss in Borders may well be traceable back to a legal development that occurred in November 2013, just one month after the Bureau filed the Borders case, when the Sixth Circuit Court of Appeals issued a RESPA decision in another lawsuit between private parties, Carter v. Wells Bowen Realty.⁶

In Carter, a consumer attempted to challenge an affiliated title services provider under RESPA, alleging that the ABA ran afoul of HUD’s Sham Guidelines.  But the Sixth Circuit rejected the claim, ruling that the Sham Guidelines were not entitled to judicial deference and could not supplant RESPA’s statutory safe harbor for ABAs.  Because the plaintiff in Carter did not dispute that the defendants satisfied the statutory safe harbor criteria, her case was dismissed.

Post-Carter, the Bureau continues to fight in Borders

After Carter was decided, Borders asked the Court to dismiss the claims it was facing, arguing that the Bureau’s theory impermissibly grafted a “bona fides” test onto the statutory safe harbor for ABAs, and that Carter—which was controlling authority in that court—confirmed that such a test is unenforceable.  Borders noted that the Bureau was subjecting it to “expansive discovery” clearly aimed at exploring an alleged violation of the Sham Guidelines.

At that point, however, the Bureau squeaked by on its allegations.  Instead of defending the Sham Guidelines, the Bureau argued that its theory was based on enforceable safe harbor criteria. The Bureau pointed to language in the RESPA statute providing that the person in a position to refer business may not receive any “thing of value” from the ABA other than “a return on the ownership interest,”⁷ which—as provided in RESPA regulations implemented by HUD—means that “bona fide” returns on ownership interests are protected.⁸

The Bureau also refused to concede that Borders had satisfied the ABA disclosure requirement, pointing to its allegations that Border’s disclosure forms were not provided on a timely basis and did not conform to the precise wording of the RESPA regulation’s model form.

On February 12, 2015, the court denied Borders’ motion, allowing the Bureau’s case to proceed.

The Bureau’s fatal flaw: overreaching to argue what it believes the law should be, rather than how it is written

As we have seen in Bureau’s ongoing enforcement proceeding against PHH, the Bureau is willing to aggressively advocate for what it believes RESPA (and no doubt other federal consumer financial laws) should be—as opposed to for what the statute’s plain language provides.  The Borders case is another example of this overreaching.

First, without the Sham Guidelines, the Bureau was unable to overcome the ABA safe harbor.  The Borders complaint alleged that the Title LLCs did not have their own employees, perform substantive title work, or manage their own affairs.  Of course, however, these are not statutory or regulatory requirements, but rather factors set forth in HUD’s Sham Guidelines.  In its decision, the court did not analyze these “sham” factors, but rather opted to address the statutory ABA safe harbor criteria only.  The court ruled:

Given that Borders & Borders disclosed the relationship with the Title LLCs, the customers could reject the referral, and the Bureau failed to show that the Title LLCs received anything of value beyond their ownership interests, there is no genuine dispute of material fact that Title LLCs arrangement with Borders & Borders qualifies as an affiliated business relationship protected under Section 8(c)(4) of RESPA, and Borders & Borders is entitled to summary judgment as a matter of law.

In so holding, the court considered the disclosure requirements set forth in the RESPA statute and found that Borders’ disclosures provided the essential information.  While the language was not exactly the same as the regulation’s model form, the court did not believe those differences “impair[ed] the effectiveness” of the disclosure.

Parting Thoughts

The Borders summary judgment ruling supports the applicability of RESPA Section 8(c)(4) as a valid safe harbor that should be applied according to its plain language.

The court reigned in, as other courts have done,⁹ the Bureau’s insistence that an ABA disclosure form must adhere to the exact content and format of the model form or subject the ABA participants to serious exposure (e.g., potential treble damages) under RESPA.

The decision also supports an apparent developing movement of industry participants to reconsider the effectiveness of joint ventures and other ABAs, as the Bureau thus far has had success in chilling the use of marketing agreements.

Nevertheless, we close with some words of caution.  First, the court did not reject all of the Bureau’s RESPA theories; it took some pains to explain why the Bureau had shown that the elements of a Section 8(a) violation were present (albeit saved by the ABA safe harbor).  Second, courts outside of the Sixth Circuit need not defer to Carter, and might be willing to consider the Sham Guidelines to be in play.  Finally, the Bureau also may have more success enforcing the Sham Guidelines and other concepts advanced in Borders in future enforcement actions that it chooses to pursue administratively.

_{1 Consumer Fin. Prot. Bureau v. Borders & Borders, PLC, Case No. 3:13-CV-1047 (W.D. Ky.).}

_{2 12 U.S.C. § 2607(a).  This provision prohibits any person from giving or receiving any “thing of value” pursuant to an “agreement or understanding” to “refer” “settlement services” that “involve a federally related mortgage loan.”}

_{3 12 U.S.C. § 2607(c)(4).  Under this provision, an ABA qualifies for the safe harbor if it meets three conditions: (1) the person making the referral must disclose the arrangement to the client; (2) the client must remain free to reject the referral; and (3) the person making the referral cannot receive any “thing of value” from the ABA other than a return on the ownership interest (or franchise relationship). Id.}

_{4 E.g., Settlement dated July 1, 2003 between HUD and TitleVentures.com, Inc. et al.; Settlement Agreement dated March 12, 2005 between HUD and Land Settlement Services, Inc. et al; Settlement Agreement dated July 8, 2005 between HUD and First American Title Insurance Company d.b.a. Memphis Title Company; Settlement Agreement dated December 15, 2005 between HUD and Downing Homes, LLC; Settlement Agreement dated October 31, 2007 between HUD, the Florida Department of Financial Services, the Florida Office of Insurance Regulation and The First American Title Insurance Company; Settlement Agreement dated April 30, 2008 between HUD and American Land Title, LLC et al.; Settlement Agreement dated November 21, 2008 between HUD and Grand Texas Homes, et al.  Copies of the foregoing settlement agreements are on file with the authors.}

_{5 1996-2 Policy Statement on Sham Controlled Business Arrangements, 61 Fed. Reg. 29,258-29,264 (June 7, 1996).}

_{6 Carter v. Wells Bowen Realty, 736 F. 3d 722 (6th Cir. 2013).}

_{7 12 U.S.C. § 2607(c)(4)(C).}

_{8 12 C.F.R. § 1024.15(b)(3)(iii)(“Neither the mere labeling of a thing of value, nor the fact that it may be calculated pursuant to a corporate or partnership organizational document or a franchise agreement, will determine whether it is a bona fide return on an ownership interest or franchise relationship. Whether a thing of value is such a return will be determined by analyzing facts and circumstances on a case by case basis.”).}

_{9 See White v. JRHBW Realty, Inc., No. 2:14-cv-01436-RDP, 2015 U.S. Dist. LEXIS 123432, at *8-9 (N.D. Ala. Sept. 16, 2015)(concluding, with reference to an ABA disclosure form that the Bureau had contended was ineffective, that “this court cannot say that the effectiveness of the disclosure was impaired in any way because it was not in the exact form of Appendix D to Regulation X. Therefore, [defendant] qualifies for the Section 8(c)(4) safe harbor provision.”).}