A federal trial court has dismissed a lawsuit brought by the Consumer Financial Protection Bureau against a Kentucky law firm accused of violating the Real Estate Settlement Procedures Act’s anti-kickback provision.
The court said the title agencies set up by the Louisville firm were permitted under RESPA’s “safe harbor” provision.
Borders & Borders, a law firm that does residential real estate closings, set up joint ventures with nine real estate service providers in Louisville in 2006, according to the court’s opinion. The Title LLCs served as title insurance agencies in real estate closings where the lender did not maintain an internal, lender-owned title agency, the court said.
The Title LLCs issued more than 1,000 title insurance policies from October 2009 to February 2011.
The relationship between the law firm and the Title LLCs was disclosed to borrowers and buyers when the law firm referred them to the Title LLC, the court said. The law firm also provided an “Affiliated Business Arrangement Disclosure Form” at closing. Borrowers and buyers had 30 days after closing to decide whether to purchase owner’s title insurance from the Title LLC.
The Title LLCs stopped operating in February 2011 when notified by HUD that it was investigating the law firm for potential violations of RESPA’s anti-kickback provision.
RESPA prohibits people from giving and receiving any “fee, kickback or thing of value” under a business agreement as part of a real estate settlement service involving a federally insured mortgage loan.
However, there is a “safe harbor.”
In 1983 Congress enacted a provision sheltering “affiliated business arrangements” as long as the business arrangement is disclosed and the person is not required to use any particular settlement provider and the “thing of value received from the arrangement” is a return on the ownership interest or franchise relationship.
The CFPB picked up the investigation in 2012, filing suit against the law firm in October 2013. In addition to alleging RESPA violations, the CFPB argued that the safe harbor provision did not apply because the Title LLCs were not bona fide providers of settlement services, that the disclosure form provided did not conform to the requirements and was not provided at referral.
Borders & Borders filed a motion with the federal trial court asking the court to dismiss the case.
The court agreed, declaring that, although the CFPB had demonstrated that a RESPA violation had occurred, the “affiliated business arrangement” of the “safe harbor” provision applied.
To qualify as an affiliated business arrangement, the court noted that the arrangement must meet three conditions:
- The person making the referral must disclose the arrangement to the client;
- the client must remain free to reject the referral; and
- the person making the referral cannot receive any ‘thing of value from the arrangement’ other than “a return on the ownership interest or franchise relationship.”
Borders & Borders gave its customers timely disclosures when it referred title insurance work to the Title LLCs, the court noted. A disclosure of the arrangement must be “at or before the time of referral,” the court said.
The CFPB testified that the law firm provided disclosures about its relationship with the Title LLCs at closing because that was the first contact that the law firm had with consumers. The customer then decided whether to accept the referral to the affiliated Title LLC.
Ballard Spahr attorney Richard J. Andreano Jr. noted that the “decision of the court that the delivery of the notice at closing was sufficient is raising more than a few eyebrows in the industry” in an analysis posted on his firm’s website.
The disclosures in the form provided by the law firm were also sufficient under RESPA, the court said. The safe harbor provision does not specify what the disclosures must include, only that the disclosures explain the existence of the affiliated business arrangement. RESPA does not require “such a rigid and inflexible standard so as to impose civil liability for deviations from the uniform settlement statement which could not possibly impair the effectiveness of such statements,” the court observed.
The disclosures notified borrowers and buyers that Borders & Borders had a relationship with the title insurance agency and would receive a commission on the insurance policy, that there were other title insurance companies available and let consumers know the amount the title insurance company would charge for the title insurance, the court said, adding that the information was sufficient to meet the disclosure standard required by the “safe harbor.”
Consumers were not required to use the Title LLC, the court pointed out. The disclosure form stated that consumers were not required to use the title insurance agency, that there were other title insurance agencies available and that borrowers and buyers were free to check with other providers in order to obtain services at competitive rates.
As for the third requirement, the “thing of value” received by members of the Title LLCs was an ownership interest, the court explained. One joint venture partner testified that he had received only a distribution from the affiliated Title LLC and that he had never received any payment for referring a customer. The distributions were “income distributions calculated from the respective ownership interests of the members” and reflected in tax filings, the court said. The court concluded that the CFPB had failed to provide evidence showing that the distributions were something other than ownership interests.
