Affiliated Business Arrangements Remain a Target for the CFPB under RESPA

By: Holly Spencer Bunting

After announcing two RESPA consent orders in June 2013 targeting affiliated business arrangements (“AfBAs”), the CFPB is again taking aim at AfBAs. In a lawsuit filed in federal district court in Kentucky, the CFPB alleges that a law firm and three of its attorney principals gave impermissible referral fees to owners and managers of real estate and mortgage brokerage companies through profit distributions made by title insurance AfBAs owned by the attorneys and the real estate and mortgage brokerage companies. Because the CFPB alleges these AfBAs were not structured according to RESPA’s requirements, the CFPB is seeking to disgorge all monies received by the attorneys related to settlement services provided in connection with referrals, including profit distributions from the AfBAs.

More specifically, the CFPB’s complaint describes an alleged arrangement whereby real estate and mortgage brokerage companies referred consumers to the attorney defendants for closing services. Then, in connection with the purchase of title insurance, the attorneys allegedly referred consumers to the specific AfBA title insurance entity partially owned by the attorneys and the consumers’ real estate or mortgage brokers. The CFPB’s complaint, however, asserts that these nine AfBAs did not constitute bona fide providers of settlement services and states the following alleged facts in support of this position:

• The AfBAs were thinly capitalized with funds contributed only by the attorney owners.

• The AfBAs each contracted with the same employee of the law firm to perform work on behalf of the AfBAs.

• The AfBAs did not have separate office space or email addresses and telephone numbers.

• The AfBAs did not advertise themselves to the public.

• The AfBAs did not perform substantive title insurance work.

• An affiliated business disclosure was sometimes provided, but at closing and in a format that did not conform to the model form in the RESPA regulations.

As a result of this arrangement, the CFPB claims the attorneys and real estate and mortgage brokerage companies received substantial profit distributions from the AfBAs that violated RESPA’s prohibition on the payment of referral fees. The CFPB also asserts that the law firm received substantial closing fees for the services it provided to consumers referred to it by the real estate and mortgage brokerage companies. The CFPB is seeking to disgorge these profits and other fees from the attorneys and the law firm as part of the lawsuit, as well as enjoin the attorneys from restarting the AfBAs or creating any new AfBAs in the future.

In addition to reinforcing the CFPB’s focus on AfBAs and the importance of creating and operating bona fide AfBAs, the CFPB’s complaint raises new questions about how the CFPB is interpreting RESPA and seeking relief. For instance, RESPA grants the CFPB a three-year statute of limitations to pursue violations of Section 8 of RESPA. Here, the CFPB filed the complaint on October 24, 2013, which suggests the CFPB is authorized to seek relief for impermissible activities conducted since late 2010. Yet, the complaint refers to alleged improper activities as far back as 2006. Whether the CFPB intends to seek relief for AfBA activities in 2006 through 2010 and under what legal theory remains to be seen.

Moreover, Section 8 of RESPA requires one person to give and one person to receive a thing of value in return for the referral of settlement service business. In this action, the CFPB seeks to disgorge the closing fees earned by the law firm, which were presumably paid by consumers for services performed by the law firm. However, the facts identified in the complaint focus on the structure of the AfBAs and the referrals made by real estate and mortgage brokerage companies. While the CFPB may view the closing fees received by the law firm as substantial, it is unclear from the complaint how the law firm’s closing fees amount to impermissible referral fees.

Finally, Appendix D to Regulation X contains a model disclosure form to be used in crafting an affiliated business disclosure that complies with RESPA. Here, the complaint suggests the affiliated business disclosures provided by the attorneys and the law firm were noncompliant because, among other reasons, the disclosures “modified language and typography from the model form set forth in Appendix D.” Without more detail about the actual content of the disclosures in this case, if the CFPB is suggesting that the mere variation of typography in a disclosure raises concerns for an AfBA under the RESPA “safe harbor,” more information is needed about how the CFPB believes a “model” disclosure form should be used to comply with RESPA.

Each of these issues has the potential to result in significant implications for AfBAs if the CFPB is successful in its apparent broad interpretations of the law and broad relief sought in the complaint. That makes this case one to watch for any persons or companies that own an interest in AfBAs under RESPA. To read the CFPB complaint filed in this case, please refer to the CFPB’s press release. To read more about the CFPB’s June 2013 RESPA consent orders, please refer to K&L Gates’ Legal Insight titled, “CFPB’s RESPA Radar Pointed at Affiliated Business Arrangements.”


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