The United States District Court for the Western District of Kentucky recently granted a law firm’s motion for summary judgment and held that its referrals of business to title agents it partially owned did not violate the Real Estate Settlement Procedures Act (“RESPA”). See Consumer Fin. Prot. Bureau v. Borders & Borders, PLC, 2017 WL 2989183 (W.D. Ky. July 13, 2017). There, a law firm established nine joint ventures with other real estate service providers. When the firm closed on a transaction with a lender that did not have an affiliated title agency, the firm would refer the title insurance business to the joint venture affiliated with the transaction’s real estate agent. The firm would disclose its relationship with the joint ventures at the time of the referral, inform borrowers that they could use other agencies, and did not receive any compensation other than income distributions given to the joint venture’s owners. Nonetheless, HUD, and then the CFPB, began investigating the firm for violating RESPA’s anti-kickback provisions relating to these referrals. See 12 U.S.C. 2607. The CFPB then brought an action against the firm.
Both the firm and the CFPB moved for summary judgment. The firm argued, among other things, that it did not violates RESPA’s prohibition on giving or receiving “any fee, kickback, or thing of value pursuant to any agreement or understanding . . . that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred in any person,” and that even if it did, it was protected by RESPA’s safe harbor for referrals to affiliated entities. First, the Court rejected the firm’s argument that it did not receive a kickback or thing of value in exchange for referrals. Testimony from both the firm’s attorneys and their partners in the joint ventures demonstrated that the joint venture partners received compensation in the form of ownership interest each time a referral was made to one of the jointly-owned title agents.
Second, the Court held that the firm nonetheless was protected by RESPA’s safe harbor provision, which protects referrals affiliated business arrangements so long as (i) a disclosure is made of the existence of the arrangement; (ii) the borrower is not required to use the affiliated entity; and (iii) the only thing of value received, other than payments expressly allowed by RESPA, are returns on the ownership interest. See 12 U.S.C. 2607(c)(4) The Court found that the firm’s arrangement with its joint ventures met all three parts of this test, and the referrals fell into RESPA’s safe harbor.
Notably, the Court in this matter did not apply the ten-factor test set forth by HUD in its 1996 Policy Statement regarding sham entities, which set the factors that should be considered in determining whether a joint venture is a “bona fide provider” of settlement services or a sham entity set up to avoid RESPA liability. In 2013, the United State Court of Appeals for the Sixth Circuit—which includes Kentucky—held that it did not need to give this Policy Statement any deference and courts only need to look at the aforementioned three-part test found in RESPA. See Carter v. Welles-Bowen Realty, Inc., 736 F.3d 722 (6th Cir. 2013). Accordingly, settlement service providers outside the Sixth Circuit should be aware that the ten-factor sham entity test may be applied in other jurisdictions.