For the past five years, the Consumer Financial Protection Bureau has accused a Kentucky law firm, Borders & Borders, of paying illegal kickbacks. Last week, the judge presiding over the lawsuit threw out the CFPB’s case—for a second time—on grounds different than before. The ruling could be a boon for affiliated business arrangements.
In the case, CFPB v. Borders & Borders, PLC, the law firm faces scrutiny over nine joint ventures it created in the mid-2000s in the Louisville area. The joint ventures were title agencies, each of which was half owned by Borders and half owned by a partnering mortgage broker or real estate agent. During closings, if no title agency had been selected, Borders would refer the title work to one of its joint-venture agencies. The CFPB alleged that the joint ventures were sham companies that were referring business in violation of Section 8(a) of the Real Estate Settlement Procedures Act (RESPA). According to the bureau, the joint ventures provided no real services and therefore could not qualify for the exemption, under RESPA Section 8(c)(4), for affiliated business arrangements (AfBAs).
The trial court, in its ruling from last July, held that the joint ventures could validly invoke the affiliated-business exemption. The CFPB then asked the court to reconsider that decision. Last week, the court denied the CFPB’s motion to reconsider. But rather than affirm its original conclusion, the court switched justifications, relying instead on the recent ruling involving PHH corporation.
Instead of invoking the affiliated-business exemption, the joint ventures could resort to the services-provided exemption under RESPA Section 8(c)(2). Because no one disputed that Borders’s clients had paid market value for their title insurance, the joint ventures got the benefit of the 8(c)(2) exemption, the court held.
The court also found that Borders did not give a “thing of value” to the partnering mortgage brokers or real estate agents, which is a necessary element for a RESPA violation. Borders’s referral to the joint ventures was contingent on the consumers’ accepting that arrangement. According to the court, that scenario merely conferred a conditional, potential benefit, one not rising to the level of a thing of value.
That holding could prove difficult to uphold on appeal. Numerous regulations define thing of value in expansive ways and could seemingly encompass even a potential, contingent benefit.