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CFPB settles RESPA enforcement action involving affiliated business arrangements

Posted in CFPB Enforcement, Mortgages

The CFPB has announced the settlement of an enforcement action in which it was alleged that two affiliated business arrangements (ABAs) violated Section 8 of the Real Estate Settlement Procedures Act.  

The arrangements involved two mortgage origination companies created by a Texas homebuilder who owned one company  together with a bank and the other company together with a mortgage company.  The CFPB charged that, through the ABAs, the homebuilder received unlawful referral fees for mortgage loans that he or his homebuilding company referred to the bank or mortgage company.

According to the consent order, the referral fees in the ABA with the bank were passed back to the homebuilder through profit distributions and such distributions were not entitled to the ABA “safe harbor” because the ABA was a sham as described in HUD’s Statement of Policy 1996-2 Regarding Sham Controlled Business Arrangements.  The consent order stated that the referral fees in the ABA with the mortgage company were in the form of payments made to the homebuilding company by the mortgage company pursuant to a service agreement. 

The consent order prevents the homebuilder, his homebuilding company and another affiliated company from engaging in any real estate settlement service business other than the sale of homes or owning an interest in any entity providing such services for five years.  It also requires the homebuilder to pay disgorgement in the amount of $118,194.20, which according to the CFPB, represents the full amount of money he received since early 2010 from the allegedly unlawful arrangements.  

We find it interesting that, in seeking disgorgement, the CFPB appears to have relied on the remedies available under Dodd-Frank Section 1055 rather than RESPA.  (The consent order cites to Section 1055 rather than to RESPA.)  Disgorgement is one of the forms of relief the CFPB  is specifically authorized to  seek in enforcement actions it brings under a federal consumer financial law.  

The HUD 1996 Statement of Policy referenced in the consent order was issued as guidance on RESPA’s application to ABAs and discusses the factors HUD would consider when assessing whether an ABA is a bona fide provider of settlement services or a sham arrangement. Unless and until the CFPB acts to change it (and there has been no indication the CFPB intends to do so), the Statement of Policy remains in effect. The CFPB’s enforcement action, while alleging facts that if true did not come close to satisfying the Statement of Policy, should nevertheless serve as a reminder to companies involved in ABAs to periodically review their arrangements with counsel for Section 8 compliance.  While it is important for the documentation for ABAs to satisfy the Statement of Policy, it is equally important that ABAs actually be operating in accordance with the Statement of Policy. 

The CFPB’s enforcement action resulted from a referral from the FDIC, which separately fined the bank involved in one of the ABAs. Given that the facts alleged by the CFPB indicated a clear RESPA violation, we find it interesting that the CFPB did not impose any penalty in addition to ordering disgorgement. Last month, the CFPB announced the settlement of enforcement actions against four national mortgage insurers involving allegations that the insurers paid kickbacks to mortgage lenders through captive reinsurance arrangements in  violation of RESPA Section 8.  In those settlements, the CFPB imposed substantial penalties on the insurers.