The Consumer Financial Protection Bureau on Thursday sued a six-lawyer firm in Louisville, alleging that it paid illegal real estate kickbacks.
According to the consumer agency, Borders & Borders and name partners Harry Borders, John Borders Jr., and J. David Borders ran a “network of shell companies” to pay kickbacks for referrals of mortgage settlement business.
The firm strongly disputes the charges. “The CFPB’s statement in its press release that we ‘paid kickbacks’ or did anything illegal could not be further from the truth. We are a family-owned firm that has been in business for over 40 years, and we would not and did not violate” the law, the firm said in a written statement.
“We are very disappointed by the CFPB’s conduct, and we will certainly defend the case vigorously,” it said. “We look forward to showing that we followed the rules that Congress laid out in the statute.”
In a complaint filed in the U.S. District Court for the Western District of Kentucky, the CFPB alleged that the firm violated the Real Estate Settlement Procedures Act by paying kickbacks to owners and managers of local real estate and mortgage brokerage companies under the guise of legitimate profit sharing.
In the complaint, the CFPB laid out the alleged scheme: The law firm ran nine title insurance companies between 2006 and 2011, joint ventures with owners and managers of local real estate and mortgage brokerage companies.
The affiliated realtors or mortgage brokers would refer buyers to Borders for settlement services. The buyers would also need title insurance, and Borders allegedly funneled this business to one of the joint ventures. The profits from the title insurance joint ventures were then split between Borders and the referring real estate or mortgage broker in what amounted to a kickback, according to the CFPB.
“Today’s action sends a clear message that companies cannot design business structures to hide illegal kickbacks,” CFPB Director Richard Cordray said in a news release. “The CFPB will continue to pursue companies that seek to profit from convoluted arrangements that limit competition and hurt honest businesses.”
Borders responded, “There were disclosures to every consumer, as required by the statute, and in every instance in which title insurance was issued through the agencies, the consumer approved. We note that the CFPB does not allege that there was any consumer harm, or that any consumer paid a penny more for title insurance issued through the agencies in question.”
A key CFPB allegation is that the title insurance companies weren’t “bona fide entities.” All nine were allegedly staffed by the same independent contractor, an employee of Borders, and the companies lacked their own office space or phone number.
Furthermore, the CFPB said that the Borders firm did all the substantive title work. “The CFPB believes the entire arrangement served no significant business purpose beyond acting as a conduit for kickbacks in exchange for referrals,” the agency said.
The CFPB’s position is grounded in a 1996 U.S. Department of Housing and Urban Development policy statement establishing a 10-factor test for determining whether affiliated business arrangements are shams.
In 2010, the U.S. District Court for the Northern District of Ohio considered the question in another case involving real estate firms and title companies, and found that the 10-factor test “raises serious constitutional difficulties” and “gives no guidance … on applying its vague standards.” The case, Carter v. Welles-Bowen Realty, is on appeal before the U.S. Court of Appeals for the Sixth Circuit.
“We are surprised and disappointed that the CFPB decided to file this lawsuit today instead of awaiting a determination by the Sixth Circuit Court of Appeals as to the constitutionality of the rules that it is trying to enforce,” said T. Morgan Ward Jr., a partner at Stites & Harbison who represents the firm. “We are also concerned that the CFPB seeks to change marketplace behavior through a singular action against our clients rather than rulemaking or changes in the law that apply across the board. We respectfully think that the CFPB is out on a limb with this lawsuit.”
To Ronald Rubin, a former CFPB enforcement lawyer who is now a partner at Hunton & Williams, the case is another recent example of the agency going after lawyers.
“It would be an overstatement to say that the CFPB is targeting lawyers, but the bureau definitely wants to send the message that lawyers who violate consumer financial laws do not get a pass,” he said.
Contact Jenna Greene at firstname.lastname@example.org.