Alert May 28, 2013

CFPB Takes Enforcement Action Against Homebuilder

Based on a referral from the FDIC, the CFPB announced that it issued a stipulation and consent order against a homebuilder alleging violations of the Real Estate Settlement Procedures Act. The consent order prohibits the homebuilder from providing real estate settlement services in the future, except for the sale of homes, and requires the surrender of money the CFPB alleges represents kickbacks in violation of RESPA. According to the CFPB, the homebuilder entered two separate arrangements creating entities to perform mortgage origination services. One entity was created by the homebuilder and a state-chartered bank. The other entity was created by the homebuilder and a mortgage lender. Under each arrangement, the homebuilder referred customers to the mortgage origination entities, which the CFPB asserted were sham entities designed for the homebuilder to receive kickbacks for referring customers to the state-chartered bank and the mortgage lender. In particular, the CFPB alleged the mortgage origination entity created with the state-chartered bank had no office space, performed services only when business was referred by the homebuilder and all origination work was completed by employees of the state-chartered bank. The homebuilder then received distributions from that entity based on his ownership interest. The CFPB also alleged that with the arrangement with the mortgage lender, the mortgage lender financed all mortgages originated by the mortgage origination entity and the homebuilder received a payment pursuant to a service agreement meant to compensate the homebuilder for referring customers to that entity.

The CFPB determined that the distributions and service agreement payment violated section 8 of RESPA, which generally prohibits kickbacks, fees or thing of value in exchange for referring customers for settlement services involving federally related mortgage loans. In addition, the CFPB determined the arrangement with the state-chartered bank did not qualify for the affiliated business "safe harbor" in RESPA because the mortgage origination entity created with the state-chartered bank was not a bona fide settlement service provider. Instead, the CFPB noted the mortgage origination entity "was a sham controlled business as described in U.S. Department of Housing and Urban Development Statement of Policy 1996-2 Regarding Sham Controlled Business Arrangements, 61 Fed. Reg. 29,258 (June 7, 1996)."