Stites obtains summary judgment dismissing the CFPB’s kickback claims against Borders & Borders PLC

LOUISVILLE, Ky.—Ending four years of litigation and a six-year investigation, on July 12, 2017, U.S. District Court Judge Charles Simpson entered summary judgment dismissing all the Consumer Financial Protection Bureau’s (CFPB) claims against Borders & Borders, PLC. Consumer Fin. Prot. Bureau v. Borders & Borders, PLC, NO. 3:13-CV-1047, Dkt. #157 (W.D. Ky. July 12, 2017). The decision rejected the CFPB’s publicized allegations that Borders & Borders paid “illegal kickbacks” in violation of the Real Estate Settlement Procedures Act (RESPA).

Borders & Borders is a small, family-owned real estate law firm founded in 1971 that has conducted tens of thousands of real estate closings. From 2006-2011, Borders & Borders operated several title insurance agencies as joint ventures with prominent real estate brokers and lenders in Louisville, Ky.

When conducting real estate closings, Borders & Borders referred underwriting work to these title insurance agencies, which would issue title insurance policies and receive commissions. The profits of these title agencies were split among the joint venture partners according to their ownership interest.

The title agencies were transparently operated as “Affiliated Business Arrangements,” which are permitted by RESPA. 12 U.S.C. § 2607(c)(4). More than 30 years ago, Congress determined that such Affiliated Business Arrangements were efficient and often resulted in lower prices for consumers. Hearings on Real Estate Settlement Procedures Act – Controlled Business, H. Subcomm. on Housing and Community Development, 97th Cong., 1st Sess., at 4 (1981)(“The practice of owning or controlling an ancillary service company has become controversial since the passage of RESPA. . . . We have found, however, that a controlled [affiliated] business arrangement may be the cheapest and most efficient provider of that service, and referral to a controlled business saves the consumer time and money in searching.”).

As required by RESPA, Borders & Borders gave written disclosures to consumers in every transaction involving any of the affiliated title insurance agencies, and the consumers had the right to choose whether to use the affiliated agencies.

After the CFPB took over enforcement of RESPA in 2011 following passage of the Dodd-Frank Act, it began an aggressive campaign to stop settlement service providers from operating Affiliated Business Arrangements, despite the statutory allowance. The CFPB took the position that profit distributions from an affiliated business are kickbacks if, in the CFPB’s subjective, post hoc assessment, the affiliated business is not sufficiently “bona fide.”

In October 2013, the CFPB filed suit against Borders & Borders claiming that the joint venture profit distributions were kickbacks because the title insurance agencies were not “bona fide providers of settlement services.” Upon filing the complaint, CFPB Director Richard Cordray issued a press release claiming that “Today’s action sends a clear message that companies cannot design business structures to hide illegal kickbacks. . . . The CFPB will continue to pursue companies that seek to profit from convoluted arrangements that limit competition and hurt honest businesses.”

Borders & Borders engaged Stites & Harbison to refute the allegations. Through years of discovery, including more than 20 depositions, Borders & Borders established that its operation of the affiliated businesses was permitted by RESPA.

When deposed in a Rule 30(b)(6) deposition, the CFPB’s designated representative was forced to concede that Borders & Borders had a systematic business practice of disclosing its affiliations with the joint venture title insurance agencies. The CFPB offered no evidence whatsoever to substantiate its publicized allegations about harm to consumers, harm to competition, or that Borders & Borders hid anything about these joint ventures.

At the close of discovery, Judge Simpson granted complete summary judgment dismissing the CFPB’s claims.

Upon learning of the decision, John Borders and Harry Borders stated, “We are pleased that the Court agreed with what we explained to the CFPB all along – our affiliated business arrangements were designed and operated to be fully compliant with federal law. We appreciate the support of our clients and friends in the real estate community and beyond during this time.”

Borders & Borders was represented by Stites & Harbison attorneys Morgan Ward, Richard A. Vance, David B. Owsley II, and Michael Denbow throughout the case.

“The Court’s summary judgment ruling is a complete vindication for our client Borders & Borders, which is an honest and reputable family business,” stated Morgan Ward, a Member (Partner) with Stites & Harbison. “The CFPB sought to nullify RESPA’s safe harbor for Affiliated Business Arrangements by sending a message to the industry that even if you follow the law, you are still subject to prosecution. This case was not about protecting consumers. Instead, this was an example of the CFPB’s practice of regulation by enforcement. We are gratified with the Court’s ruling and are happy for our clients, who followed the law.”

The case appears to be the CFPB’s first loss on the merits at the federal trial court level.