A group of mortgage brokers and their manager filed a motion to dismiss a complaint brought against them by Pennsylvania Attorney General (AG) Michelle Henry alleging they violated RESPA through a kickback scheme that involved real estate agents directing potential homebuyers to the brokers.
The motion to dismiss argued RESPA explicitly exempts profit distributions to investors in an affiliated business arrangement (AfBAs) from liability and that the complaint failed to identify any referrals in exchange for payments, among other things.
The complaint filed in January in the U.S. District Court for the Eastern District of Pennsylvania alleged Barry Newhart and six brokerages he managed – Bright Financial Group, Conquest Mortgage, Flagship Home Loans, Legacy Mortgage Partners, Nittany Home Loans and MCT Financial – offered agents discounted ownership in a joint venture brokerage company, as well as sporting event tickets, dinners and other things of value, in exchange for agents steering clients to the mortgage brokerage.
The complaint alleged the brokers violated RESPA, the Consumer Financial Protection Act and Pennsylvania’s Unfair Trade Practices and Consumer Protection Law.
Specifically, it alleged Newhart disguised kickbacks as stock sales and cash to the referring real estate agents. The alleged plan included joint ownership of the brokerages by Newhart and his former business partner and the referring agents.
“This joint ownership allowed [them] to give the referring real estate professionals profit distributions that were out of proportion to the price at which the real estate professionals bought their equity ownership interests in the defendant mortgage brokerages,” the complaint stated, outlining the RESPA violation.
The motion to dismiss, filed by Saul Ewing Partners Francis “Trip” Riley and Jason McElroy, argued the complaint fails to identify any actual RESPA violations, calling it a “mish-mash of poorly pled facts and wrongly-applied law.”
“The Commonwealth’s reliance on fictitious RESPA requirements has no basis in the statutory text — the purported ‘requirements’ proffered by the Commonwealth do not exist and are at odds with the language and purpose of RESPA,” the motion stated.
“The Commonwealth cannot point to any express, objective statutory or regulatory criteria for being an investor in an affiliated business arrangement that supports its basis for the alleged violation, because RESPA does not cover such granular details.”
The motion stated Henry’s case hinges on the allegation that the brokerages “sold ‘discounted’ ownership interests to unidentified ‘real estate professionals,’ causing that ownership interest to be an impermissible ‘thing of value’ provided in exchange for referrals,” in violation of RESPA Section 8(a).
“But 12 U.S.C. § 2607(c)(4) explicitly exempts profit distributions paid as a return on ownership interest to investors — even if those investors are referral sources — where certain conditions are met. None of the exemption’s conditions relate to or restrict the price paid for the investment in AfBA,” the motion stated.
It also argued “the complaint fails to identify a single loan that was referred to anyone in exchange for a payment for the referral. This is key, because Section 8(a) prohibits only payment for referrals.”
The motion to dismiss also referred to Regulation X, saying nothing in the statute “places any restrictions or requirements on the valuation of an investment in an AfBA, or the capital contribution an investor must pay or invest.”
As far as the complaint’s concern that under the plan, the businesses returned “hundreds or thousands of dollars per share in distributions most quarters,” the motion to dismiss argued “being successful is not against the law, and neither RESPA nor Regulation X make the referring business investor’s investment a violation of Section 8(a), depending on how profitable the company is.”
The motion also argued that even if the complaint stated an actual RESPA violation, most are time-barred as they are outside both RESPA’s and the Consumer Financial Protection Act’s three-year statute of limitations.
“The Commonwealth has filed a complaint against the defendants based on violations of a statute that they wish existed, not one that does. As a result, their claims are not only unmoored from what the law actually prohibits, but expressly permitted! As a result, the complaint fails to state a claim against any of the defendants and should be dismissed,” the motion stated.