A class-action lawsuit recently filed in California federal court against real estate brokerage franchisor Realogy and embattled mortgage lender PHH may shed some light on the companies’ recent decision to amend their joint-venture agreement.
The lawsuit, filed Nov. 25 in the U.S. District Court for the Central District of California, targets the companies’ joint venture, alleging that they, their subsidiaries and their settlement service affiliates violated the Real Estate Settlement Procedures Act (RESPA) by operating a “sham” affiliated business arrangement (ABA) designed to funnel kickbacks and referral fees to each other.
Realogy and PHH recently removed provisions in their 10-year-old strategic relationship agreement (SRA) that referred to Realogy as PHH’s “exclusively recommended real estate broker.”
The companies have maintained that their agreement is a legal joint venture, but in the wake of the Consumer Financial Protection Bureau’s (CFPB) crackdown on co-marketing practices in the real estate and settlement services industries, some are waiting to see if the bureau will apply its broad interpretation of RESPA to the agreement and deem it a violation of the federal mortgage transaction law.
PHH is already in hot water with the CFPB for its mortgage reinsurance arrangements. The CFPB alleged in a 2014 administrative proceeding that PHH, over a 15-year period, solicited and collected illegal kickback payments and unearned fees through its affiliates Atrium Insurance and Atrium Reinsurance, in exchange for the referral of private mortgage insurance business.
PHH has denied the allegations and taken the bureau to federal court to contest CFPB Director Richard Cordray’s order calling for the lender to pay more than $109 million in disgorgement. Arguments in the case are expected to take place this spring.
“We believe this complaint is without merit, and we intend to aggressively defend ourselves against these claims,” said Mark Panus, senior vice president of corporate communications for Realogy.
Complaint cites kickbacks, referral fees and non-disclosure
Meanwhile, the class-action lawsuit alleges that Realogy and PHH violated RESPA in at least two ways.
First, the complaint alleges that the joint venture called PHH Home Loans is a sham “carefully engineered by the former affiliates to facilitate and disguise the payment of unlawful referral fees and kickbacks in exchange for the referral of title insurance and other settlement services to Realogy’s subsidiary, Title Resource Group (TRG).”
Secondly, the complaint alleges that under the Private Label Solutions (PLS) model, which PHH uses to manage the mortgage process for various banking institutions — including Morgan Stanley, Merrill Lynch, HSBC and UBS — “PHH directs the PLS partners to refer title insurance and other settlement services to TRG without disclosing to consumers the existence of PHH’s affiliation with TRG, nor the fact that PHH was required to cause the PLS partners to refer title insurance and other settlement services to TRG under the terms of the SRA.”
In addition, the complaint alleges that “PHH also receives disguised kickbacks and referral fees for the referrals made via the PLS partners, in the form of, among other things, the right of first refusal over the purchase of the servicing rights to mortgages originated by PHH Home Loans.”
This conduct violated Sections 8(a) and 8(c)(4) of RESPA, particularly its prohibition on referral fees and kickbacks, the complaint alleges.
The complaint calls the decision by PHH and Realogy to delete the mandatory referral provision from their SRA “telling,” and questions the companies’ timing of the decision.
“PHH and Realogy amended the SRA because they knew the mandatory referral provision was a violation of Section 8 of RESPA Section 2607(a), and sought to limit future exposure,” the complaint alleges. “The CFPB noted in its decision that PHH’s violations persisted for over 15 years and that there was no indication that PHH changed its practices due to their illegality (as opposed to merely having become unprofitable), nor that PHH took any steps to make future violations less likely.”
In addition to Realogy, PHH and TRG and their subsidiaries, the lawsuit also names as defendants:
- RMR Financial, a California limited liability company founded in 2005 that also does business as Princeton Capital, Mortgage California and First Capital
- NE Moves Mortgage, a Massachusetts limited liability company founded in 2005
- West Coast Escrow, a California limited liability company founded in 1984 that is a wholly owned subsidiary of TRG
- NRT, which also does business as Coldwell Banker, Sotheby’s International Realty, Citi Habitats, The Corcoran Group and ZipRealty
The defendants have not yet responded to the complaint. Realogy Senior Vice President Mark Panus said in a statement, “We believe this complaint is without merit, and we intend to aggressively defend ourselves against these claims.”
The lawsuit’s class representative is Timothy L. Strader Sr., a homeowner in Newport Beach, California. The exact number of class members is unknown, but the complaint estimates that “hundreds of thousands” of borrowers may have been impacted by the alleged illegal conduct.
The lawsuit seeks $4,950 per class member, plus three times the amount of any other settlement service fees paid to TRG for each federally related mortgage loan that borrowers obtained from PHH, PHH Home Loans or one of the PLS partners.
