News
HUD Settlement Agreement causes concern with respect to use of Affiliated Business Arrangements
The U.S. Department of Housing and Urban Development ("HUD") recently entered into a settlement agreement with TitleVentures.com ("TV") and others arising out of allegations by HUD that TV and others were engaging in a sham affiliated business arrangement. HUD alleged that TV formed a limited liability company that became the general partner in limited partnership arrangements with mortgage brokers and real estate brokers for the performance of title services. TV actually performed the services, and the mortgage brokers and real estate brokers, through the affiliated partnerships, received a large percentage of the title premiums for performing little or no title work.
HUD imposed a number of conditions as part of the settlement agreement, including that any title agency formed, owned or operated by TV and the other respondents must actively compete in the marketplace for title insurance business, and receive at least 40% of its gross revenues from referrals received from parties other than the real estate brokers, mortgage brokers, or other settlement service providers with which it had an affiliate relationship (the "40% Requirement").
This condition seemed to contradict example 3 in HUD Statement of Policy 1996-2 (the "Statement of Policy"), relating to sham controlled business arrangements. In example 3, a lender and a real estate broker formed a joint venture mortgage broker. Each party contributed an equal amount of capital to the joint venture, and the capital contribution was a sufficient initial capital contribution and typical in the industry. The real estate broker does not require its customers to use the new entity. The new entity, using its own employees, performs typical mortgage broker services, and rents space in the real estate broker's office at market rates. The real estate broker is the sole source of referrals to the venture, which submits loan applications to numerous lenders, including a small percentage to the lender participant in the venture. HUD's analysis of this set of facts was that the venture was an example of an entity which was a bona fide provider of settlement service business rather than a sham arrangement.
We discussed our concerns with a high ranking official in HUD's RESPA enforcement division, and suggested that the 40% Requirement conflicted with HUD's analysis of example 3 in the Statement of Policy. The official stated that if a joint venture's only business was referred by one of the venturers (such as a member of a limited liability company), HUD would consider it a red flag in determining whether the venture was a bona fide provider of settlement services or a sham arrangement. He said other factors could lend support to the arrangement being bona fide and that all arrangements will be considered based upon their individual facts, but that HUD will always take a hard look at an arrangement in which the venture is not competing for business in the marketplace. We attempted to persuade him to voice support for the conclusion set forth in the Statement of Policy with respect to example 3, but he was noncommittal.
This is somewhat disquieting with respect to its impact on limited liability company joint ventures established in the mortgage lending industry, in that the official did seem to place so much emphasis on the joint venture's referral source, even though that is only one of a multitude of factors discussed by HUD in the Statement of Policy. It would therefore be prudent for the joint ventures to comply with as many of the other factors discussed by HUD as possible, and for a joint venture lender to make every effort to sell loans to other than its affiliates if the pricing, product and delivery terms offered by non-affiliates are in the best interests of the joint venture.
If you have any questions relating to this, please contact
David H. Sands at (213) 617-5536 or
Sherwin F. Root at (213) 617-5465 at your convenience.