Realogy Holdings Corp., a real estate franchise group, and PHH Corp., a mortgage solutions provider, might have won the most recent court round, but that doesn’t mean their battle is over yet.
A class-action lawsuit filed in California federal court alleging that PHH and Realogy violated the Real Estate Settlement Procedures Act (RESPA) in failing to adequately disclose their joint venture and affiliated businesses to consumers may be on its last attempt to see the case through — but the plaintiffs are not giving up easily.
Attorneys for the plaintiffs in Strader, et al., v. PHH Corp., et al., a lawsuit filed Nov. 25, 2015 in the U.S. District Court for the Central District of California, have filed a second amended complaint in an attempt to clear a statute of limitations hurdle that threatens the case’s survival.
On April 5, the court granted the defendant companies’ motion to dismiss the case after they argued that the case was not timely filed and exceeded RESPA’s statute of limitations — but the court also gave the plaintiffs another chance to amend their complaint and cure certain deficiencies.
Attorneys with the Costa Mesa, Calif., law firm of Greenberg Gross LLP filed a new complaint on April 21, and two of the law firm’s partners, Howard Privette and Evan Borges, agreed to discuss certain aspects of the case with Inman, as one of our reports on the PHH-Realogy joint venture has been cited as a trigger for the lawsuit.
“Given what the defendants have been arguing on the statute of limitations issue, we wanted to put more information in the complaint about why this scheme was something unknown and unknowable to consumers over a period of time,” said Privette, who is chair of the law firm’s class action practice and is considered to be a thought leader in shareholder and fiduciary duty litigation.
Who: The defendants
The plaintiffs’ second amended complaint describes, in greater detail than their original filings, both the plaintiffs and the defendant companies.
The new complaint identifies as defendants:
- PHH Corp.
- Realogy Holdings Corp.
- PHH Mortgage Corp.
- PHH Home Loans LLC
- RMR Financial LLC
- NE Moves Mortgage LLC
- PHH Broker Partner Corp.
- Realogy Group LLC
- Realogy Intermediate Holdings LLC
- Title Resource Group LLC
- West Coast Escrow Co.
- TRG Services Escrow Inc.
- Equity Title Co.
- NRT LLC
- Realogy Services Group LLC
- Realogy Services Venture Partner LLC
At the center of the lawsuit, according to the new complaint, is PHH Home Loans, a joint venture that PHH Corp. and Realogy entered into in January 2005. The companies’ strategic relationship agreement (SRA) established PHH Home Loans as the “exclusively recommended mortgage lender of Realogy’s vast real estate brokerage network, which is operated by Realogy’s subsidiary, NRT LLC, and includes such recognizable brands as Coldwell Banker, Sotheby’s International Realty, ZipRealty, The Corcoran Group and Citi Habitats.”
“This exclusive status results in referrals either directly to PHH Home Loans (or an affiliate) to serve either as the mortgage lender or mortgage broker for clients of these real estate brokerages,” the complaint states.
PHH uses a “Private Label Solutions (PLS)” model to manage the mortgage process for various banking institutions, directing its PLS partners to refer title insurance and other settlement services to TRG or its affiliates, the complaint alleges.
But “the precise roles and relationships of each of these affiliated entities in the allegations described herein are known only to defendants and will be the subject of discovery,” the complaint adds.
The attorneys said they have faced an uphill battle in getting access to the companies’ files. They initiated discovery attempts, but the defendant companies countered that the numerous consumer files requested for a period of several years were too onerous to produce and contain sensitive, nonpublic personal information that would need to be redacted for consumer protection reasons.
Borges said the plaintiffs proposed a smaller set of documentation for a certain time period during which consumers in the proposed class leaders’ local area executed mortgage contracts with the defendant companies, but “the defendants have been stonewalling” those requests.
The companies offered to produce documents required by the CFPB’s TILA-RESPA Integrated Disclosure (TRID) rule, but those documents were not legally required to be given to consumers until after the rule took effect in October 2015, which was well after the class leaders’ transactions happened, with TILA and RESPA disclosures that are no longer used, Borges said.
“If their business practices are so kosher, why won’t they show us their documents?” said Borges, an attorney who in the 1990s was involved in liquidating American Savings and Loan Association, one of the largest savings and loan failures in U.S. history.
[Tweet “Borges: ‘If their business practices are so kosher, why won’t they show us their documents?'”]
Who: The plaintiffs
According to the new complaint, class leaders Timothy L. Strader Sr. and Susan M. Strader, as trustees of the Strader Family Trust, purchased a home in April 2011 in Newport Beach, Calif., with a loan from Bank of America. PHH acted as Bank of America’s agent and later serviced the loan.
The Straders were referred to TRG for both title insurance (via TRG subsidiary Equity Title) and other settlement services (via TRG subsidiary West Coast Escrow). In July 2012, the Straders refinanced their mortgage, with the same companies involved in their purchase transaction.
Boats and houses along Beacon Bay, in Newport Beach, California. Credit: Jon Bilous / Shutterstock.com
The complaint also states that co-class leader Lester Hall Jr., purchased a home in Santa Ana, Calif., in April 2007. Hall’s real estate agent at Coldwell Banker provided him with a referral to First Capital, which placed the loan with PHH Mortgage.
At the time, First Capital was a trade name of Hamera Corp., one of the small corporations referenced in the PHH-Realogy SRA, and later merged into RMR, which now owns and uses the First Capital trade name.
When Hall’s transaction closed, PHH Mortgage paid a “third-party mortgage fee” of $3,800 to First Capital, and Hall was required to pay an additional $1,012 in settlement fees to First Capital. Hall was also referred to TRG and West Coast Escrow.
Attached to the new complaint is a snapshot of the file folder Hall kept on his loan depicting the business cards of the Coldwell Banker, First Capital and West Coast Escrow agents with whom he worked. The cards do not indicate the companies’ relationships with each other, PHH or Realogy; the Coldwell Banker agents’ cards indicate that they are “owned and operated by NRT LLC.”
“Those cards illustrate, from the consumer’s perspective, one of the things that we found most striking, which was the differently named entities involved in the relationship,” Privette said. “No one told him, ‘this is who we are and how we are interconnected.’ How is a consumer ever going to piece together if they have any relationship to each other?”
What: Inadequate disclosures, ‘sham’ joint venture alleged
During their mortgage transactions, the Straders and Hall were “not notified of any of the contractual obligations between and among defendants by which they had agreed to exchange referrals, preferences, exclusivities and other things of value in relation to the settlement services,” and “paid more for settlement services than he would have paid in the absence of the anticompetitive referrals and kickbacks,” the complaint alleges.
The plaintiffs “trusted that each of these referrals was lawful and had no idea that they were being victimized by defendants’ anti-competitive kickback scheme,” the complaint states.
The complaint further alleges that the relationships between the defendant companies “was in fact a sham venture designed to facilitate illegal kickbacks and referral fees.”
“When thoroughly analyzed and stitched together, this seemingly disparate set of corporate-level commitments, preferences, exclusivities and referrals — as implemented at the consumer level — had the design and effect of guiding and pushing unwitting consumers through the homebuying process in a manner that caused the consumers not to use competing settlement service providers,” the complaint alleges.
“The purpose and effect of the scheme was to permit defendants to rig the market and obtain anticompetitive prices for their services. In order for their scheme to succeed, defendants purposefully hid the interconnected nature of their activities to ensure the scheme was unknown to plaintiffs and other consumers who paid for the services.
“From the consumer’s standpoint, the real estate broker, mortgage broker, lender, escrow officer, title insurer and settlement service providers to which they were referred by defendants were standalone, independent companies, with diverse brand logos and recognizable names like Coldwell Banker, West Coast Escrow and First Capital, which in no way suggested any affiliation.”
These practices violated RESPA’s prohibition on referral fees and kickbacks, the complaint asserts.
When: RESPA’s statute of limitations threaten the case
This brings us to “when,” or the major issue of this case. On April 5, the court granted the defendant companies’ motion to dismiss the case. The companies had argued that the transactions described by the plaintiffs far exceeded RESPA’s one-year statute of limitations for litigation filing.
The plaintiffs petitioned the court to apply equitable tolling in the case, a legal principle that sets aside a statute of limitations in cases where the plaintiff, despite use of due diligence, could not or did not discovery injury until after the statute of limitations period expired. The plaintiffs effectively asked the court to set the RESPA statute of limitations calendar in this case to Jan. 31, 2005, the date that PHH and Realogy entered into their SRA — but the defendants argued that the plaintiffs could have discovered information about their relationships by reading their regulatory filings and financial earnings statements.
“But neither PHH nor Realogy provided any meaningful discussion of their referral arrangements in their SEC filings, and certainly did not explain the interconnected nature of the referrals, preferences, exclusivities and other things of value being swapped between them as part of the scheme alleged in this action,” the second amended complaint states.
“Like plaintiffs, the members of the class were not informed of the agreements’ existence and were given no reason (and were under no obligation) to research PHH’s and Realogy’s submissions to the SEC in order to try to ferret out whether they were being victimized by an illegal referral/kickback scheme with respect to the purchases of their homes.
“Even if plaintiffs or any other class members had an urge to conduct research into PHH’s and Realogy’s submissions to the SEC, the byzantine corporate structures used by defendants stood (and still remain) in the way,” the second amended complaint continues.
“For example, if class members desired to find the PHH submission that attached the SRA and operating agreement, they would have to know how to search the SEC’s database and know the specific entity that submitted the document in question. As of the date of this second amended complaint, a search for ‘PHH’ in the SEC’s database returns 34 different entities using some variation of that name. Even if the correct entity were found, class members would have to sift through that entity’s hundreds of submissions to find the one among them that actually attached the exhibits in question.”
This, the second amended complaint argues, would be like “finding a needle in a haystack,” the plaintiffs assert.
“Sifting through SEC filings, that’s what I do in my spare time,” Borges said. “God bless you if you can get through SEC filings and figure this out. They are hiding behind the statute of limitations issue and arguing that our plaintiffs didn’t do their due diligence.
“I would challenge anyone in this world to tell me they ever went back and looked at their closing documents and researched their settlement service, escrow and title insurance providers. In that context, due diligence for a homebuyer means what, exactly? This is a very convenient, technical defense for them, and they don’t wish to wish to explain themselves on the actual merits of this case.”
The 2015 ‘triggers’
The second amended complaint pinpoints two specific events in 2015 as the triggers for the plaintiffs’ allegations. The first was in June, when the CFPB concluded in an administrative proceeding against PHH that the company’s mortgage reinsurance practices violated RESPA and ordered PHH to disgorge over $109 million in illegally charged fees.
The new complaint notes that CFPB Director Richard Cordray’s decision enjoined “PHH from referring borrowers to any provider of a settlement service if that provider has agreed to purchase a service from PHH, and if payment for that service is triggered by the referrals. This provision seeks to prevent PHH from entering into illegal referral agreements with respect to any settlement service, and it also applies for 15 years from the date the order becomes effective, as a further means of preventing PHH from committing similar violations of RESPA.”
“In leveling these and other penalties, 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), or that PHH took any steps to make future violations less likely. The decision explains the extensive injunctive penalties by noting that ‘referral agreements that violate RESPA can be difficult to detect,’” the complaint states.
The CFPB’s case against PHH “blew their cover,” Borges said.
“Once the CFPB issued its order and the companies’ relationship became publicly known, they changed their business practices,” Privette added.
Cordray’s decision “drew media attention and caused industry analysts to scrutinize PHH and question if it might have additional exposure for similar violations,” the complaint states — culminating in the second triggering event, a Nov. 13 Inman report about a regulatory filing indicating that PHH and Realogy were amending their SRA to delete the “exclusive recommended” provider provision.
“On information and belief, PHH and Realogy amended the SRA because they knew the mandatory referral provision of the SRA violated Section 8 of RESPA, and sought to limit future exposure,” the second amended complaint states. “Despite their diligence, the Straders had no reason to suspect that they were victims of the illegal scheme that is the subject of their claims in this action, and had no reason to investigate the possibility of such claims until the subsequent events and disclosures described herein that occurred in November 2015.”
Why: Interpretation of RESPA’s ‘thing of value’ provision mirrors CFPB’s much-criticized analysis
Notably, the plaintiffs’ second amended complaint also seems to piggyback on the CFPB’s controversial position that an affiliated business arrangement, joint venture or marketing services agreement can be considered a “thing of value” offered in return for the referral of business. This is, in fact, just one of the many CFPB perspectives that PHH is currently challenging in federal court, arguing that the bureau — and specifically Cordray — have exceeded the authority granted by Congress.
Normally — and historically under publications offered by the Department of Housing and Urban Development, the CFPB’s regulatory predecessor — a “thing of value” is a specific item or service offered to settlement service providers in consideration of business referrals. Examples include gifts, prizes, payment of another person’s expenses, advertising goods and services, luncheons and open houses.
But in some of the CFPB’s RESPA enforcement actions, consent orders and settlements — most obviously in its 2014 consent order against Michigan title company Lighthouse Title — the bureau has stated that it considers a contract describing an affiliated relationship itself to be a thing of value.
Mirroring that position, the second amended complaint states that “In response to RESPA, many settlement service providers abandoned the classic kickback — where a specific payment was made in return for a specific referral and there was no other reason for the payment — and instead devised sophisticated transactions involving a less obvious causal link between the referral and the payment. These transactions arose most frequently within the context of business arrangements, where one settlement service provider maintained an enhanced relationship with a second provider of a different settlement service, through which each service provider captured the clients of the other.”
The complaint acknowledges that affiliated business arrangements are permissible under RESPA as long as they meet all of the requirements under Section 8(c)(4):
- A disclosure must be made about the existence of the arrangement to the person being referred, and that person must be given a written estimate of the charges generally made by the provider
- The consumer must not be required to use any particular provider of settlement services
- The only thing of value that is received from the arrangement, other than the other payments permitted, may be a return on the ownership interest or franchise relationship
But the defendant companies’ arrangement did not meet those requirements, the plaintiffs allege.
“Realogy, PHH and TRG created and received a fee, kickback or thing of value by making PHH Home Loans the exclusively recommended mortgage lender for Realogy’s vast real estate brokerage network; granting PHH Home Loans the exclusive right to use the Century 21, Coldwell Banker and ERA trade names to market its mortgage products; providing PHH Home Loans access to consumers attending trade shows, conventions and conferences organized by Realogy’s brokerages; giving PHH a right of first refusal for the purchase of the mortgage servicing rights for PHH Home Loan originated mortgages; and providing the other benefits to PHH alleged herein,” the complaint states.
Should the court agree with this argument, the CFPB’s highly criticized interpretation of RESPA could be considered to be sanctioned by the court system, paving the way for the CFPB to continue on the same path.
What happens next?
The defendants are expected to file a response to the second amended complaint within about a week, but under local rules, the two sides are required to discuss motions to dismiss in conference.
[Tweet “Realogy/PHH suit: The plaintiffs are seeking 3X the amount of all fees and other charges.”]
The plaintiffs are seeking three times the amount of all fees and other charges that the class members paid to TRG for title insurance and other settlement services when obtaining a mortgage from PHH Home Loans. The lawsuit does not seek punitive damages.
