Pennsylvania AG Alleges Mortgage Brokers Engaged in Illegal Referral Scheme

Sheppard Mullin Richter & Hampton LLP

On January 17, the Pennsylvania Attorney General filed a civil enforcement action in the U.S. District Court for the Eastern District of Pennsylvania against a group of mortgage brokers and their manager, alleging that they operated an unlawful referral scheme in violation of the Real Estate Settlement Procedures Act (RESPA), the Consumer Financial Protection Act (CFPA), and Pennsylvania’s Unfair Trade Practices and Consumer Protection Law.

According to the complaint, the defendants offered real estate professionals a mix of financial incentives—such as discounted shares in a joint venture mortgage company, event tickets, and luxury meals—in exchange for directing clients to affiliated mortgage brokerages. These referral arrangements were not disclosed to homebuyers.

The Attorney General alleges that the defendants:

  • Improperly transferred ownerships interests. Real estate agents were offered discounted, nonvoting shares in affiliated mortgage companies to incentivize referrals, in violation of RESPA and state consumer protection law kickback prohibitions.
  • Provided high-value entertainment. Agents allegedly received event tickets and luxury dinners in exchange for steering homebuyers, conduct the Attorney General contends violates RESPA and constitutes unfair and deceptive acts under the CFPA.
  • Disguised payments as legitimate business deals. The scheme was structured to appear as stock sales and profit distributions to conceal kickbacks, allegedly violating RESPA and both federal and state consumer protection statutes.
  • Failed to meet disclosure requirements. The defendants allegedly did not comply with the legal standards for affiliated business arrangements under RESPA, depriving consumers of material information and transparency.

The lawsuit seeks injunctive relief, restitution, civil penalties, and recovery of attorneys’ fees.

Putting It Into Practice: This state enforcement continues the trend of states ramping up regulation and enforcement of financial services companies (previously discussed here and here). As certain states continue to align themselves with the CFPB’s January recommendations encouraging states to adopt and apply the “abusive” standard under the CFPA (previously discussed here), we expect to see more states ramp up their consumer financial protection efforts.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Attorney Advertising.

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