The Pennsylvania Attorney General's office has sued an Allentown mortgage broker and several related entities alleging violations of the federal anti-kickback statute.
The legal filing in the U.S. District Court for the Eastern District of Pennsylvania claims the total value of the payments to the real estate agents for directing clients to the mortgage brokerage was in excess of $500,000 and possibly more than $1 million.
Such payments are governed by Section 8 of the
Charges were levied against Bright Financial Group; Conquest Mortgage; Flagship Home Loans; Legacy Mortgage Partners; Nittany Home Loans; and MCT Financial, along with Barry Newhart; Newhart Holdings and Conquest Holdings.
"The mortgage brokerages named in the lawsuit are completely RESPA compliant," the company said in an emailed statement. "Therefore, neither the investment nor the profit distributions to investors are illegal kickbacks or referral fees."
The statement asserted that no other things of value were provided for business referrals to Bright and the other companies named.
"The businesses remain strong and continue to provide consumers with the best loans and services," Bright Financial said. "We look forward to proving the [Pennsylvania Office of Attorney General's] complaint is without merit"
Specifically, it was alleged in the legal filing that Newhart and the other defendants gave "underpriced, nonvoting stock" in the companies to real estate agents and brokers for the referrals.
Payments to those real estate professionals, who were not charged in this action, were disguised as stock sales and profit distributions, the filing claimed.
Under federal law, joint ventures are permitted but cannot be sham arrangements. A 2005 Office of the Comptroller of the Currency policy statement makes it clear that for these arrangements not to run afoul of Section 8, payments to a third party
"But the underpriced nature of the stock, and the large, outsized profit distributions that Newhart and the other Defendants distributed directly to referring Real Estate Professionals, belied the scheme," the court filing said.
The defendants are also alleged to have paid for event tickets and expensive dinners in exchange for referrals.
"Buying a home can be a stressful and challenging time, and this group of mortgage brokers and real estate agents conspired to serve themselves while betraying buyers," Attorney General Michelle Henry said in a press release. "Consumers, especially those who are making large financial investments like the purchase of a home, which is very often a family's most valuable asset, deserve to know if businesses assisting them have conflicts of interest."
Section 8 enforcement, especially when it comes to joint ventures and marketing services agreements, must now comply with an appellate court ruling involving PHH that
In 2023, the CFPB fined Freedom Mortgage $1.75 million for a Section 8 violation.
While this investigation was likely underway before the 2024 election, it could be a harbinger for things to come for mortgage regulatory enforcement, especially by the Bureau. The first Trump Administration issued guidelines
"I expect that state AGs will pay more attention to RESPA and the conduct of mortgage brokers, title companies, and real-estate agents if, as many expect, the CFPB steps back even further," said Jeff Ehrlich, a partner at McGuireWoods and former deputy enforcement director at the Bureau from April 2013 through March 2022.
But why the entities on the other side of these arrangements weren't charged remains an open question.
"I do not know why the Pennsylvania AG did not go after the real estate agents and brokers who were involved in the joint ventures, but the AG certainly could have done that; it has authority to do so under the Consumer Financial Protection Act," Ehrlich noted.
