A district court judge has ruled in favor of a Louisville, Ky., law firm that was sued by the Consumer Financial Protection Bureau in 2013 for allegedly paying illegal kickbacks in exchange for referrals.

The ruling last week is another loss for CFPB Director Richard Cordray, whose unique interpretation of the Real Estate Settlement Procedures Act led a three-judge panel to rule that the agency's structure is unconstitutional.

Senior Judge Charles R. Simpson III, of the U.S. District Court for the Western District of Kentucky, ruled Thursday that the Borders & Borders law firm qualified as an "affiliated business arrangement" that is protected under Respa.

CFPB Director Richard Cordray.
The ruling last week was another loss for CFPB Director Richard Cordray, whose interpretation of the Real Estate Settlement Procedures Act has been rejected by other courts. Bloomberg News

Simpson repudiated the CFPB's allegations that the law firm's joint ownership agreements with nine title companies were used to disguise illegal kickbacks. The judge said the company qualified for a safe harbor that Congress enacted in 1983 specifically to shelter affiliated business arrangements.

"There is no genuine dispute of material fact that Title LLCs arrangement with Borders & Borders qualifies as an affiliated business relationship," Simpson wrote in a 17-page decision.

The judge said that Borders & Borders met the two conditions to qualify for a safe harbor: it disclosed its affiliations to borrowers, and the only thing of value received by members of its affiliated title companies was an ownership interest.

The company declared victory over the CFPB.

"The court's summary judgment ruling is a complete vindication for our client Borders & Borders, an honest and reputable family business that found itself in the crosshairs of a regulatory agenda," said Morgan Ward, an attorney for Borders & Borders. "This was truly a David vs. Goliath battle and we are very pleased for our clients, who showed a great deal of courage in standing up to the CFPB and demonstrating that they followed the law."

Mitch Kider, chairman and managing partner at Weiner Brodsky Kider, said courts are taking a close look at the CFPBs position under Respa.

"It's a repudiation of the CFPB's position that it can go out there and allege sham affiliations even though these structures meet both the letter and spirit of the statute," Kider said.

Simpson declined to rule on the law firm's request to find the CFPB's structure unconstitutional, citing ongoing litigation in the PHH case.

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