The U.S. Department of Housing & Urban Development (HUD) has announced an agreement with Prospect Mortgage LLC to settle allegations the California-based mortgage lender created sham affiliated business arrangements (ABAs) for the purpose of paying improper kickbacks or referral fees in violation of Federal Housing Administration (FHA) guidelines and the Real Estate Settlement Procedures Act (RESPA). Prospect agreed to dissolve these sham joint ventures and pay $3.1 million to resolve the complaint. HUD claimed Prospect operated as a “series limited liability company,” a business structure unauthorized by FHA, and that Prospect used this business structure to create hundreds of sham joint ventures with real estate brokers, mortgage brokers, mortgage lenders, servicers and other settlement service providers and to share profits for the referral of real estate settlement services. Through these affiliated business arrangements, Prospect allowed non-approved branch offices to originate FHA-insured mortgages in violation of FHA’s guidelines. “The real test for any bona fide affiliate business arrangement is whether the affiliate has sufficient capital and employees to stand on its own two feet,” said Acting FHA Commissioner Carol Galante. “In this case, it was clear that these sham companies had neither and were merely sharing profits for the referral of business.” HUD alleges that Prospect Mortgage LLC entered into “series” or “subscription agreements” with real estate brokers, agents, banks, mortgage servicers and others to give the appearance that it was creating legitimate joint ventures to provide real and compensable services. HUD discovered these sham businesses had little or no employees, capital and/or offices; that all core mortgage origination services were performed by Prospect itself; and that Prospect had allowed these affiliated businesses to participate in the origination of FHA-insured loans out of branch offices registered with FHA as exclusive to Prospect. In return for the referral of business, Prospect shared 50 percent of its profits with these entities which HUD determined were not bona fide affiliated businesses, and many of which were not FHA-approved lenders.