A cautionary tale for mortgage brokers arrived this week from Allentown, Pa., after state prosecutor and former Pa. Attorney General, Michelle Henry, filed a lawsuit against six mortgage brokerages that operate in the area, and their manager, Barry Newhart, concerning an alleged kickback scheme involving real estate agents steering potential home buyers to the brokers.
The complaint, filed in U.S. District Court, lists the defendants as: Bright Financial Group, LLC; Conquest Mortgage, LLC; Flagship Home Loans, LLC; Legacy Mortgage Partners, LLC; Nittany Home Loans, LLC; and, MCT Financial, LLC — all based in Allentown, Pa. — and the owner of said brokerages, Barry Newhart.
None responded to NMP's emailed request for comment.
The Scheme’s Structure
Former AG Henry claims that Newhart and the other defendants potentially spent up to $1 million on sporting event tickets, expensive dinners, and profit distributions for the real estate professionals who, in exchange, referred their clients to the Newhart-owned mortgage brokerages.
The alleged profit sharing ruse is believed to have run up the value of the kickbacks and masked them as sales of stock and profit distributions to shareholders.
Former AG Henry claims that the scheme violated Pennsylvania Unfair Trade Practices, Consumer Protection Law, and the Consumer Financial Protection Act (CFPA), based on Regulation X of the Real Estate Settlement Procedures Act (RESPA).
According to the complaint, Newhart and his former business partner, Rafael Trinidad, “Newhart and Trinidad,” created various corporate entities to hold, manage, and benefit from the operations of the six defendant brokerages. Newhart bought out Trinidad’s ownership interest in August 2024, so Conquest Holdings, LLC is solely owned by the defendant, Newhart Holdings, LLC.
Conquest Holdings, LLC, and thereby Newhart, are alleged to directly own and control defendants Nittany Home Loans, LLC, MCT Financial, LLC, and Conquest Mortgage, LLC. It also owns LMP Management, LLC; Mortgage Affiliated Services Group, LLC; and Home Lending Partners, LLC — which own and control defendants Legacy Mortgage Partners, Bright Financial Group, LLC, and Flagship Home Loans, LLC.
Kickbacks Masked As Stock Sales
Newhart and the mortgage brokers are claimed to have offered real estate agents discounted ownership in a joint venture mortgage brokerage company, sporting event tickets, dinners, and other kickbacks, in exchange for the agents steering clients to the mortgage brokerage. According to the complaint, the buyers were unaware of the scheme.
“Because the shares were sold at a large discount, Real Estate Professionals purchasing shares effectively received a thing of value with each share purchase,” the lawsuit reads. “The discounted sale was a transfer of a thing of value — the excess of fair market value over the sales price.”
The defendants allegedly sold Class I Units to the real estate professionals at a price far below a reasonable market price — “a set price of $450 per share,” the lawsuit reads. The annual rate of return for owners of Class I Units reached upwards of 900%, according to the complaint.
Additionally, the plaintiff claims that without the non-compliant referrals from the real estate professionals, the defending brokerages did not accrue enough business to sufficiently operate as independent mortgage brokerages.
“In other words, without the guaranteed flow of referrals from the Real Estate Professionals who owned Class I Units, the Defendant Mortgage Brokerages could not have operated as profitable mortgage brokerage businesses,” the complaint reads.
Kickbacks Vs. “Affiliated Business Agreement”
Most mortgage professionals are well aware of RESPA Section 8(a) that prohibits giving or accepting any “fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.”
RESPA does, however, permit settlement service providers to enter into “affiliated business arrangements” with other entities who may refer business to the settlement service providers.
Defined within RESPA, an affiliated business arrangement is “(A) a person who is in a position to refer business incident to or a part of a real estate settlement service involving a federally related mortgage loan, or an associate of such person, has either an affiliate relationship with or a direct or beneficial ownership interest of more than 1% in a provider of settlement services; and (B) either of such persons directly or indirectly refers such business to that provider or affirmatively influences the selection of that provider.”
However, referrals made through an affiliated business arrangement must comply with specific statutory and regulatory requirements: referral arrangements must be properly disclosed to consumers (ABA disclosure), generally on a separate sheet of paper no later than the time of the referral and subject to certain conditions.
Unintentional and bona fide errors are excusable only if procedures reasonably adopted to result in compliance have been maintained.
In a compliant affiliated business arrangement, affiliates can lawfully exchange things of value under two specific circumstances: (1) the payment is permitted under 12 U.S.C. § 2607(c) and 12 C.F.R. § 1024.14(g); and (2) the thing of value is a bona fide “return on the
ownership interest or franchise relationship.”
Yet, even within an affiliated business arrangement, apart from transfers of things of value expressly allowed under 12 U.S.C. § 2607(c)(4)(C) and 12 C.F.R. § 1024.15(b)(3), all other transfers of value between parties referring business incidents to mortgage settlement services are prohibited by RESPA.
