In an ongoing proposed class action against Veterans United Home Loans and Veterans United Realty, a federal judge has allowed the plaintiffs’ core RESPA theory to move forward, rejecting the lender’s argument that its affiliated real estate referral arrangement is categorically protected by RESPA’s safe harbor.
The case, filed Feb. 18, accuses Veterans United and its affiliated real estate network, Veterans United Realty, of steering military borrowers into Veterans United mortgages through an alleged referral and kickback scheme. NMP recently examined the lawsuit in a cover story that also featured other top VA originators discussing Veteran United's practices and its role in the VA lending market.
In an Aug. 20 order, Chief U.S. Magistrate Judge Willie J. Epps Jr. dismissed most of the plaintiffs’ claims but found it too early to determine whether the 35% commission structure at the center of the case is a legitimate cooperative brokerage arrangement or an unlawful lender-steering scheme.
“Plaintiffs argue that RESPA’s safe harbor provision does not apply at this stage because such a determination requires further development of facts through discovery. The Court agrees and finds that the safe harbor provision does not warrant dismissal at the pleading stage,” the order states.
Veterans United prevailed, however, on its statute-of-limitations argument. RESPA claims generally must be brought within one year of the alleged violation, and the court rejected the plaintiffs’ attempt to extend that deadline through fraudulent concealment. Epps found that allegations Veterans United failed to disclose the steering arrangement were not enough to toll the statute of limitations
As a result, the RESPA claims of most of the named plaintiffs were dismissed as time-barred. Only three plaintiffs — Salem Zahn, Donald Tumino and Dawn Johnson — still have live RESPA claims, under Counts 1 and 2, after this ruling.
The RESPA Theory
The plaintiffs’ core theory is that Veterans United Realty gave real estate agents valuable leads and continued access to its referral network in exchange for steering borrowers toward Veterans United Home Loans. Judge Epps found that, if those allegations are true, they could plausibly amount to an unlawful RESPA kickback arrangement.
“The Amended Complaint plausibly alleges that Defendants were engaged in an unlawful referral arrangement and steering scheme. Plaintiffs allege VUR was created to collect payments a lender could not lawfully receive and performed no settlement services. If proven true, these allegations would place the arrangement outside any bona fide brokerage exemption.” the court order states.
Judge Epps also rejected Veterans United's argument that the plaintiffs hadn't suffered a concrete, personalized injury. The plaintiffs claim they paid higher interest rates and loan costs that were $5,000 to $10,000 above market, and that their transaction costs were inflated by the undisclosed 35% commission split. At the motion-to-dismiss stage, the judge found those allegations sufficient.
Under RESPA Section 2607(a), which prohibits paying or providing something of value in exchange for settlement-service referrals, Epps found that repeated leads, continued participation in the referral network, commissions and mortgage business can qualify as a “thing of value.” He also rejected Veterans United’s argument that borrowers already pre-approved by VUHL could not later be “referred” back to the lender, because an agent can still influence which lender the borrower ultimately chooses.
“For example, Mr. Peyton alleges that after pre-approving him, VUHL ‘referred him to a Veterans United associated real estate agent (B.D.)’ to purchase his home. That clearly alleges a referral within the regulation’s definition,” the order states.
Under Section 2607(b), the plaintiffs also allege that the 35% commission and kickback scheme violate RESPA’s prohibition against splitting settlement charges with another party when no services were actually performed. Although Veterans United argued no plaintiffs alleged that they paid a ‘charge’ in violation of RESPA, the court disagreed.
“Kickbacks paid from settlement proceeds, including real estate commissions received as part of a real estate settlement, fall within the definition of the statute,” the order states. “The ‘plain language of Section [2607(b)] requires plaintiffs to plead facts showing that the defendant illegally shared fees with a third party.’”
Essentially, if the plaintiffs can prove that some portion of the real estate commission was paid because of the referral arrangement rather than payment for real work, that could violate RESPA.
On the state-law claims, Veterans United did considerably better. The court dismissed the Missouri, Illinois, Ohio and Texas consumer-protection claims, as well as the unjust enrichment claim.
The only state consumer-protection claim that survived was Lillian Norrs’ New York General Business Law § 349. Norrs alleges she was told Veterans United was a “VA company” and that she ultimately paid higher rates and fees.
The Current Scorecard
Still alive: RESPA claims for Zahn, Tumino and Johnson; along with Norrs’ New York consumer-protection claim.
Dismissed: Missouri, Illinois, Ohio and Texas consumer-protection claims; unjust enrichment; RESPA claims for most of the other named plaintiffs.
Unresolved issue: Whether the Veterans United Realty referral model falls within RESPA’s brokerage safe harbor or instead constitutes an unlawful steering or kickback arrangement.
Up Next: Plaintiffs have 14 days from Aug. 20 to file a second amended complaint. All dismissals were without prejudice, meaning plaintiffs can attempt to cure at least some pleading defects.
Bottom Line
The most consequential sentence in the order, from an industry perspective, is that the court would not bless the Veterans United referral structure as RESPA-safe at the pleading stage. That means the mechanics of the 35% commission split, lead distribution, AgentDash tracking and any alleged pressure on agents to retain Veterans United financing could now become discovery issues.
