Case Shows Problems With Joint Ventures

SOME MUSINGS ON THE CASE INVOLVING BORDERS & BORDERS

MORAL

I have discussed time and again over the years that joint ventures will never work. Now there is a lawsuit and it is possible the attorney licenses could be in jeopardy, depending on the outcome and Kentucky State Bar Rules. The law firm denies the violation and avers it was an “Affiliated Business Arrangement.” However, with all due respect, if the allegations in the complaint are true and that is a matter for trial, this lawyer’s opinion is that no affiliated business arrangement can exist unless there are services rendered and the businesses are such that each shareholder or member (if it is a limited liability corporation) receives its proportionate distribution according to the percentage of interest held.  The CFPB states in its complaint as you read above, no services were really rendered by the title companies. At this point only time will tell.

BROKERING OR FUNDING ONLY QUALIFIED MORTGAGES IN AND OF ITSELF WILL NOT NECESSARILY VIOLATE THE “DISPARATE IMPACT” RULE OF ECOA

FACTS

Consumer Financial Protection Bureau. Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Interagency Statement on Fair Lending Compliance

“In the Agencies’ view, the requirements of the Ability-to-Repay Rule and ECOA are compatible. ECOA and Regulation B promote creditors acting on the basis of their legitimate business needs. Viewed in this context, the Agencies do not anticipate that a creditor’s decision to offer only Qualified Mortgages would, absent other factors, elevate a supervised institution’s fair lending risk.” (10-22-13)

MORAL

Just be sure you document the “Ability-to-Repay.”

ONE VERY BIG REASON NOT TO ALLOW LOAN ORIGINATORS TO HAVE DISCRETION IN PRICING MORTGAGE LOANS TO BORROWERS

FACTS

The complaint filed Sept. 30, alleges that Chevy Chase Bank’s loan officers were given the discretion to charge “overages” of up to one percentage point and an incentive to do so: the greater the overages, the greater their compensation. The complaint further alleged that this discretion resulted in minorities being charged larger overages than similarly situated white borrowers from 2006 to 2009.

The alleged annual disparities ranged from 7 to 27 basis points. In one office, the complaint also alleges, there was a disparity one year of 4 basis points—which the complaint labels “statistically significant.”

The same day that the complaint was filed, the DOJ filed an unopposed motion for entry of a settlement agreement. Under the agreement, Capital One agrees to pay $2.85 million in money damages. (doj93013civil rights division, the u.s. attorney’s office for the eastern district of virginia)

MORAL

Capital One took over Chevy Chase and so was not involved in the fair lending violations. But the point here is why loan officers should not be given pricing discretion. Two other mortgage lenders were disciplined for essentially the same thing on the same day.  These were Plaza Home Mortgage and Southport Bank.

FORMER OWNER OF A CALIFORNIA REAL ESTATE FIRM PLEADS GUILTY TO SEVEN FRAUD CHARGES AND IS EXPECTED TO GET EIGHT YEARS IN FEDERAL PRISON

FACTS

On Oct. 21, James Lee Lankford, formerly a Modesto-based real estate broker, pleaded guilty to seven counts of mail fraud in connection with a mortgage fraud scam that looted elderly homeowners and lending institutions of millions of dollars. Lankford’s husband, Jon Vance Lankford, formerly Jon Vance McDade, pleaded guilty on Sept. 16 to one count of bank fraud in connection with the same mortgage fraud scam.

Lankford fraudulently induced elderly property owners to sell their homes to him and to provide financing for his purchases. In return, Lankford agreed to make interest-only payments and to pay the principal amount at a future date. Lankford fraudulently induced the elderly sellers into believing that their financing was secured by the property itself by filing deeds with the county recorder’s office. Unbeknownst to the elderly sellers, Lankford also obtained mortgages from lending institutions to finance the purchase of the same properties. In order to obtain the mortgages, Lankford would not inform the lending institutions that he had obtained seller-backed financing. Lankford and co-defendant McDade also would make other material misrepresentations on the loan applications and in some instances, submitted falsified documents regarding monthly income to ensure approval for the loans.

During the mortgage closings, Lankford directed that a portion of the money supplied by the lending institutions be released to him or co-defendant McDade rather than go to the elderly sellers for the purchase of the property. Lankford would then lull the elderly sellers into believing that their sales transactions were proceeding according to the agreement by mailing them monthly interest-only payments and similarly lulled the lending institutions into believing the transactions were legitimate by recording deeds at the county recorder’s office. Lankford fraudulently induced the lending institutions into believing they had the only lien on the purchased property by withholding from escrow the documents containing the seller financing information and by waiting until after the close of escrow for the conventional mortgage financing to record the sellers’ deed.

In many instances, Lankford then refinanced the properties with another lending institution after filing fraudulent deeds purportedly showing that the elderly property owners had been paid in full. After fraudulently eliminating the seller’s lien on the property, Lankford would then fraudulently obtain refinancing and draw out any equity that had accumulated in the property. Lankford, having refinanced the property, and in some instances having obtained additional financing by reselling the property to co-defendant McDade, would then allow the property to go into foreclosure, or would sell it as a short sale.

Lankford admitted in his plea agreement to causing more than $7 million in losses to the elderly property owners, lending institutions, and banks he victimized.

Lankford and McDade are scheduled to be sentenced by Senior U.S. District Judge Anthony W. Ishii on Jan. 27, 2014. Lankford faces a maximum statutory penalty of 20 years in prison and a $250,000 fine for each count of mail fraud. McDade faces a maximum statutory penalty of 30 years in prison and a $1 million fine. (uattycaed102113)

MORAL

Rumor has it that Lankford will get eight years and McDade one day? Quite a disparity. McDade may have cooperated with authorities?

NEW YORK STATE SETTLES DISPUTE OVER DISCOUNT FEES WITH PROSPECT MORTGAGE FOR $3 MILLION

FACTS

New York financial regulators say they've settled an investigation into Prospect Mortgage discount fees with a $3 million penalty. The Department of Financial Services says the Sherman Oaks, Calif.-based company has also agreed to pay more than $427,000 in refunds to 270 New York homeowners.

Superintendent Benjamin Lawsky stated their examination showed the company charged borrowers for interest rate discounts that never materialized from 2008 to 2011.

The agreement also cites other violations and that Prospect will file quarterly reports for three years showing its compliance steps. (naap102413)

MORAL

Don’t mess with New York.

THE INFORMATION CONTAINED HEREIN IS NOT LEGAL ADVICE. AN ATTORNEY SHOULD BE CONSULTED IF YOU DESIRE LEGAL ADVICE.