On May 17, 2013, the Consumer Financial Protection Bureau (“CFPB”) issued a consent order to Paul Taylor Homes Limited, Paul Taylor Corp. and Paul Taylor individually (altogether “Taylor”) based on the CFPB’s findings that Taylor entered into a sham joint venture arrangement with Benchmark Bank that resulted in Taylor receiving compensation for referrals in violation of Section 8 of RESPA. According to the CFPB’s findings, the joint venture had no employees (all work was done on behalf of the joint venture by an employee of Benchmark Bank), did not have its own office space, did not advertise to the public, and conducted no origination business outside of the referrals that it received from Taylor. All 32 loans originated by the joint venture between the time of its formation in March 2010 and the date of the consent order were funded by Benchmark Bank.
The lesson to be learned from this consent order is that a joint venture, no matter how small in volume or opportunity, needs to be a real, functioning business that strives to pass as many of the ten factor tests set forth in HUD’s RESPA Statement of Policy 1996-2 as possible in order to establish that it is a bona fide settlement service provider, and not a sham arrangement. While Taylor and Benchmark Bank each contributed capital to the joint venture, the amount of capital was relatively small ($25,000 per partner) and the joint venture did not appear to pass any of the other tests (i.e., it had no employees, no operations, no office space and did not compete in the market).