Long & Foster Real Estate is now locked in affiliated business combat on two sides. Waging a court battle for years with regard to its affiliation with Fountainhead Title, it is now facing a new RESPA class action suit challenging the legitimacy of its joint venture with Wells Fargo. This comes just months after the company did damage control on a memo that CEO P. Wesley Foster sent to agents asking them to increase their usage of the affiliated mortgage provider. Read on for the latest scoop.
By Robin Wardzala
On Dec. 26, a new RESPA class action suit was filed against Wells Fargo Bank, Long & Foster Real Estate and their joint venture, Walker Jackson Mortgage Co. (d/b/a Prosperity Mortgage), in the U.S. District Court of Maryland.
The suit, brought on behalf of plaintiff Denise Minter by attorney Richard Gordon of the Baltimore-based firm Quinn Gordon Wolf Chtd., claimed that Prosperity Mortgage is a sham affiliated business that violates RESPA.
In her complaint, Minter alleged that Wells Fargo "solicited mortgage origination work from Long & Foster, promising that Long & Foster could make additional money for each loan application referred without performing any additional work. Wells Fargo, together with Long & Foster and Walker Jackson, then set up an affiliated business arrangement - Prosperity Mortgage - that was established to appear on closing documents as a mortgage lender."
Partnership allegations
"Once the AfBA was created," the complaint continued, "it appeared on the settlement documents as an entity that had performed bona fide and substantial mortgage loan origination services. This, however, was false and untrue. Even though the AfBA charged and was paid substantial fees by the borrower that ranged from $100 - $2,500 or more, for each mortgage loan originated, Prosperity Mortgage, in fact, performed little or no work in connection with the mortgage transaction."
Minter also claimed that following the settlement, the fees - "which were in addition to the customary and usual fees that Wells Fargo charged for mortgage origination" - were split and paid to Long & Foster and/or Walker Jackson. The borrower was allegedly not informed that the fees charged were "to reward Long & Foster and Walker Jackson for the referral of the mortgage loan to Wells Fargo."
Thus, the complaint stated, the defendants "were able to systematically and deceptively hide and conceal the fact that Prosperity Mortgage is a sham' AfBA and served no purpose in the transaction other than to: (1) permit Long & Foster and Walker Jackson to pocket additional monies, paid by the borrower, while providing no additional goods or services; and (2) facilitate the payment of a referral fee and kickback, sponsored by Wells Fargo, at the increased expense of the borrower and in violation of the borrower's rights under state and federal law."
The suit requested class action status and included counts of RESPA Section 8(a) and (b) violations, RICO violations, Maryland Consumer Protection Act violations, negligent misrepresentation, fraud, civil conspiracy and restitution/unjust enrichment.
Defending the JV
As of press time, Long & Foster and Wells Fargo had yet to file a response to the complaint.
But Mary K. Weddle, executive vice president of the Long & Foster Companies, told RESPAnews in a statement, "It is Long & Foster's policy not to comment on pending litigation, however, we believe the suit is without merit. Long & Foster works consistently in all endeavors to ensure compliance with federal, state and local laws."
Wells Fargo, meanwhile, told RESPAnews, "Wells Fargo's joint venture support team takes our risk-management and compliance responsibilities very seriously. Since its launch in 1993, Wells Fargo's strategic business alliances are regularly - and successfully - reviewed for regulatory compliance."
Notably, the Minter complaint included a reference to a memo, previously reported on by RESPAnews, that P. Wesley Foster Jr., founder, chairman and CEO of Long & Foster, sent to all of the company's agents encouraging them to use Prosperity for their clients' loans, because a loan sent elsewhere "does not help our company stay strong."
"Given such a mandate, Long & Foster's consumers have no real alternative to doing business with Prosperity Mortgage," the complaint said.
However, the complaint did not mention the fact that Foster sent the memo because, as he told RESPAnews, Prosperity currently gets fewer than 20 percent of the loans generated by Long & Foster agents.
"We would love to get more," Foster said. "I wrote the memo to ask our people to do more and to give their business to our own people when they can."
The crux of the case
Regarding the Minter suit's allegations, Howard Lax, partner with Lipson Neilson Cole Seltzer Garin PC observed that while one paragraph of the complaint stated that Prosperity Mortgage had loan officers, a subsequent paragraph said that Prosperity did NOT have loan officers and used "loaned employees" from Wells Fargo, instead.
"Therein lies the crux of this case," Lax said. "Did Prosperity Mortgage perform substantial services through its employees? Who controlled these employees, and who paid them? Did these employees originate loans for any other company? The plaintiffs must show that Prosperity Mortgage had no employees, not even part time employees. The complaint collapses if the plaintiffs cannot prove this. The defendants, or course, will be trying to show (through email records, etc.) that the joint ventures directed the activities of, paid compensation to, and directly benefited from the work of these employees."
Lax also noted that the lawsuit did not allege that Prosperity Mortgage illegally paid its loan officers. "If, as alleged, the loan officers were really Wells Fargo employees, then being paid to make referrals to Prosperity Mortgage might be improper," he said.
He added, "Where is the allegation that compensation paid to these 'loan officers' is not bona fide compensation exempt from scrutiny under RESPA? Does this omission imply that the loan officers received bona fide compensation? If so, were they not providing bona fide services on behalf of these mortgage companies?
"If anything good comes from this lawsuit," Lax continued, "it could be a definition of what an 'employee' is for the purposes of RESPA, as HUD has carefully avoided defining this term."
And the beat goes on��
The Minter suit also has ties to another RESPA case involving Long & Foster's affiliated business arrangement with Fountainhead Title. For details on that, see: "RESPA in the courts: AfBAs, markups return to spotlight." That suit, also being litigated by Gordon, is currently at the class certification stage.
RESPAnews will bring you more on both of these intertwined cases as they progress.