The attorney general is claiming that the defendants have violated the Pennsylvania Unfair Trade Practices and Consumer Protection Law, and the Consumer Financial Protection Act (CFPA) due to alleged violations of Section X of RESPA.
According to the filing, Newhart partially owns and controls all of the defendants. The complaint claims that he “controlled, directed, supervised or otherwise participated in the actions and practices alleged herein through ownership, management, and operational control over the other Defendants.”
The filing also states that he is the sole member of Newhart Holdings, which is the sole member of defendant Conquest Holdings. According to the filing, Conquest Holdings directly owns and controls Defendants Nittany Home Loans, LLC, MCT Financial, LLC, and Conquest Mortgage, LLC, and it owns the majority of and controls management companies, including LMP Management, Mortgage Affiliated Services Group and Home Lending Partners, which own and control defendants Legacy Mortgage Partners, Bright Financial Group, LLC, and Flagship Home Loans, LLC. Additionally, the filing notes that Newhart set up this structure with his former business partner Rafael Trinidad.
According to the complaint, Newhart and the other defendants transferred “things of value,” specifically underpriced, nonvoting stock in Newhart-owned mortgage brokerages to real estate agents and brokers, who in return referred their clients back to the Newhart-owner mortgage brokerages.
“Through this setup, Newhart and the other Defendants attempted to mask the kickbacks they paid to Real Estate Professionals as sales of stock and profit distributions to shareholders,” the complaint states. “But the underpriced nature of the stock, and the large, outsized profit distributions that Newhart and the other Defendants distributed directly to referring Real Estate Professionals, belied the scheme.”
Additionally, the former AG alleges that the defendants also paid for event tickets and “expensive dinners” for the real estate professionals, which when combined with the profit distributions, “surpassed $500,000 and potentially amounted to close to or more than a million dollars in total.”
Finally, Henry also alleges that the defendants “failed to adhere to disclosure requirements and other requirements that are necessary to qualify for an exception that allows settlement services providers to transfer certain things of value to entities as part of an ‘affiliated business arrangement.’”
In the filing, Henry alleges that when Newhart and Trinidad set up the companies they created two classes of membership shares: Class I Units and Class II Units. Those who bought Class I Units own 50% of the mortgage brokerage defendants, and, according to the filing, were available for purchase by real estate professionals including agents and brokers at a set price of $450 per share, which the complaint calls “far below a reasonable market price.” The Class II Units were owned by entities controlled and largely beneficially owned by Newhart and Trinidad.
Since 50% of the mortgage brokerage defendants were owned by real estate professionals, they were entitled to 50% of the companies’ profits. The complaint alleges that each Class I Unit shareholder’s expected annual return would be “more than $10,000.”
Additionally, the complaint alleges that the mortgage brokerage defendants has the ability to “kick out owners of Class I Units who were generating insufficient referrals or conduct a “reassessment” to allocate more shares to other owners of Class I Units who referred larger volumes than anticipated allowed the Defendants to calibrate the ownership precisely based on actual referral amounts.”
“Thus, Defendants’ Subscription Agreements enabled the Defendants to give (or take away) discounted shares and the corresponding profit distributions ‘on the basis of the amount of their actual, estimated or anticipated referrals,’” the complaint continues.
The plaintiff is seeking a permanent injunction preventing the defendants from engaging in the alleged unlawful and consumer harming behavior.
Last week, the defendants fired back filing a motion to dismiss the suit. In the filing, the counsel for the defendants state that “each purported federal and state claim fails because it is premised on either (i) a novel and illusory theory of liability under the Real Estate Settlement Procedures Act through all Defendants’ collective conduct or (ii) allegations of a RESPA violation (missing affiliated business disclosures and providing a thing of value for referrals) which lacks the basic facts required to state a claim.”
“The Commonwealth’s reliance on fictious RESPA requirements has no basis in the statutory text,” the motion continues. “The Commonwealth has filed a Complaint against the Defendants based on violations of a statute that they wish existed, not one that does. As a result, their claims are not only unmoored from what the law actually prohibits, but expressly permitted! As a result, the Complaint fails to state a claim against any of the Defendants and should be dismissed.”
Additionally, the motion notes that the claims are based on share sales that occurred in 2021, making any claims based on those investments time-barred.
“The Commonwealth’s Complaint is a mish-mash of poorly pled facts and wrongly-applied law. While the Commonwealth may want RESPA to prohibit affiliated business arrangements, it does not. Instead, the Commonwealth makes a series of serious allegations that have harmed the reputations and businesses of the defendants, all without specifying which defendants did what, on what loans, or when,” the motion states. “All of this adds up to grave government abuse and overreach, attempting to create new law and standards where they have never existed in the 50-plus year history of RESPA. The abuse and overreach should stop now.”
