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My last blog post outlined a new series discussing some important changes to the regulatory landscape that will affect your business in the years to come. The upcoming segments in the Industry Insider series will cover each of the topics outlined last week in more depth.
In this post, I’ll provide a more detailed, but plain language review of the PHH Corp. v. CFPB case and what it means for your business.
The long-awaited decision in the PHH Corp. v. CFPB case was finally issued in January, and its impact on the industry is significant. Originally, the case arose because the CFPB pursued a $109 million enforcement action against PHH Corp., a mortgage services company, alleging that PHH violated RESPA section 8, which prohibits payments or kickbacks for referrals of settlement service business.
The CFPB alleged that PHH illegally received a thing of value for referring borrowers to mortgage insurers, because PHH only referred business to mortgage insurance companies that would purchase reinsurance from its insurance affiliate, which acted like a kickback (these arrangements are referred to in the industry as “captive reinsurance” arrangements). The CFPB argued that, while RESPA section 8(c)(2) permits reasonable payments for services at reasonable market value, it does not apply as an exemption if the arrangement is made for business referrals.
The CFPB’s interpretation hit the industry like a tidal wave, because it significantly increased the risk of using RESPA section 8(c)(2) to support commonly-used arrangements, such as Marketing Services Agreements and desk rentals. Notably, the agency that had previously administered RESPA, the U.S. Department of Housing and Urban Development (HUD), had issued informal guidance going back decades noting that an arrangement was exempt as long as the payments were reasonably related to the market value of the services provided.
PHH appealed the CFPB’s enforcement action and its massive judgment on three separate grounds. PHH argued that:
- The CFPB misinterpreted the meaning of RESPA section 8 by not treating section 8(c)(2) as an exemption even if referrals are made,
- The CFPB violated due process because it retroactively applied an interpretation that departed from long-standing public guidance from HUD (described above), and
- The CFPB’s enforcement action is void, because the CFPB’s structure is unconstitutional, as it has a single Director who is removable only for cause (the specific causes are “inefficiency, neglect of duty, or malfeasance in office”), which violates the separation of powers under the Constitution.
The D.C. Circuit’s Rejection of the CFPB’s RESPA Interpretation
The U.S. Court of Appeals for the D.C. Circuit ruled in favor of PHH, disagreeing with the CFPB’s interpretation of RESPA section 8.The court determined that RESPA section 8 permits captive reinsurance arrangements, like PHH’s, as long as the mortgage insurers do not pay more than the reasonable market value for the reinsurance.
The court also found that the CFPB violated due process by trying to enforce its interpretation against PHH, in spite of HUD’s previous informal guidance. One of the judges in the case admonished the CFPB on this point, stating that it violated “Rule of Law 101.”
Even though PHH won the case on the RESPA issues, the court also found that the CFPB’s structure is constitutional. This means the CFPB can continue to operate with its current single-Director structure.
The PHH Decision’s Impact
While the court’s decision on the constitutionality of the CFPB is significant and grabbed many national news headlines, the most immediate impact on real estate professionals is the court’s decision on the RESPA issue. Many in the industry, including some big players, had been holding back from entering into arrangements that would fall under the exemption under RESPA section 8(c)(2) after the CFPB’s interpretation on the issue. But for many, this court decision has opened the door back up to arrangements designed to utilize this exemption, like MSAs, desk rentals, and other co-marketing arrangements. In addition, pushing back against the CFPB’s attempt to violate due process may serve as a warning to future leadership at the CFPB and other regulatory agencies.
Caution is warranted though. Despite what you may hear, this decision does not eliminate the need to comply with RESPA. It merely brings the industry back to the same state that existed before the CFPB tried to change how the government would interpret the rule. This means that the institutions that want to utilize the exemption under RESPA section 8(c)(2) will still need to ensure compliance with two important elements of the exemption:
- the payment bears a reasonable relationship to the market value of the services, and
- the goods or services are actually provided.
In addition, past enforcement actions also highlight certain practices in the administration of an arrangement designed to fall under section 8(c)(2) that may result in a violation of RESPA section 8. It would be prudent to review the past enforcement actions on the CFPB’s website of the CFPB and other regulatory agencies to identify potential risks in utilizing the exemption.
Be Mindful, RESPA is Also Enforced Outside of the CFPB
While the CFPB has recently undergone a change in leadership that calls into question its inclination to pursue enforcement actions, do not let that lull you into a false sense of security. Other regulatory agencies also enforce RESPA, including the federal banking agencies and state regulatory agencies, and they may be more inclined to enforce RESPA than the current CFPB leadership.
It’s also important to note that the “acting” status of the current CFPB Director means that this state of affairs could potentially change in the near term when a permanent Director is nominated and confirmed. Considering that examinations and investigations are backward looking, if the new CFPB leadership has a more active interest in RESPA enforcement, the agreements your institution enters into now could be subject to enforcement in the future.
All in all, the PHH case is a significant win for the industry. The court pushed back against the CFPB’s interpretation of RESPA and its attempt to apply its new interpretation retroactively. However, if your institution plans to take advantage of this new decision by entering into new business arrangements with others in the real estate industry, you should still pay close attention to compliance under RESPA.
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About the Author: Richard Horn is a former CFPB Senior Counsel & Special Advisor who led the rule integrating the mortgage disclosures under the Truth in Lending Act and the Real Estate Settlement Procedures Act (the TILA-RESPA integrated disclosures, also known as “TRID”).