Compliance Blog

Apr 29, 2016

"If You Scratch My Back, I'll Scratch Yours"... Maybe Not Says CFPB

Written by Shereefat Balogun, Regulatory Compliance Counsel

The CFPB is embroiled in an enforcement action involving RESPA Section 8, and this case is being closely monitored because of the significant impact any decision will have on the mortgage industry. If the court accepts the CFPB's interpretation of what constitutes a referral fee, just about any aspect of the mortgage settling business will be impacted, from loan applications and originations, to closings, and insurance on a home. In light of this significance and the growing industry concerns, here is an overview of Section 8's regulatory requirements for credit unions involved in the mortgage business.

As way of background, in 2014, the CFPB brought an enforcement action against PHH Corp., a mortgage lender, alleging that when PHH originated mortgages, it referred consumers to mortgage insurers with which PHH had partnered. In exchange for this referral, the insurers purchased reinsurance from PHH's subsidiaries. The CFPB says this is a kickback, and thus a clear violation of Section 8. 

As you know, Section 8 of RESPA generally prohibits kickbacks and referrals. Specifically, Section 8(a) provides that no person shall give and no person shall accept any fee, kickback, or other thing of value pursuant to any oral or written agreement or understanding for the referral of a settlement service involving federally related mortgage. See, 12 U.S.C. 2607(a). Thing of value is broadly defined, and thus many credit unions tend to be cautious regarding real estate transactions and referrals. Regulation X, which implements RESPA, defines a thing of value as:

"(d) Thing of value. This term is broadly defined in section 3(2) of RESPA (12 U.S.C. 2602(2)). It includes, without limitation, monies, things, discounts, salaries, commissions, fees, duplicate payments of a charge, stock, dividends, distributions of partnership profits, franchise royalties, credits representing monies that may be paid at a future date, the opportunity to participate in a money-making program, retained or increased earnings, increased equity in a parent or subsidiary entity, special bank deposits or accounts, special or unusual banking terms, services of all types at special or free rates, sales or rentals at special prices or rates, lease or rental payments based in whole or in part on the amount of business referred, trips and payment of another person's expenses, or reduction in credit against an existing obligation. The term payment is used throughout 1024.14 and 1024.15 as synonymous with the giving or receiving of any thing of value and does not require transfer of money." 12 CFR 1024.14(d).

Regulation X also broadly defines both agreement or understanding and settlement service. With respect to agreement or understanding, the regulation states:

"(e) Agreement or understanding. An agreement or understanding for the referral of business incident to or part of a settlement service need not be written or verbalized but may be established by a practice, pattern or course of conduct. When a thing of value is received repeatedly and is connected in any way with the volume or value of the business referred, the receipt of the thing of value is evidence that it is made pursuant to an agreement or understanding for the referral of business."  12 CFR 1024.14(e)(emphasis added).

The term "settlement services," as defined in RESPA 12 U.S.C. 2602(3), includes any service provided in connection with the settlement of a loan. Similarly, Regulation X's definition of "settlement services" contains a laundry list of activities. 

In addition to the prohibition of Section 8(a), RESPA Section 8(b) prohibits the splitting of charges for providing real estate settlement services. The section specifies:

"No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed." 12 U.S.C. 2607(a).

As you can see, the definitions of some of these terms are extremely broad, and the provisions of Sections 8(a) and (b) seem very restrictive. While, these two provisions can be read to cover any type of arrangement or partnership, many players in the mortgage industry relied on Section 8(c) as a possible safe harbor well until recently when Director Cordray expelled that notion in the PHH case.

Section 8(c), unlike the other two sections, sets forth permissive conduct. Rather than describe conduct that is prohibited, it lists several types of conduct that are permitted, so long as certain conditions are satisfied.  Indeed, Section 8(c), states:

"Nothing in this section shall be construed as prohibiting (1) the payment of a fee (A) to attorneys at law for services actually rendered or (B) by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance or (C) by a lender to its duly appointed agent for services actually performed in the making of a loan, (2) the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed 12 U.S.C. 2607(a)(emphasis added).

Similarly, Regulation X provides:

"(g) Fees, salaries, compensation, or other payments. (1) Section 8 of RESPA permits:

(iv) A payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed  12 CFR 1024.14(g)(iv)(emphasis added.).

Many relied on this provision allowing the payment of a bona fide salary or compensation where services are actually performed in justifying their arrangements. However, the CFPB's current position is that Section 8(c)(2) merely clarifies section 8(a), providing direction as to how that section should be interpreted, but does not provide a substantive exemption from section 8(a). See, In re PHH Corp., page 16. Director Cordray explains that in order to be lawful, payments must be bona fide, which he defined as not being tied in any way to a referral of business. This seems to be the first time that the term bona fide for purposes of Section 8(c) has been qualified this way. Certainly, this definition is not found in the statute or the regulation, hence the reason for the industry concern. Moreover, the Bureau's new interpretation is a departure from other interpretations including previous guidance issued by the U.S. Department of Housing and Urban Development (HUD), which enforced RESPA prior to the CFPB.

The CFPB's new interpretation of RESPA would essentially invalidate and make unlawful most payment arrangements. If the CFPB prevails this will definitely be a game changer. If it's any consolation, the judges seemed to share the industry's concerns and questioned the fairness of the Bureau's decision to disregard HUD's guidance and other judicial interpretations, also noting that the entire industry relied on HUD's interpretations. NAFCU will keep you updated on any further developments.

In light of RESPA's already restrictive language, coupled with the recent CFPB interpretation, credit unions involved in the mortgage business are advised to consult with counsel before making referrals. Note also that Appendix B to Regulation X includes examples of the application of RESPA, which credit unions can review for additional guidance.