by Brian Fink
The recent resolution of the PHH case is good news for banks that originate mortgages. The court vacated the CFPB’s $109 million fine for PHH’s alleged violations and provided helpful guidance regarding the permissibility of working with others—even if a referral is made . The following article discusses the PHH case, its context, the impact of the decision on compliance management, and why today’s RESPA Section 8 looks a lot like the pre-CFPB RESPA.
Referral Arrangements and RESPA
RESPA aims to, among other things, eliminate kickbacks or referral fees that tend to unnecessarily increase the costs of certain real estate settlement services. Section 8(a) of RESPA prohibits the giving or receiving of “any fee, kickback, or thing of value pursuant to any agreement or understanding” to refer business incident to a real estate settlement service involving a federally related mortgage loan. Section 8(c)(2) of RESPA, however, provides that this general prohibition on kickbacks and referral fees does not prohibit 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. Historically, a company was considered to be compliant if it paid or received a reasonable market value for the goods or services that it actually furnished or performed, even if that business had been referred to the company.
PHH Case and Context
In the CFPB’s first PHH ruling, an administrative law judge (ALJ) determined that payments between PHH and others violated RESPA because they were not reasonably related to the value of the services provided. PHH appealed, and Director Cordray ruled against everyone, PHH and the ALJ alike.
In 2015, the CFPB issued a compliance bulletin advising industry regarding marketing services agreements (MSAs). MSAs had been tricky, maybe, but legal, covered by the bona fide compensation provision discussed above. The CFPB’s guidance suggested otherwise. It provided:
MSAs are usually framed as payments for advertising or promotional services, but in some cases the payments are actually disguised compensation for referrals…It appears that many MSAs are designed to evade RESPA’s prohibition on the payment and acceptance of kickbacks and referral fees.
Mortgage businesses that provided services, including marketing services, to each other for bona fide compensation—and that also provided referrals, occasionally or regularly—found their regulatory risk increasing. The guidance explained that MSAs were risky, but it did not explain how to reduce the risk. In addition, the volume of CFPB RESPA cases suggested that kickback enforcement was a priority.
In PHH, Director Cordray determined that a contract for services between parties was itself an impermissible thing of value exchanged for referrals. RESPA, the CFPB determined, forbids an arrangement that ties business to a company, even if the only compensation for the provided services is reasonable. The CFPB found that PHH’s arrangement had gone on for years. The ALJ had not accounted for the practice or its duration, and so a $6.4 million enforcement case, on appeal to the Director, turned into $109 million.
The case was appealed to a panel, and ultimately to the entirety, of the U.S. Court of Appeals for the District of Columbia Circuit. The full court confirmed the panel’s ruling as it related to RESPA and overruled the CFPB’s RESPA interpretation. It held:
How do we determine whether the mortgage insurer’s payment to the lender was a bona fide payment for the reinsurance rather than a disguised payment for the lender’s referral of a customer to the insurer? As HUD had long explained, the answer is commonsensical: If the payment to the lender-affiliated reinsurer is more than the reasonable market value of the reinsurance, then we may presume that the excess payment above reasonable market value was not a bona fide payment for the reinsurance but was a disguised payment for a referral.
Section 8(a) proscribes payments for referrals. Period. It does not proscribe other transactions between the lender and mortgage insurer. Nor does it proscribe a tying arrangement, so long as the only payments exchanged are bona fide payments for services and not payments for referrals. . . .Congress explicitly made clear in Section 8(c) that those other transactions were lawful so long as reasonable market value was paid and the services were actually performed.
Impact of PHH Case
Now that the PHH case has been resolved, referrals and RESPA § 8 compliance have not become risk free. The risks, however, are better known, so banks are better able to manage them. Prior to the CFPB’s enforcement actions and guidance, RESPA § 8 was understood to require two things of MSAs and similar arrangements: that goods and services actually be performed or provided for the compensation paid and that the payment be reasonably related to the value of the goods or services. The court specifically referenced this standard in its decision, excerpted above.
As a result, banks should build compliance management systems to ensure that products and services actually are provided (or received) at a fair price. For example, if a bank purchases services from a referral source, it is important that the bank researches and identifies market rates for the services, makes payments that are consistent with the market, and monitors the rates and payments over time. The determination and the amount of the payment should be documented and retained in the bank’s records. And of course, a compliance management system must be able to identify and remediate instances of noncompliance as well. Banks have grown familiar with developing these kinds of systems. It is still a good idea, nevertheless, to discuss this kind of arrangement with counsel.
For those with good memories, all of this should look familiar. The court ruled that compliance with RESPA § 8 is more than theoretically possible. But it did not issue any guarantees. So protecting your bank from violations remains important, and it requires establishing a compliance management framework that works for your bank.
Brian Fink is of counsel in the Washington, D.C. office of McGlinchey Stafford and concentrates his practice in consumer financial services regulatory compliance. A former regulator, Brian regularly advises banks and other companies on lending and compliance management issues. Licensed in DC, NY, & PA.