Going after the Big Cheese (PHH takes on CFPB’s Director)

As many of you know, I have been following the PHH dispute with the CFPB virtually from its inception. Although PHH is a large organization, let’s face it, this is still like a mouse (PHH) squeaking at an elephant (CFPB)! The bite, in this instance, happens to be a $109 million penalty that the CFPB is assessing against PHH.

Reduced to the least common denominator, this is a fight against the authority vested in the Director of the CFPB, or, better said, the authority that the Director presumes to have vested in himself versus a play at arrogating to himself certain authority that he simply does not have.

Going after the Big Cheese himself is no mean feat!

But PHH has assembled a highly skilled and prominent legal team.

And there are amici curiae on both sides.

Let me back up a few steps and give a wider angle. PHH appealed to the DC Circuit Court because the Bureau’s Director Richard Cordray raised a $6 million penalty for mortgage insurance kickbacks - such penalty issued by an administrative law judge - to a whopping $109 million.

To ensure that the information presented at bar was applicable to Dodd-Frank, the hearing judges required the Bureau to provide answers in oral arguments regarding substantive provisions as to the president’s authority to remove the CFPB director only for cause, and, importantly, about how the Court should view an administrative agency led by a single director rather than the more typical commission structure.

Today is the day for those oral arguments!

Here’s one bottom line that may come from the foregoing aspects of the dispute: if the Bureau loses, the Director may find that his authority, presumed or otherwise, will be vitiated.

An access point to the litigation is to challenge the constitutionality of the Bureau itself! Areas of contention, right from the inception, have been the supposed, czarist-like construct of having a single director in charge of the Bureau, plus the view that the CFPB’s funding should come from congressional appropriations rather than from the Federal Reserve’s own budget.

Is it surprising that the DC Circuit recently required the Bureau to be prepared to face questions about whether Dodd-Frank’s provision - stating that the president can remove the CFPB director only for “inefficiency, neglect of duty, or malfeasance in office” - passed constitutional muster? Actually, I don’t think so. After all, the Bureau has been challenged on these issues all along and there is clearly an interest in determining the scope of authorities vested in the Director. If adjudication seems to reach to an unassailable decision, the viability of claims involving the CFPB’s constitutionality may be finally resolved. Or maybe not! The Supreme Court would be the next step along this circuitous path to a decision.

Should we be surprised that the Court is looking for answers about potential remedies for any problems that the applicable provision brings, including potentially removing it from the statute and allowing the president to remove the CFPB director without any specific cause?

Again, I am not surprised. If it turns out that the cures (remedies) are worse than the infection (overreaching authority) and the treatment needs to be changed, the Court will need to determine the extent to which such changes could affect the Director’s authority.

CFPB versus PHH: Impact on Marketing Services Agreements

Jonathan Foxx

President & Managing Director

On November 5^th, the Consumer Financial Protection Bureau (“Bureau”) stated in a brief filed with the D.C. Circuit that its $109 million disgorgement order against PHH Corp. in a mortgage reinsurance kickback case met all statutory requirements and should be allowed to stand to keep other companies from engaging in similar schemes. The Bureau's position has significant implications for Marketing Services Agreements ("MSAs").

Due to the implications of the Bureau’s authorities and powers, I cover the impact of the PHH matter in some detail in a forthcoming webinar, entitled Marketing Services Agreements: Challenges and Choices. My colleague, Michael Barone, will cover the ins-and-outs of MSAs. This free webinar is hosted by MortgageFlex Systems.

Webinar Registration Link

Presenters

Jonathan Foxx, President & Managing Director

Michael Barone, Executive Director & Director Legal & Regulatory Compliance

Title Marketing Services Agreements: Challenges and Choices

Date November 19, 2015

Time 2PM-3PM ET

Recording No

Topics

PHH Corp – Enforcement Action

Background regarding MSAs

Lighthouse Title – Consent Order

Lessons learned about MSAs

CFPB's Bulletin 2015-05 on MSAs

Synopses – Three Takeaways

Attendee Package

Webinar Slides

Marketing Services Agreements - Checklist

Suite of Services

The Bureau contends that PHH incorrectly interpreted the Real Estate Settlement Procedures Act (“RESPA”) in its appeal of the $109 million disgorgement order. The CFPB and its Director, Richard Cordray, contend that they were correct in levying the foregoing penalty, which, they claim, serves as a necessary deterrent to other firms that might consider engaging in kickback actions.

To quote the Bureau itself:

“Eliminating kickbacks is a primary goal of RESPA. If PHH is permitted to keep the fruits of its kickback scheme merely because it claims it believed its scheme was legal, this will encourage others to take advantage of areas of statutory uncertainty.”

Further, the Bureau contested PHH’s claims that the agency’s ‘single-director structure,’ as opposed to ‘multimember-commission leadership,’ and funding through the Federal Reserve rather than the congressional appropriations process, violate the U.S. Constitution.

To refresh the history of this matter, the Bureau had filed administrative claims against PHH in January 2014, alleging that when PHH originated mortgages, the financial institution referred consumers to mortgage insurers with which it had relationships. In exchange for this referral, the agency claimed, these insurers purchased reinsurance from PHH’s subsidiaries, and PHH took the reinsurance fees as kickbacks.

The Bureau contended that PHH also charged more money for loans to consumers who did not buy mortgage insurance from one of its supposed kickback partners and, in general, charged consumers additional percentage points on their loans.

Then, in June 2015, Director Cordray upheld a November 2014 ruling by Administrative Law Judge Cameron Elliot that PHH engaged in a mortgage insurance kickback scheme under RESPA; but, according to Director Corday, the judge incorrectly assessed the penalties.

Director Cordray’s position may be outlined, as follows:

Rather than requiring that PHH face a penalty for kickbacks on mortgages that closed on or after July 21, 2008 – three years before the CFPB took over RESPA enforcement from the U.S. Department of Housing and Urban Development – the firm should be penalized for each payment it received after that date, regardless of when the mortgage had closed.

Mr. Cordray based his decision on the way mortgage reinsurance premiums are paid. Thus, rather than coming as a onetime payment at the closing date of a mortgage, such premiums are paid by borrowers each time they make a monthly mortgage payment.

To take a line directly from Director Cordray’s opinion, “That means PHH is liable for each payment it accepted on or after July 21, 2008, even if the loan with which that payment was associated had closed prior to that date.”

Thus the penalty changed as a result of a differing reading of the law, which increased PHH’s penalty by over 1600% - from $6.4 million in Judge Elliots ruling, based on the amount borrowers paid on mortgages that closed on or after July 21, 2008 to the new penalty calculation of $109 million!

PHH appealed the decision and the D.C. Circuit put a stay on the ruling. The firm argues that the due process clause bars the government from retroactively punishing conduct that was recognized as lawful at the time.

I cover the PHH matter in considerable depth at the beginning of the webinar, bringing in salient features of the dispute, and at the end of the webinar I provide three synopses regarding the implications of the Bureau’s position and actions with respect to Marketing Services Agreements.

Webinar Registration Link

Court Rules: RESPA “Unconstitutionally Vague”

A U.S. District Court judge concluded that Policy Statement 1996-2, in which HUD set forth factors to aid in determining whether an affiliated business arrangement is a bona fide provider of settlement services under the Real Estate Settlement Procedures Act (RESPA), is "unconstitutionally vague."

We have been tracking this litigation for some time, due to its importance. In our February 4, 2009 Advisory Letter, "Section 8 and AfBAs-Private Right of Action w/o Concrete Injury," we provided a brief outline of the Federal Appeals Court ruling of January 23, 2009, which held that a plaintiff has standing to bring a RESPA claim, even if there is no concrete injury.

• The Plaintiffs-Appellants, Edward and Whitney Carter (Carter), brought a RESPA claim alleging that Chicago Title Insurance Company (Chicago Title) was improperly splitting fees with other service providers in exchange for referrals. Settlement service provider Welles-Bowen Realty (WB Realty), a realty agent, was owned by Chicago Title and Welles-Bowen Investors, LLC (WB Investors). Chicago Title owned 51.1% and WB Realty owned 49.9% of Welles-Bowen Title Agency, LLC (WB Title).

The heart of the case pertained to this issue: whether a plaintiff must allege a concrete injury, such as an overcharge, in order to have standing for a RESPA violation.

• In the January 23, 2009 decision, the Sixth Circuit ruled that a plaintiff has a statutorily-authorized private right of action under the Real Estate Settlement Procedures Act (RESPA) and constitutional standing to sue, despite failing to allege that there was an overcharge for any settlement service.

• The Carter's allegation that they were injured by the deprivation of a right conferred by RESPA was upheld, because the Court determined that the statute creates an individual right to receive referral services untainted by kickbacks or fee-splitting.

By alleging that the sole purpose for the creation of WB Title was to enable Chicago Title to provide kickbacks to WB Realty in exchange for referrals (i.e., violating sections 8 (a) and 8 (b) of RESPA [12 USC §2607 (a)-(b)] - and that the Carters themselves received a referral from WB Realty - the Court ruled that the Carters had adequately demonstrated that their own RESPA rights were violated.

On June 30, 2010, in a ruling on a consolidated case, the U.S. District Court held that U.S. Department of Housing and Urban Development's (HUD) Policy Statement 1996-2, "Policy Statement on Sham Controlled Business Arrangements," in which HUD set forth ten factors to aid in determining whether an affiliated business arrangement is a bona fide provider of settlement services under RESPA, is "unconstitutionally vague."

• Plaintiffs again contended that the real estate firms' partial ownership of the affiliated business arrangements from which plaintiffs purchased their title insurance violated RESPA's anti-kickback provision. Defendants asserted in a summary judgment motion that the statutory exception for affiliated business arrangements barred plaintiffs' claims.

• In response, plaintiffs argued that an affiliated business arrangement must be a bona fide provider of settlement services in order to take advantage of this exception, an inquiry typically determined by apply a ten-factor test set forth in the Policy Statement.

The court, however, has declined to apply that test, concluding that it raised serious constitutional concerns. By employing broad terms such as "sufficient," "substantial," and "reasonable" without providing guidance as to how to determine the meaning of such terms in the context of the title insurance business, the court noted that the Policy Statement 1996-2 invited a highly subjective evaluation.

Furthermore, according to the court, HUD's Policy Statement 1996-2 providing that the ten factors be considered together required further subjective judgments, because the directive provided no guidance as to how many factors would be determinative, or how much weight was to be given to the individual factors. As a result, the court concluded that the regulation did not contain sufficient detail to prevent arbitrary enforcement and to give notice of what an individual must do to comply with the Policy Statement, and instead applied the terms of the statute itself.

After concluding that no violation of the anti-kickback provision had occurred, the court entered summary judgment for the defendants.

The Affiliated Business Arrangement (AfBA), when properly structured, is a RESPA-compatible means to developing strategic alliances between certain settlement service providers.

Comprehensive planning and implementation are necessary to satisfy current RESPA requirements and HUD's specified guidelines in order to satisfy a "safe harbor" test.

If you have any questions about this matter or would like assistance with mortgage compliance, please contact Jonathan Foxx, Managing Director or call 516-442-3456 x 100.

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Carter v. Wells-Bowen Realty, Inc.
No. 3:05 CV 7427 (N.D. Ohio June 30, 2010)

RESPA: KICKBACKS - INTERPRETIVE RULE

Overview

The National Association of Realtors asked the Department of Housing and Urban Development (HUD) for clarification on an unofficial staff interpretation HUD had issued on February 21, 2008. In that interpretation, HUD's Office of General Counsel opined that services performed by real estate brokers and agents on behalf of a home warranty company (HWC) are compensable as additional settlement services if the services are actual, necessary and distinct from the primary services provided by the real estate broker or agent [See 24 CFR 3500.14(g)(3)], and allowed that the real estate broker or agent may accept a portion of the charge for the homeowner warranty only if the broker or agent provides services that are not nominal and for which there is not a duplicative charge. [See 24 CFR 3500.14(c)]

In today's Federal Register, HUD's Office of General Counsel has published an Interpretive Rule which interprets Section 8 of the Real Estate Settlement Procedures Act (RESPA) and HUD's regulations as they apply to the compensation provided by home warranty companies to real estate brokers and agents. An interpretive rules is exempt from public comment under the Administrative Procedure Act; however, HUD is providing a public comment period, commencing today and continuing to July 26, 2010.

HUD's Interpretive Rule holds that an HWC's compensation of a real estate broker or agent for marketing services that are directed to particular homebuyers or sellers would be a payment that violates Section 8 of RESPA as an illegal kickback for a referral of settlement service business. This obviously upholds HUD's historic view that a referral is not a compensable service for which a broker or agent may receive compensation.

However, on a case-by-case basis, compensation may be permissible when the services provided are actual, necessary, and distinct from the primary services provided by the real estate broker or agent, and when those additional services are not nominal and for which there is a duplicative charge.

The amount of the compensation from an HWC that is permitted under Section 8 for such additional services must be reasonably related to the value of those services and not include compensation for referrals of business, pursuant to the guidelines offered in HUD's Statement of Policy 1999-1. HUD provides several examples that would not constitute an illegal kickback.

Highlights

Interpretive Rule (1) A payment by an HWC for marketing services performed by real estate brokers or agents on behalf of the HWC that are directed to particular homebuyers or sellers is an illegal kickback for a referral under Section 8 of RESPA. (2) Depending upon the facts of a particular case, an HWC may compensate a real estate broker or agent for services when those services are actual, necessary and distinct from the primary services provided by the real estate broker or agent, and when those additional services are not nominal and are not services for which there is a duplicative charge. (3) The amount of compensation from the HWC that is permitted under section 8 for such additional services must be reasonably related to the value of those services and not include compensation for referrals of business.

Examples of Permissible Compensation To evaluate whether a payment from an HWC is an unlawful kickback for a referral, HUD may look in the first instance to whether, among other things: The compensation for the HWC services provided by the real estate broker or agent is contingent on an arrangement that prohibits the real estate broker or agent from performing services for other HWC companies (i.e., if a real estate broker or agent is compensated for performing HWC services for only one company, this is evidence that the compensation may be contingent on such an arrangements). Payments to real estate brokers or agents by the HWC are based on, or adjusted in future agreements according to, the number of transactions referred. If it is subsequently determined, however, that the payment at issue is for only compensable services, the existence of such arrangements and agreements would not be an indicator of an unlawful referral arrangement, and would be permissible.

Pricing the Compensation In analyzing whether a particular payment or fee bears a "reasonable relationship to the value of the goods or facilities actually furnished or services actually performed," payments must be commensurate with that amount normally charged for similar services, goods or facilities. If the payment or a portion thereof bears no reasonable relationship to the market value of the goods, facilities or services provided, the excess over the market rate may be used as evidence of a compensated referral or an unearned fee in violation of Section 8(a) or (b) of RESPA. [See 24 CFR 3500.14(g)(2)] The market price used to determine whether a particular payment meets the reasonableness test may not include a referral fee or unearned fee, because such fees are prohibited by RESPA.

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Home Warranty Companies’
Payments to Real Estate Brokers and Agents - Interpretive Rule
RESPA: 24 CFR Part 3500 FR: Vol. 75, No. 122, 36271-36273 (06/25/10)