- PHH was victorious in the latest ruling about its captive reinsurance program, but captive reinsurance is not a marketing services agreement.
- Although real estate professionals can view the court's decision as a win for the industry, they should still approach MSAs with caution, say experts.
A federal court’s recent decision in Consumer Financial Protection Bureau (CFPB) v. PHH Corp. has some in the real estate, mortgage and settlement services industries breathing a little easier about Real Estate Settlement Procedures Act (RESPA) compliance concerns.
But don’t get too comfortable with resuming or starting new affiliated business activities just yet.
The Oct. 11 decision in the two-year court battle may have renounced the CFPB’s interpretation of RESPA — widely criticized as “overly broad” and contrary to federal regulator guidance and case law — in this case, but the bureau has vowed to appeal the U.S. Court of Appeals for the District of Columbia’s decision while affirming its firm RESPA stance.
‘Not final at this point’
“The case is not final at this point,” CFPB Director Richard Cordray told the Mortgage Bankers Association (MBA) on Oct. 25 at the trade group’s Annual Convention & Expo in Boston. “The bureau has made clear that it respectfully disagrees with the panel’s decision and is considering its options for seeking further review.
“In the meantime, we will continue to consider how best to apply RESPA to specific factual situations just as we always do.”
The real estate industry, however, views the decision a bit differently, especially when it comes to the CFPB’s ongoing full-scale RESPA attack on marketing service agreements (MSAs) between real estate brokers, lenders and settlement service providers. These agreements typically involve an exchange of services between companies — for example, a broker and a lender might refer business to each other as “preferred partners.”
“Today’s decision offers much-needed clarity on the legality of marketing service agreements, and makes clear that MSAs are compliant with RESPA provided that payment for goods and services actually furnished or performed are made at fair market value,” said Tom Salomone, president of the National Association of Realtors (NAR), shortly after the court released its opinion.
But the captive reinsurance agreements at issue in the PHH case were not MSAs, and the court’s decision may not be the last word in this ongoing tug-of-war over RESPA’s anti-kickback provisions.
Here’s how NAR made that leap and what real estate agents and brokers should be mindful of if they are going to pursue affiliated business activities in a heightened legal and regulatory environment.
20-year RESPA battle comes to a head
CFPB v. PHH put the New Jersey-based lender in the hot seat over agreements that it set up with mortgage reinsurance companies as far back as 1994.
At that time, PHH was among many lenders that began setting up captive reinsurance subsidiaries to assume a portion of the insurance premium and risk on loans they originated — much to the chagrin of some regulators, who raised questions about whether such agreements violated RESPA’s anti-kickback provisions.
Some of those regulator questions persisted even after the CFPB took over RESPA enforcement duties from the Department of Housing and Urban Development (HUD) in 2011 and the bureau inherited some of HUD’s captive reinsurance investigations.
In January 2014, the CFPB filed a notice of charges, alleging that when PHH originated mortgages, it illegally referred consumers to its mortgage reinsurer partners, some of whom HUD and the bureau had already taken action against for allegedly violating RESPA.
The bureau further alleged that PHH took reinsurance fees as kickbacks in violation of RESPA and drove up the cost of mortgage insurance premiums for consumers.
Although many companies elect to settle these kinds of cases with the CFPB to avoid protracted, expensive litigation and reputational damage, PHH’s team of nationally recognized RESPA attorneys was quick to strike back, attacking the bureau’s broad interpretation of RESPA, its use of administrative law proceedings to skirt RESPA’s legal statute of limitations and its single-director structure.
Nevertheless, CFPB Director Richard Cordray sought a $109-million penalty against PHH while at the same time publicly putting RESPA Section 8 under a microscope to examine what the statute has to say about how real estate brokers, mortgage lenders, title companies and others can work together in a legally compliant way.
PHH argued in court that the CFPB’s application of RESPA contradicted guidance put forth by HUD that has governed industry practice for about 20 years, even as the CFPB used the same provisions of RESPA to initiate several enforcement actions against companies engaged in MSAs — in some cases going so far as to declare them “sham arrangements.”
“Any agreement that entails exchanging a thing of value for referrals of settlement service business likely violates federal law, regardless of whether a marketing services agreement is part of the transaction,” the CFPB said in a controversial October 2015 guidance bulletin.
From captive reinsurance to MSAs: How the PHH decision applies to both
Although the court’s decision in CFPB v. PHH pertained to mortgage reinsurance practices specifically, the court analyzed the same RESPA interpretations that the CFPB has used in its MSA enforcement actions.
The bureau stated in the October 2015 bulletin that “MSAs are usually framed as payments for advertising or promotional services, but in some cases, the payments are actually disguised compensation for referrals.”
The bureau went on to proclaim: “Any agreement that entails exchanging a thing of value for referrals of settlement service business involving a federally related mortgage loan likely violates RESPA, whether or not an MSA or some related arrangement is part of the transaction.”
“The court held that PHH’s reinsurance agreements were not unlawful based on the CFPB’s reasoning, which was the same reasoning the bureau used when it said MSAs were unlawful under the same conditions,” said Ralph Holmen, associate general counsel for NAR.
“PHH argued that RESPA Section 8(c)2’s exemptions rendered its agreements lawful, as long as it can prove that it provided bona-fide services at fair-market value. That is the same RESPA provision that applies to MSAs.”
The decision tracks the original intent of the RESPA statute and HUD’s “1997 letter” — which still, despite the court’s decision, conflict with the CFPB’s interpretation, Holmen said.
“The CFPB has declined to say MSAs are outright unlawful, while at the same time saying that MSAs are not possible to make lawful — and that’s kind of saying two things at once,” he said. “But to the extent that the CFPB decides to seek an enforcement action against a broker engaging in an MSA, and the broker can show that they were offering bona-fide services at market rates, if you follow this decision, that MSA would not be illegal.”
If that seems confusing, that’s because it is, and although real estate professionals can view the court’s decision as a win for the industry, they should still approach MSAs with caution, said Ken Trepeta, executive director of the Real Estate Services Providers Council Inc. (RESPRO), a national, nonprofit trade association that promotes RESPA-compliant affiliated services.
“PHH is a broad victory, not necessarily directly related to MSAs, but for RESPA Section 8(c) exemptions, which the CFPB has had under a microscope almost since its inception. It certainly ratified the common understanding of 8(c) exemptions that people have been operating under for decades,” Trepeta said.
“But while we feel the court’s reasoning on the RESPA issues in this case was solid, it’s not the final say in the matter. The CFPB is very likely to appeal.”
What’s more, “this is one decision from one circuit court,” Trepeta noted.
“If I’m doing business in a circuit that hasn’t opined on this, I’m still being cautious,” he said. “Do you really want to poke the bear by going too far afield or thumbing your nose at the CFPB? It’s not a good idea.”
RESPA Section 8: The anti-kickback law of the land
Much of the RESPA statute may seem arcane to most real estate professionals, as many of its provisions fall more on the settlement services side of the mortgage transaction.
However, RESPA Section 8 is required reading for any real estate entity that decides to align in some way with a mortgage or settlement service partner.
Section 8(a) of RESPA prohibits anyone from giving or accepting a fee, kickback or anything of value in exchange for referrals of settlement service business involving a federally related mortgage loan.
In addition, RESPA Section 8(b) prohibits fee splitting and receiving unearned fees for services not actually performed.
However, RESPA Section 8(c) also contains some “safe harbors” for certain activities that are considered permissible, including:
- Fees for services actually performed by attorneys, title company agents or lender agents
- Salaries, compensation or other payment for goods or facilities actually furnished or for services actually performed
- Payments pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and brokers
- Affiliated business arrangements that meet the following qualifications:
- “(A) a disclosure is made of the existence of such an arrangement … [and] a written estimate of the charge or range of charges” is provided
- (B) use of the affiliated entity is not required (except for “the services of an attorney, credit reporting agency, or real estate appraiser chosen by the lender”)
- (C) “the only thing of value that is received from the arrangement, other than the payments permitted under this subsection, is a return on the ownership interest or franchise relationship”
Amidst questions swirling around whether these exemptions applied to mortgage reinsurers, several reinsurance companies in 1997 asked HUD to weigh in on the matter.
HUD’s response, in what has come to be known as “the 1997 letter,” stated that “So long as payments for reinsurance under captive reinsurance arrangements are solely ‘payment for goods or facilities actually furnished or for services actually performed,’ these arrangements are permissible under RESPA Section 8 (c)(2).”
The 1997 letter came to be accepted by the industry as formal guidance and dictated captive reinsurance arrangements from then on.
PHH argued that its reinsurance agreements met these safe-harbor exemptions and complied with HUD’s 1997 letter — but the CFPB countered that the letter was not, in fact, formal guidance because it was never published in the Federal Register.
Ultimately, the D.C. Circuit Court of Appeals sided with PHH, ruling that captive reinsurance is, in fact, permissible under RESPA, as long as reinsurance charges do not exceed fair market value.
So what next?
Holmen said the PHH decision has made some brokers more comfortable with the idea of engaging in MSAs — even as some of the nation’s largest mortgage lenders have publicly announced their exit from them — but he agreed with Trepeta that this court’s decision “is not necessarily ironclad.”
“This wasn’t the Supreme Court weighing in on RESPA,” Holmen said. “So we are advising our members to make sure they do two critical things to make sure they satisfy the conditions for a lawful MSA: Make sure you are providing bona-fide services to your partner, and make sure those services are rendered at actual, fair-market value.”
As RESPRO prepared for an Oct. 28 webinar explaining the impact of the PHH decision, Trepeta harkened back to a list of “MSA Dos and Don’ts” that he helped NAR prepare as the association’s former director of real estate services.
The list describes many best practices to keep in mind when setting up a legally compliant MSA, including engaging an independent third party to establish the fair market value of the marketing and advertising services rendered, and ensuring that marketing fees are not tied to the volume or success of business referrals.
“This decision does not say that all MSAs are legal now,” Trepeta said.
“If you have an MSA and you provide marketing services under that agreement, those services are a legitimate exemption in RESPA Section 8(c)2. But the decision is not a green light for people to jump back into MSAs that are agreements in name only. Anyone who engages in an MSA should still approach them with extreme caution.”