Locke Lord QuickStudy: Debilitating Uncertainty Highlights CFPB RESPA Enforcement

Since certain regulatory and enforcement authority transferred from the Department of Housing and Urban Development (HUD) to the Consumer Financial Protection Bureau (CFPB) in 2011, the CFPB has become increasingly active in bringing enforcement actions alleging violations of section 8 of the Real Estate Settlement Procedures Act (RESPA). Indeed, two recent enforcement actions highlight this trend. However, these two cases also demonstrate a troubling divergence from HUD precedent in this area. 

Section 8(a) of RESPA prohibits giving or accepting “any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” However, section 8(c)(2) provides “[n]othing in this section [8] shall be construed as prohibiting the payment of bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.” Until recently, due to previous HUD interpretations, the settlement services industry generally understood Section 8(c)(2) as providing an exemption from liability under Section 8(a). The following two cases challenge this understanding.

In the first case, Lighthouse Title, which focused on the use of marketing services agreements (MSAs) and was decided in the fall of 2014, the CFPB made headlines by explicitly stating in the order that “[e]ntering a contract is a “thing of value” within the meaning of Section 8, even if the fees paid under that contract are fair market value for the goods or services provided.” The order further notes that “[e]ntering a contract with the agreement or understanding that in exchange the counterparty will refer settlement services related to federally related mortgage loans violates Section 8(a).” See paragraphs 20 and 21 of the Lighthouse Title Consent Order, 2014–CFPB-0015. These assertions appear to be contrary to previous HUD interpretations and guidance. The perspective now appears to be that the 8(c)(2) exception cannot be relied on if there also are referrals pursuant to an agreement or understanding.

Perhaps even more troubling to the settlement services industry is the CFPB Director’s decision in the case of PHH Corporation (PHH). In the Decision of the Director, released in early June 2015, CFPB Director Cordray reiterated to the settlement services industry that previously relied upon HUD Section 8 guidance is open to new (his) interpretation. Most significantly, the decision concludes that the CFPB does not believe that Section 8(c)(2) of RESPA provides and exception to Section 8(a) of RESPA. This perspective is contrary to the Administrative Law Judge’s interpretation of a 1997 letter issued by HUD which applies Section 8(c)(2) as an exception to Section 8(a). That said, there will be more to come as the D.C. Circuit Court issued a stay against the $109 million penalty issued by the CFPB against PHH just last week.

Given the possibility of criminal penalties for violating RESPA, these recent enforcement actions have put the settlement services industry in a holding pattern until more clarity is provided by the CFPB. The industry thought that the previous HUD guidance provided the necessary authority to proceed with reasonable business arrangements for the last two decades, but the CFPB clearly disagrees. These CFPB decisions offer cautionary tales and a debilitating level of uncertainty. 

Perhaps that’s what the CFPB wants. Perhaps there is such an unreasonable amount of harm to consumers where any referral for settlement service business is involved, whether paid for or not, such that the CFPB is determined to put a stop to it. However, if that is the case, then that needs to be made explicitly clear in a formal, unequivocally authoritative CFPB rulemaking. The CFPB has the authority to interpret the RESPA statute. They should do so formally, not through enforcement actions. 

Locke Lord has a dedicated team of compliance and litigation attorneys who have significant experience handling various aspects of consumer finance. Locke Lord attorneys regularly advise financial institutions on regulatory compliance matters, new product development and represent clients in regulatory enforcement matters, class actions and various lawsuits in the U.S. and abroad. Visit Locke Lord’s Consumer Finance Regulatory Practice Group website or contact the author with questions.