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Cutting Through the Constitutionality Haze in the Battle Between PHH Corporation and the Consumer Financial Protection Bureau

Blog: Consumer Financial Protection Bureau

May 19, 2016

So much has been written in recent weeks about the battle between PHH Corporation and the Consumer Financial Protection Bureau in the U.S. Court of Appeals for the D.C. Circuit.  The panel heard oral argument on April 12, 2016 and, not surprisingly, the issue getting all the attention is PHH’s challenge to the constitutionality of the CFPB’s structure.  Even though a ruling isn’t expected until late in the year, the stakes seem awfully high, right?  Perhaps.  Couple of quick points to keep things in perspective:  1) There is nothing new about challenges to the CFPB’s constitutionality – this issue has been raised before in litigation involving the CFPB and through legislation with an eye toward curbing the CFPB’s power; 2) no matter what, the panel is not going to issue a broad, sweeping ruling that the CFPB is--in and of itself--unconstitutional. PHH hasn’t even made this type of broad, sweeping assertion (that the CFPB is unconstitutional).  Rather, PHH has taken aim at the top of the CFPB’s structure, saying that the CFPB’s leadership structure does not pass constitutional separation of the powers muster because the CFPB is headed by a single director who is removable only for cause (I mention this only because I’ve seen headlines saying the CFPB’s very constitutionality is being challenged). 

While this whole business of the constitutionality of the CFPB--some would have you believe its very existence is at stake–has stoked such drama, what I want to do in this post is address the original, underlying—and much more prosaic—issues that are “at issue” in the PHH case.  And that is 1) alleged violations by PHH of the Real Estate Settlement Procedures Act (“RESPA”) which, generally speaking, prohibits kickbacks in the mortgage settlement services business, and 2) Section 8(c) of RESPA – the “Safe Harbor” provision under RESPA.  Because, after all, the CFPB’s case against PHH is based on alleged RESPA violations by PHH, and PHH’s primary defense is that PHH’s actions fell within Section 8(c)(2) of the safe harbor provision of RESPA.  My simplistic explanation of this safe harbor provision is intended for those outside the compliance world, so if you work in compliance or regularly advise lenders on compliance issues, this is going to be basic stuff for you--RESPA 101.

Let’s start with some quick background on the Real Estate Settlement Procedures Act (RESPA).  RESPA was passed by Congress in 1974 and is codified at Title 12, Chapter 27 of the United States Code.[1]  RESPA is aimed at the consumer/residential real estate mortgage industry (for federally related mortgage loans), and it has two principal objectives:

  • to require disclosures in the consumer mortgage transaction process so the buyer/borrower is aware of what he/she is paying for and can therefore make more informed choices; and
  • to prohibit those involved in the real estate settlement services industry (such as lenders, real estate agents, settlement companies, title insurance companies, mortgage insurance companies, etc.) from engaging in kickbacks in exchange for referrals.

As a quick aside, originally, Congress gave the Department of Housing and Urban Development (“HUD”) authority to regulate under RESPA, and HUD promulgated the corresponding regulations known as Regulation X. This explains why you have perhaps heard the term “Reg X” as shorthand for RESPA.  The Dodd–Frank Wall Street Reform and Consumer Protection Act transferred the regulatory authority of RESPA from HUD to the CFPB, “and the CFPB later republished Regulation X without material changes.”[2]    But the point to be made is that it is now the CFPB (since 2010), not HUD, that has regulatory and rule-making authority of RESPA.

OK, back to the purpose of RESPA.  As to that second prong noted above—about prohibitions against kickbacks in exchange for referrals—this is found in Section 8 of RESPA.  To break Section 8 down a little further, Section 8(a) says, very awkwardly I might add, that “[n]o person shall give and no person shall accept 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.”[3] And Section 8(b) says “[n]o 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.”[4]

The historical impetus behind the rather inflated language in Sections 8(a) and (b) is that, prior to the passage of RESPA in the 70s, there was a concern that people and companies who were involved in the business of buying and selling residential real estate (again--lenders, real estate agents, settlement service companies, title insurance companies, mortgage insurance providers) were sometimes engaging in providing undisclosed kickbacks to each other, inflating the costs of real estate transactions and obscuring price competition.  So RESPA was conceived.  In its most basic form, RESPA says that if you’re in the business of providing real estate settlement services within the context of consumer/residential real estate and mortgage transactions, you can’t exchange kickbacks for referrals. 

Now, to offset the rigid application of Sections 8(a) and (b), Congress provided some maneuvering room in Section 8(c).  Section 8(c), which is considerably longer than Sections 8(a) and 8(b), softens Sections 8(a) and 8(b) by listing conduct and activities which are not prohibited, that fall within the “Safe Harbor,” assuming certain conditions and disclosure requirements are complied with.  Section 8(c) is broken down into multiple subsections, 1-5, which in turn are broken down into further subsections.  Section 8(c) provides in part as follows [emphasis added]:

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, (3) payments pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and brokers, (4) affiliated business arrangements so long as (A) a disclosure is made of the existence of such an arrangement to the person being referred and, in connection with such referral, such person is provided a written estimate of the charge or range of charges generally made by the provider to which the person is referred…(B) such person is not required to use any particular provider of settlement services…[5]

OK, the above language should give you the general idea:  1) referrals are OK if services in connection with the referral are actually provided, 2) a disclosure is provided to the consumer regarding the referral, 3) an estimate of the charge in connection with the referral is provided to the consumer, and 4) the consumer is not required to use the referred services. 

As for Section Section 8(c)(2) specifically, which is at issue in the PHH case (refer to the highlighted language above), the Ninth Circuit in Edwards v. First American Corporation summed up this subsection of the safe harbor provision as follows:

RESPA defines a “thing of value” broadly to include “any payment, advance, funds, loan, service, or other consideration.” Courts commonly find a violation of § 2607(a) when (1) a payment or thing of value was exchanged, (2) pursuant to an agreement to refer settlement business, and (3) there was an actual referral...Notwithstanding the general prohibition of exchanging anything of value for a referral, a statutory safe harbor exempts a payment from RESPA violation if the payment—despite being made simultaneously with a referral—was “for goods or facilities actually furnished or for services actually performed.”[6]

So the Ninth Circuit’s explanation is good for driving home the point that there’s a safe harbor for “goods or facilities actually furnished or for services actually performed” – in other words, the goods or services provided in connection with the referral were actually provided or performed.  Again, if you focus on the highlighted language of Section 8(c) above, you should get the general idea.  But keep in mind that, in addition to actually providing the goods or services, the required disclosure requirements highlighted above must be complied with.

Here are a few examples of how this situation works in the real world (or doesn’t work if done incorrectly according to the CFPB):  

In 2014, the CFPB brought an enforcement action against RealtySouth, an Alabama real estate brokerage, which supposedly had encouraged its agents to use TitleSouth – an affiliate of RealtySouth – which provides title examinations and title insurance, without providing full and adequate disclosure to the borrowers.  RealtySouth argued that this referral arrangement was OK, that it fell within the affiliated business arrangements safe harbor because RealtySouth’s standard form contract included a blanket disclosure statement.  The CFPB disagreed, saying that RealtySouth’s disclosure statement was not sufficient, that it “did not use capital letters or another means of highlighting the fact that consumers could obtain similar settlement services from other providers and that they were free to show around for those services.”[7]  Ultimately, a settlement was reached with RealthSouth having to shell out $500,000.00 without admitted wrongdoing. 

In 2014, the CFPB also went after New Jersey based title services company, Stonebridge Title Services, Inc. for, according to the CFPB’s press release, allegedly paying “commissions to more than twenty independent salespeople who referred title insurance business to Stonebridge.”[8]  According to the CFPB, “Stonebridge solicited people to provide it with referrals of title insurance business, offering to pay commissions of up to 40% of the title insurance premiums Stonebridge itself received. These practices violated Section 8 of the Real Estate Settlement Procedures Act (RESPA), which prohibits kickbacks and payment of unearned fees in the context of residential real estate transactions.”[9] In this case, Stonebridge agreed to a consent order that required it to pay a penalty to the CFPB.

One can log into the CFPB’s enforcement action web page to review the CFPB’s other cases involving purported RESPA violations.[10]  One thing is clear: the CFPB hasn’t been sitting on its hands when it comes to pursuing purported RESPA violations.

OK, as for PHH case, in January 2014, the CFPB filed a notice of charges alleging that

PHH had engaged in a “mortgage insurance kickback scheme that started as early as 1995…that when PHH originated mortgages, it referred consumers to mortgage insurers with which it partnered. In exchange for this referral, these insurers purchased “reinsurance” from PHH’s subsidiaries…PHH took the reinsurance fees as kickbacks, in violation of RESPA. The CFPB alleges that because of PHH’s scheme, consumers ended up paying more in mortgage insurance premiums. ”[11]  The case was initially litigated before an administrative law judge, then before the CFPB’s director, Richard Cordray.  PHH lost before both which, some might quip, doesn’t come as a huge surprise.  While the administrative law judge ordered PHH to pay $6.4 million in disgorgement, Mr. Cordray upped that amount to $109 million.  Mind you, according to the CFPB, Mr. Cordray’s $109 million figure is supposed to represent disgorgement as well, not an arbitrary figure from thin air (the CFPB’s calculations for this disgorgement amount are in his 6/4/15 decision).[12]  So constitutionality aside, here’s an amount that’s worth fighting about.  That led PHH to appeal Mr. Cordray’s decision to the U.S. Court of Appeals to for the D.C. Circuit last year, which brings us to the big headlines last month in connection with oral arguments before the panel. 

So, yes, PHH’s appeal is based in part on its position that too much power is concentrated in the hands of the CFPB’s sole director.  But PHH’s opposition to the CFPB’s motion for summary disposition, filed two years ago, clearly raises Section 8(c), noting that RESPA does not in blanket fashion prohibit all payments made in connection with referrals (which, as we know, is correct assuming the conditions under 8(c) are complied with), stating “RESPA absolutely contemplates that there will be referrals in connection with the provision of real estate settlement services.”[13] PHH then makes reference to an informal guidance letter addressing captive reinsurance arrangements issued by HUD in 1997 when HUD was responsible for RESPA enforcement, arguing as follows:

Further, as it specifically relates to the captive reinsurance arrangements at issue here, in 1997, HUD, the agency previously responsible for RESPA enforcement, issued guidance in the form of an informal letter. See Letter from Nicolas P. Retsinas, Assistant Secretary for Housing Federal Housing Commissioner, to Sandor Samuels, General Counsel of Countrywide Funding Corporation (Aug. 6, 1997) (“HUD Letter”)…HUD acknowledged in its guidance that a captive reinsurance arrangement will result in the lender “ha[ving] a financial interest in having the primary insurer in the captive reinsurance program selected to provide the mortgage insurance.” ... Yet, HUD specifically allowed lenders to enter into such arrangements as long as the payments to the reinsurer “(1) are for reinsurance services ‘actually furnished or for services performed’ and (2) are bona fide compensation that does not exceed the value of such services.” HUD Letter at 3. Simply stated, HUD recognized the potential incentive to use the primary MI with which there was a reinsurance arrangement. Critically, HUD placed no limitation on a…lender’s use of one or more MIs under such circumstances. Indeed, if HUD had wanted to prohibit captive arrangements pursuant to its authority under RESPA, it had the opportunity to do so in 1997, but it did not.[14]

In addition, there’s a big argument over the application of RESPA’s three year statute of limitation for enforcement actions (keep in mind that the CFPB said the mortgage insurance kickback scheme started as early as 1995).  The CFPB has argued that the 3 year SOL does not apply to administrative proceedings, just to actions brought in court.  Hmmmm.  Of the handful of issues being bandied about in this case, that’s a pretty significant one—do we really not have established law on this point?

Here are a few things to keep in mind regarding the PHH case:  1) It’s one thing for PHH to argue that the CFPB’s leadership structure does not pass constitutional muster (and, hence, the decision emanating from Director Cordray in June 2015 is void).  2)  And it’s another thing for PHH to assert the affirmative defense of the RESPA 3 year statute of limitation.  Presumably a 3 year SOL would reign in the disgorgement amount considerably (if PHH’s constitutionality argument doesn’t fly).  3)  All that said, it’s still quite another thing for PHH to successfully argue that its actions fell within the Section 8(c)(2) safe harbor provision of RESPA.  Because even if PHH prevails in its arguments that CFPB’s leadership structure does not pass constitutional muster, and prevails on the argument that the RESPA 3 year statute of limitation applies, I’m assuming everyone understands that doesn’t get PHH off the hook entirely.  At some point, PHH is still going to have to show that any of the complained of actions which don’t fall outside of the 3 year statute of limitations do fit within Section 8(c) and PHH provided all required disclosures.  CFPB losing on the constitutionality argument would not automatically translate into there being no RESPA violations on the part of PHH.  If I’m wrong about that, things will get really interesting indeed.

[1] 12 U.S.C. §§ 2601–2617

[2] Edwards v. First Am. Corp., 798 F.3d 1172, 1179 (9th Cir. 2015) cert. dismissed sub nom. First Am. Fin. Corp. v. Edwards, 15-1114, 2016 WL 866426 (U.S. Apr. 4, 2016)

[3] 12 U.S.C. § 2607(a)

[4] 12 U.S.C. § 2607(b)

[5] 12 U.S.C. § 2607(c)

[6] Edwards v. First Am. Corp., 798 F.3d 1172, 1178-79 (9th Cir. 2015) cert. dismissed sub nom. First Am. Fin. Corp. v. Edwards, 15-1114, 2016 WL 866426 (U.S. Apr. 4, 2016)

[8] Link to the Bureau’s Press Release for the Stonebridge Title Services case:

[9] Id.

[10] Link to the Bureaus’ webpage for all enforcement actions:

[11] Link to the Bureau’s 1/29/14 Press Release regarding the PHH Corporation case:

[12] Link to copy of Director Cordray’s 6/4/15 decision in the PHH case:

[13] Link to copy of PHH’s 5/5/2014 Opposition to Enforcement Counsel’s Motion for Summary Disposition as to Liability:

[14] Id.