CFPB Reversed on RESPA

Read the full decision: PHH Corp. V. Consumer Fin. Prot. Bureau

The United States Court of Appeals for the D.C. Circuit, sitting en banc, has upheld an earlier decision that the Consumer Financial Protection Bureau had incorrectly rejected a long-standing RESPA interpretation that payments between settlement service providers are permissible so long as those payments are for goods or services actually provided and are for fair market value.

The CFPB brought an enforcement action against PHH Corp. (“PHH”) for violations of RESPA for claiming that PHH received kickbacks in exchange for referrals. PHH was a mortgage lender, and it allegedly received kickback payments from mortgage insurers through policies issued by PHH’s reinsurance subsidiary, Atrium. The allegations centered on evidence allegedly showing that PHH referred substantially more business to insurers who purchased reinsurance through Atrium and also that the premiums received by Atrium did not equal the risk being insured.

The CFPB filed an enforcement action against PHH, and the administrative law judge ruled that many of the mortgage reinsurance premiums received by PHH constituted illegal kickbacks paid in exchange for the referral of mortgage insurance business by PHH. Both parties appealed this ruling to the Director of the CFPB, Richard Cordray. Director Cordray found that section 8(c)(2) of RESPA does not automatically shield fair market value payments to other settlement service providers because if the payments are seeking future referrals, the payments are not “bona fide.” PHH appealed to the D.C. Circuit.

Section 8(a) prohibits payments for the referral of settlement services. Section 8(c)(2) provides a safe harbor, stating that “[n]othing in [section 8] shall be construed as prohibiting…the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or services actually performed.” Through an interpretative letter reviewing a captive insurance structure, the Department of Housing and Urban Development (“HUD”) stated that section 8(c)(2) can provide an affirmative defense if the service is actually provided and the price reflects the actual cost of the service; however, if the reinsurer is being given a thing of value simply to obtain more referrals from the primary insurer, RESPA is violated.

A three-judge panel for the D.C. Circuit rejected the CFPB’s interpretation of section 8(c)(2). The court found that the CFPB’s interpretation was not supported by the statutory language and constituted a departure from long standing interpretations by HUD without notice, violating PHH’s due process rights. The court found that section 8(c) allowed transactions between settlement service providers so long as the services were provided and the payments were for fair market value. The court rejected the CFPB’s proposed interpretation that the payments did not qualify for the safe harbor because they were not “bona fide.” The court also ruled that CFPB’s structure was unconstitutional, as the Director could only be removed for cause by the President and so the structure violated the separation of powers.

The CFPB sought a hearing of the entire D.C. Circuit. The court granted the en banc hearing, vacating the prior opinion and directing the parties to answer specific questions about the constitutionality of the CFPB’s structure.

Sitting en banc, the Court of Appeals for the D.C. Circuit upheld the panel’s RESPA interpretation but rejected the panel’s determination that the structure of the CFPB was unconstitutional. Regarding the RESPA issues, the majority simply reinstated the panel’s reversal of the CFPB’s RESPA interpretation in a single sentence. The remainder of the opinion considered whether the structure of the CFPB was constitutional.

The majority opinion determined that the CFPB’s structure was constitutional, finding that “for-cause” removal by the President gave the CFPB director independence while also giving the President ample oversight authority. One concurring opinion agreed that the CFPB had violated due process by not providing notice of its new RESPA interpretations, but also believed that the court was required to defer to the agency’s new interpretations of RESPA. Two other judges wrote concurring opinions supporting the upholding of the CFPB’s structure, while three judges wrote dissenting opinions arguing that the CFPB’s structure was unconstitutional. Thus, the case was sent back to the CFPB for further proceedings.

PHH Corp. v. Consumer Fin. Prot. Bureau, 881 F.3d 75 (D.C. Cir. 2018).