CFPB Enforcement of RESPA Causing Uncertainty in the Housing Market

Ever since the Consumer Financial Protection Bureau (CFPB) took over the Department of Housing and Urban Development (HUD) in 2011, the CFPB has turned out to be progressively dynamic in bringing implementation activities claiming infringement of section 8 of the Real Estate Settlement Procedures Act (RESPA). The highlight of today’s article is two such enforcement actions, which also exhibit a troubling diversion from the earlier HUD precedents in this field.

According to Section 8(a) of the RESPA, it is forbidden to give or 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.” At the same time, 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, because of past HUD actions, the settlement administrations industry by and large comprehended Section 8(c)(2) as giving an exemption from liability under Section 8(a). The following two cases in question challenge this.

In the first case, In the Matter of Lighthouse Title (File No. 2014-CFPB-0015, decided in 2014), which concentrated on the utilization of marketing services agreements (MSAs), the CFPB made an unusual order in declaring 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 read 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).” [Refer to passages 20 and 21 of the Lighthouse Title Consent Order, 2014-CFPB-0015]. Going against the earlier HUD orders, this new decision now implies that the 8(c)(2) exemption cannot be depended on if there are additional referrals following an agreement.

Probably even more alarming is the CFPB Director’s decision in the PHH Corporation case of June 2015. Here, CFPB Director Cordray made it clear to the industry personnel that the earlier versions of HUD Section 8 direction is now open to his revised interpretations. The highlight of the decision as that CFPB does not accept that Section 8(c)(2) of RESPA provides an exception to Section 8(a) of RESPA. This point of view was directly contradictory with the Administrative Law Judge’s explanation of a 1997 letter issued by HUD which applied Section 8(c)(2) as a special case to Section 8(a). There is probably more to come as the a stay was issued by the D.C. Circuit against the $109 million penalty awarded by CFPB against PHH a week ago.

Considering the possible criminal penalties for violation of RESPA, these decisions have put the settlement services industry in a deadlock until clearer instructions are issued by the CFPB. Or maybe that is precisely what the CFPB has in mind, seeing that there is such an unreasonable risk of harm to consumers where any referral for settlement services business is included, whether paid for or not, such that the CFPB is resolved to put a stop to it. Whatever the reason, the modern day interpretation of the RESPA should be done in a formal manner and not by handing down random enforcement decisions.

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