The legal challenge by PHH Corp. (PHH) to a June 4, 2015, decision
by the director of the Consumer Financial Protection Bureau (Bureau) in connection with the Bureau’s enforcement proceeding against PHH has captivated the real estate settlement services industry. The attention is justified. Director Cordray’s ruling against PHH, which was the first appeal from a Bureau administrative trial, was shocking. The director had increased PHH’s disgorgement penalty 17-fold (from a $6.4 million penalty initially awarded to a massive $109 million), and in doing so trampled established rules and precedents for interpreting Section 8 of the Real Estate Settlement Procedures Act (RESPA). The director also declared that the Bureau is not subject to any statute of limitations if it decides to prosecute claims in its own administrative forum.
PHH’s appeal of the director’s decision to the U.S. Court of Appeals for the D.C. Circuit drew seven amicus briefs, many of them filed on behalf of industry or business associations, including one such brief by the authors of this note.[i] Amicus curiae in support of PHH collectively voiced concerns on behalf of millions of business of all sizes.
Now that a panel of judges for the D.C. Circuit has ruled and vacated the director’s decision in a resounding victory for PHH,[ii] we offer five major takeaways from the decision, notwithstanding the fact that the Bureau may yet appeal.
1. The Bureau is Not Going Anywhere and the D.C. Circuit’s PHH Decision is Unlikely to Disturb Its Prior Settlements or Cases.
Although the D.C. Circuit held that the Bureau’s unusual single-director structure is unconstitutional, the court prescribed a very narrow remedy. The court surgically removed the offending constitutional component — the authority of the president to remove the director of the Bureau only “for cause” — with the result that the president now has the power to remove the director for any reason or no reason at all. However, this remedy does not affect the Bureau’s general ability to operate. The Bureau will continue all of its functions without interruption, including supervision, examination, rulemaking, and vigorous enforcement of the 18 pre-existing federal consumer protection statutes within its purview, as well as the Bureau’s general authority to prosecute unfair, deceptive, or abusive acts and practices (UDAAP).
It is unlikely that the D.C. Circuit’s decision will upset prior Bureau consent orders or litigated judgments, even though the Bureau may have been unconstitutionally structured at the time that it acted in such matters. In 2010, for example, the U.S. Supreme Court ruled in the Free Enterprise Fund case that the Public Company Accounting Oversight Board (PCAOB) violated the U.S. Constitution’s separation of powers principle because board members were not appointed by the president.[iii] The Supreme Court ordered a similar remedy, and there was no significant fallout with respect to prior PCAOB consent orders and decisions. Here, it would seem that even if a litigant attempted to challenge a prior order or decision, the “new” Bureau — as remedied by the D.C. Circuit — could simply reaffirm its prior position in the matter.
2. RESPA Section 8(c) is Back and Possibly Stronger Than Ever.
For industry, the most important part of the D.C. Circuit’s PHH decision is its rejection of the Bureau’s assault on the RESPA Section 8(c) exemptions, including the Section 8(c)(2) exemption for goods, services, or facilities provided.[iv]
The Bureau should be deeply chastened with respect to its RESPA interpretation. The D.C. Circuit unequivocally ruled that Section 8(c) is a series of safe harbor exceptions to the prohibitions of Sections 8(a) and (b), as industry has long understood. As the court noted, the Bureau’s argument that Section 8(c) should be interpreted far more narrowly was “not a close call.” The court explained that “Section 8(c) was designed to provide certainty to businesses” in the residential real estate settlement process, including allowing market participants to refer customers to other service providers, which may enhance the efficiency of the home buying process, so long as the exemption criteria are satisfied. Another purpose of the statute was to assure market participants that they could engage in transactions — other than payments for referrals — so long as reasonable payments were made for goods, services, or facilities actually provided. The D.C. Circuit confirmed that payment for a good, service, or facility provided is permissible, so long as the payment reflects reasonable market value.
The D.C. Circuit may have added some new teeth to an aspect of Section 8(c)(2) that had not been clearly answered by the courts: whether the applicability of 8(c)(2) must be disproven by the government or whether it is an affirmative defense that the respondent must prove. In PHH, the court ruled that the Bureau bears the burden to prove that the payments at issue were more than reasonable market value and were in fact payments for referrals, since this is an element of the Bureau’s case and one on which it has the burden of proof and production.
3. The D.C. Circuit’s Decision Clarifies RESPA’s Narrow Prohibitions and That the Statute Does Not Guarantee Impartial or Fair Competition.
The D.C. Circuit’s PHH decision may have an important role in resolving Article III standing issues in RESPA Section 8 cases.
A common issue in private RESPA litigation is whether a plaintiff who cannot show any actual injury — that is, who did not pay excessive or unreasonable prices, receive inferior service, or experience any other adverse effect — from the claimed Section 8 violation has standing to sue in federal court under Article III of the U.S. Constitution. The spotlight on that issue has only gotten brighter in the wake of the Edwards and Spokeo cases,[v] with the U.S. Supreme Court confirming in its recent Spokeo decision that a mere alleged statutory violation divorced from any concrete harm does not confer standing.
Historically, most consumers who cannot point to any actual harm from the alleged RESPA Section 8 violation have argued that they are still entitled to their day in court because RESPA was intended to ensure impartial and fair competition and that the statute allows a right of action without any overcharge. However, while the statute may not require an overcharge, Spokeo makes clear that this does not automatically satisfy the constitutional standing inquiry. Instead, a plaintiff must show some concrete and particularized harm.
The argument that RESPA Section 8 was intended to protect impartiality and fair competition is generally tethered to a piece of RESPA legislative history, namely, a 1982 House committee report.[vi] The 1982 report articulated a concern that advice from a referring party could lose its impartiality in a “controlled business arrangement” (now known as an affiliated business arrangement or ABA), which is an arrangement that exists when settlement services providers have an ownership or affiliated relationship with one another.[vii] Thus, the underlying context was limited to ABAs, not all arrangements between settlement service providers generally.
Moreover, the cases that have cited to that language from the 1982 House committee report have failed to recognize that the committee was discussing a prior proposed ABA exemption that contained private competitor rights of action and strictly limited the amount of affiliated business that could be done in any given year — a proposal that Congress never enacted. The Section 8(c)(4) ABA exemption that Congress actually passed in 1983, which did not contain those provisions designed to help independent competitors of ABAs, was supported by legislative material supporting the legality of ABAs and the consumer benefits that could result.[viii]
The ABA exemption as enacted in 1983 requires disclosure of a referring party’s financial interest in the recommended provider, but that disclosure requirement is limited to the ABA context.[ix] RESPA Section 8 contains no other disclosure requirement that might advise a consumer that a provider has a vested interest in making a referral to another provider. A provider may make referrals to other settlement service providers for a variety of reasons, such as a personal relationship, to curry favor, because the providers co-advertise with one another, because they believe one another to be terrific service providers, or for dozens of other reasons — yet if there is no affiliated business arrangement, no consumer disclosure is required. Indeed, the court in PHH noted that while PHH did choose to disclose its captive reinsurance arrangement, it was under no obligation to do so.
The D.C. Circuit’s PHH decision reaffirms what industry has long known to be true: RESPA was not enacted for the broad purpose of promoting fair and impartial competition. Courts have held that Section 8(a) of RESPA is “quite specific” in describing the conduct it prohibits.[x] In PHH, the D.C. Circuit confirms that “Section 8(a) proscribes payments for referrals. Period.” The court expressly noted that under the captive reinsurance arrangement at issue in PHH, “the lender’s actions create a kind of tying arrangement in which the lender says to the mortgage insurer, we will refer customers to you, but only if you purchase another service from our affiliated reinsurer, albeit at a reasonable market value.” Nonetheless, the D.C. Circuit concluded, RESPA “does not proscribe that kind of arrangement.”
4. The Bureau Cannot Game the System by Proceeding Administratively and Bypassing the Relevant Statute of Limitations.
The D.C. Circuit’s PHH decision also easily rejected the Bureau’s argument “that no statute of limitations applied to its case against PHH.” The court explained that Dodd-Frank authorized the Bureau to conduct hearings and adjudication proceedings to ensure or enforce compliance with 19 federal consumer protection laws, and that the Bureau may enforce those federal laws “unless such Federal law specifically limits the Bureau from conducting a hearing or adjudication proceeding.” The court then logically concluded that one such limit in those federal laws is a statute of limitations.
The court likewise rejected the Bureau’s argument that RESPA’s statute of limitations, which includes a three-year statute of limitations for government enforcement actions, only applies to court cases. Instead, the D.C. Circuit held that the term “action” encompasses court cases and administrative proceedings prosecuted by the Bureau. The court employed a logical, common sense approach. It concluded that there was no “remotely plausible reason” why Congress would have imposed a time limit for the Bureau to bring a given case in court, while at the same time allowing the Bureau an indefinite period in which to bring the same sort of claim — and seek the same sorts pf penalties — administratively.
A RESPA statute of limitations issue that was not resolved, however, was the fact that the director’s ruling in PHH disregarded settled case law, holding that the occurrence of the violation, which triggers the RESPA limitations period, is the closing of the real estate transaction. Instead, the director held that each payment of a “thing of value” (i.e., each reinsurance premium ceded) was a new violation. Because the prevailing case law flatly rejects the director’s interpretation,[xi] it will be interesting to see whether Bureau enforcement continues to advance that position.
5. The PHH Decision’s Impact on Bureau Informal Guidance and Articulation of New Positions.
The Bureau ought not to interpret the PHH decision as an obstacle to providing informal advice to industry. The U.S. Department of Housing and Urban Development (HUD), which had authority for RESPA prior to 2011, had a robust and generally helpful informal advisory opinion program, as do many other federal agencies. To date, the Bureau has not adopted such a program. While the Bureau has offered some general guidance on new practices or rules through promulgation of FAQs and an occasional policy statement, it has been repeatedly criticized for its practice of regulating by enforcement.
The D.C. Circuit was critical with this form of regulation given that the director of the Bureau staked out a new interpretation of Section 8(c)(2) and retroactively applied it against PHH without fair notice. The court cited a 1997 letter, by then-HUD Assistant Secretary Retsinas, clarifying the application of RESPA Section 8 to captive reinsurance arrangements, which (along with subsequent confirmatory letters) had been widely disseminated and relied on in the industry.
Interestingly, the D.C. Circuit was not deterred by the standard proviso in the HUD informal opinions, including in the captive reinsurance letters, cautioning that the advice was informal and could not be relied upon. The court understandably seemed to regard that disclaimer as an oxymoron, especially in light of the letter’s statement that HUD “trust[ed] that this guidance will assist you to conduct your business in accordance with RESPA.” Put another way, what use is informal guidance upon which you cannot rely? The court offered the example of a police officer who tells a pedestrian that the pedestrian can lawfully cross the street at a certain place, only to hand the pedestrian a jaywalking ticket on the other side of the street.
It remains clear that industry needs well-defined guidance about how to comply with RESPA, an issue that the authors of this note have written about previously. Paradoxically, however, the D.C. Circuit’s apparent rejection of standard disclaimers that the advice cannot be relied on could discourage the Bureau from providing the guidance. This would be a mistake. Advisory opinions utilized by other agencies like the Federal Trade Commission and the Department of Justice generally caution that the views expressed in their advisory letters are based on the agency’s current view and are subject to change. That makes sense. It is quite another thing to offer informal guidance that is subject to retroactive change and, therefore, cannot be relied upon at all, which is how the D.C. Circuit viewed the Bureau’s “nonsensical” approach to the captive reinsurance issue.
The Bureau can and should implement an informal advisory program to give industry members guidance upon which they can rely, which would not preclude the Bureau from changing its view prospectively.
The court’s logical and forceful ruling on RESPA Section 8(c) may lift the cloud that the Bureau had placed over practices like desk/office space rentals and, to some degree, marketing and services agreements (MSAs), both of which rely on the 8(c)(2) exception to the referral fee prohibition. With MSAs, however, the line between marketing and referrals can be murky and still merits close attention.
Furthermore, while we expect to see a shift in the Bureau’s RESPA Section 8 enforcement to better align itself with the proper interpretation of Section 8(c), the Bureau’s aggressive exercise of its UDAAP authority is not diminished. While such actions may be subject to a statute of limitations, even if they are initiated through the administrative process, the Bureau’s expansive formulations of who is subject to the UDAAP prohibition and what acts or practices are unfair, deceptive, or abusive are unchecked by PHH. Persons subject to the Bureau’s UDAAP authority must remain especially vigilant.
Accordingly, industry must establish appropriately robust compliance programs that address applicable RESPA Section 8 and UDAAP considerations. Critical features include complaint resolution procedures, written policies and procedures, training and auditing to ensure compliance, and clear and accurate advertising, promotional literature, and customer communications.