Noting that “[t]he basic statutory question in this case is not a close call,” the D.C. Circuit has held that a bona fide payment by one settlement service provider to another does not violate Section 8(a) of the Real Estate Settlement Procedures Act (RESPA) if the payment is reasonably related to the market value of the goods, services, or facilities provided. See PHH Corp. v. Consumer Financial Protection Bureau (D.C. Cir. Oct. 11, 2016). The court’s conclusion was mandated by the unambiguous text of Section 8(c) of RESPA, along with the U.S. Department of Housing and Urban Development’s (HUD’s) long-standing interpretations of the same statutory provision.
In its underlying decision, the Consumer Financial Protection Bureau (CFPB or Bureau) determined, for the first time and at odds with its predecessor HUD, that Section 8 of RESPA prohibits captive reinsurance agreements even if the mortgage insurers paid no more than reasonable market value for the reinsurance. The CFPB then applied its interpretation retroactively to conduct that occurred before the Bureau notified the public of its new interpretation. The D.C. Circuit agreed with the appellants (collectively, “PHH”) that the CFPB both misinterpreted the plain language of Section 8, but also violated due process by applying its interpretation retroactively.
With respect to statutory interpretation, the court read Section 8(c) as unambiguously permitting captive reinsurance arrangements “where mortgage insurers pay no more than reasonable market value for the reinsurance.” By stating that “[n]othing” in Section 8 “shall be construed as prohibiting” a “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,” Section 8(c) creates a safe harbor for payments where a referral is involved . 12 U.S.C. § 2607(c). The court succinctly held, “[n]othing means nothing.” It stated further that HUD’s earlier interpretation of Section 8(c) is “commonsensical:” whether a payment is a bona fide payment for services, rather than a disguised payment for referral, may be evaluated by whether the payment represents the reasonable market value of the service provided. Any payment in excess of market value is not for the service, the court noted.
The CFPB had determined in the underlying decision that, if a referral was involved in a transaction, any payment made was for that referral in violation of Section 8, regardless of whether it was reasonably related to the market value of services provided. Flatly rejecting the CFPB's reasoning, the court noted that RESPA’s statutory framework does not prohibit tying arrangements in which one entity agrees to refer business to another conditioned on the purchase of a service from an affiliated entity at reasonable market value. Section 8(a) does not “proscribe a tying arrangement, so long as the only payments exchanged are bona fide payments for services and not payments for referrals.” As the court repeated in its decision, “[a] bona fide payment means a payment of reasonable market value.” That the payment may be part of “a tying arrangement does not make the payment any less bona fide….”
In reaching its decision, the court steered the CFPB back to Section 8(c) as plainly written and consistent with the decisions of other Circuit Courts of Appeal throughout the country.[1] “Congress explicitly made clear in Section 8(c) that” transactions that involve referrals “were lawful so long as reasonable market value was paid and the services were actually performed.” The court agreed with PHH and supportive amici curiae by stating that “Section 8(c) specifically bars the aggressive interpretation of Section 8(a) advanced by the CFPB.” Section 8(c) “was designed to provide certainty to businesses in the mortgage lending process,” a certainty that had been based on years of relying on the plain language of Section 8(c), including as repeatedly interpreted by HUD both informally and in Regulation X.
Indeed, the court acknowledged what industry participants have known for a long time: “referrals often enhance the efficiency of the homebuying process.” And further:
[T]ying arrangements can be beneficial to consumers and the economy by enhancing efficiencies and lowering costs…. [RESPA] allows vertical integration of lenders and other settlement service providers under its affiliated business provisions. If such vertical integration is allowed, it would not make much sense to conclude that similar vertical contractual relationships are proscribed. (emphasis in original)
The court’s interpretation of Section 8 is consistent not only with the plain language of the statute but also with Regulation X as implemented by HUD and later adopted by the CFPB itself,[2] the purpose of the statute, and Congressional intent.[3] Indeed, because Section 8(c) “eliminates any potential ambiguity” that may have been presented by Section 8(a) standing alone, the court rejected the CFPB’s assertion that its new interpretation of Section 8 was entitled to Chevron deference and further suggested that the CFPB’s apparent belief that reinsurance arrangements are harmful should be addressed to Congress and the President “when exercising legislative authority.”
Finally, the court concluded that, even if the CFPB’s interpretation of Section 8 were consistent with the statute, the Bureau violated PHH’s due process rights by retroactively applying the new interpretation to conduct that had already occurred. At the time that PHH was engaged in the captive reinsurance arrangement that the CFPB penalized, it was entitled to rely on HUD’s “consistent and repeated interpretation of Section 8,” which was widely known and relied upon by the mortgage lending industry through letters, guidance, and regulation. “The retroactive application of the CFPB’s new interpretation violated the Due Process Clause” because “PHH did not have fair notice of the CFPB’s interpretation of Section 8 at the time PHH engaged in the conduct at issue here.” This, according to the court, is “Rule of Law 101.”
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In the coming days, we will be publishing additional articles on different aspects of the PHH opinion, including regarding the constitutionality of the CFPB and ramifications of the court’s holding as to statute of limitations.
For K&L Gates Alerts on related topics, see:
Notes:
[1] See, e.g., Galiano v. Fid. Nat. Title Ins. Co., 684 F.3d 309, 314 (2d Cir. 2012) (Section 8(c) “provides that § 8(a) shall not be construed as prohibiting payments by a title company for goods, facilities actually furnished, or services actually performed.”); O’Sullivan v. Countrywide Home Loans, Inc., 319 F.3d 732, 740 (5th Cir. 2003) (“We defer to 24 C.F.R. § 3500.14(g)(2), as a broad agency rule.”); Mims v. Stewart Title Guar. Co., 590 F.3d 298, 304 (5th Cir. 2009) (“Section 8(c) of RESPA contains several exceptions to the general rule….”); Carter v. Welles-Bowen Realty, Inc., 736 F.3d 722, 728 (6th Cir. 2013) (holding Section 8(c)(2) “protects ‘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’”); Egerer v. Woodland Realty, Inc., 556 F.3d 415, 420–21 (6th Cir. 2009) (“Under RESPA, the referral of settlement service business is not compensable, except as provided by 12 U.S.C. § 2607(c), which contains a list of fees, salaries, compensation and payments that are not prohibited by § 2607(a).”); Howland v. First Am Title Ins. Co., 672 F.3d 525, 531 (7th Cir. 2012); Glover v. Standard Fed. Bank, 283 F.3d 953, 962–63 (8th Cir. 2002) (“applying either Christensen or Skidmore, we find that the Policy Statements issued by HUD reflect a reasoned view of a responsible agency which is consistent with the statute and regulation and which constitutes a body of experience and informed judgment that this court may look to as determinative authority”); Bjustrom v. Trust One Mortg. Corp., 322 F.3d 1201, 1208 (9th Cir. 2003) (holding payments did not violate Section 8 where “total compensation received … was reasonably related to the services it provided”); Schuetz v. Banc One Mortg. Corp., 292 F.3d 1004, 1011–12 (9th Cir. 2002) (conduct undertaken in “good faith compliance with HUD rules, regulations, and interpretations” is protected under RESPA); Smith v. Argent Mortgage Co., 331 Fed. Appx. 549, 555 (10th Cir. 2009); Culpepper v. Irwin Mortg. Corp., 491 F.3d 1260, 1276 (11th Cir. 2007) (see infra); Hirsch v. BankAmerica Corp., 328 F.3d 1306, 1308-09 (11th Cir. 2003); Geraci v. Homestreet Bank, 347 F.3d 749 (9th Cir. 2003).
[2] 24 C.F.R. § 3500.14(g)(2011); 24 C.F.R. § 3500.14(e)-(f)(1992); 12 C.F.R. § 1024.14 (2016).
[3] “Reasonable payments in return for services actually performed or goods actually furnished are not intended to be prohibited.” S. Rep. No. 93-866, at 6 (1974).
