United States: PHH v. CFPB: "What Is A Kickback?"

On April 12, 2016, a panel of the U.S. Court of Appeals for the D.C. Circuit heard oral argument in PHH Corporation's (PHH) milestone legal battle with the Consumer Financial Protection Bureau (Bureau). During the argument, the Bureau had a lot to worry about: whether the agency's unusual structure, headed by a single director who has great power and is removable only for cause, is constitutional; whether the Bureau can prosecute claims in its own administrative forum with no statute of limitations, especially when courts have held that doing so after years have passed would be "an abomination;" whether the Bureau gave PHH and other industry participants fair notice of the conduct that the Bureau now condemns based on a new interpretation of Section 8 of the Real Estate Settlement Procedures Act (RESPA); and whether the court must construe a statutory ambiguity in PHH's favor because RESPA carries criminal, as well as civil, penalties.

But one basic question posed by the court during argument —"What is a kickback?"—highlights what may be the most anomalous and problematic Bureau RESPA interpretation of all.

The Bureau's underlying enforcement claim is that PHH, a mortgage lender, violated RESPA Section 8 in its dealings with mortgage insurers. Section 8(a) prohibits the payment or receipt of monies or other "things of value" pursuant to an agreement or understanding that business will be referred in connection with transactions involving federally related mortgage loans, subject to various categories of expressly permitted payments and arrangements under Section 8(c).

The crux of the Bureau's theory—advanced in the PHH ruling made by Director Richard Cordray as well as the Bureau's appellate arguments defending that ruling—appears to be that PHH violated RESPA because of its claimed intent to disguise the payments it received from mortgage insurers in the form of reinsurance premiums, when in fact the payments were what the Bureau has labeled as "kickbacks" intended to compensate PHH's referral of business. PHH has defended the case on the grounds that, inter alia, the reinsurance premiums were reasonably related to the services actually provided, as evidenced by millions of dollars of reinsurance claims that ultimately were paid out.

Director Cordray wrote in his PHH ruling that because the reinsurance premiums were paid "for" the referral of business, it was unnecessary to even consider services under Section 8(c), since Section 8(a) was violated.

The Bureau's position has two untenable flaws. First, it wrongly ignores the plain language of Section 8. Second, it wrongly adopts a subjective inquiry concerning the intent behind a given program when, in fact, there is no intent element even mentioned in the statute. Under the Bureau's view, one would have to undertake a hopelessly subjective inquiry into whether a given payment was made, or arrangement entered into, with the intent of obtaining referrals; the intent to pay for goods, facilities, or services provided; or both.

Congress, however, drafted RESPA to pose an objective test. In Section 8(a), Congress sought to prohibit payments (broadly defined as "things of value") made in exchange for the referral of settlement services business.

Recognizing, however, that this is a murky concept, Congress sought to clarify in Section 8(c) that certain categories of payments or arrangements that often relate to referrals of settlement service business are entirely permissible, notwithstanding the 8(a) prohibition. This includes Section 8(c)(2), which expressly permits payments "to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed."

Ironically, the U.S. Department of Housing and Urban Development (HUD), which had authority for RESPA prior to 2011, plainly recognized this. HUD published numerous policy statements in which it analyzed the payments referenced in Section 8(c) as exemptions.

Under HUD's approach, if (i) services, goods, or facilities were actually furnished by the referring party (and they were necessary and not duplicative of others occurring in the transaction), and (ii) the payment was commensurate with the amount normally charged for similar services, goods or facilities, the payment was exempt1. (Indeed, in the title insurance context, HUD provided that if so-called "core title services" were provided, HUD generally would not even examine whether the payment for such services was reasonable as long as it did not violate any state law caps on such compensation.) On the other hand, if the payment bore no reasonable relationship to the market value of the goods, facilities or services provided, the excess over the market rate could be used as evidence of a compensated referral in violation of Section 8(a)2.

In short, Congress and HUD intended a Section 8 inquiry to examine claimed kickbacks objectively, not subjectively.

The Bureau's interpretation is the opposite—one that the Eleventh Circuit Court of Appeals briefly adopted in the Culpepper case,3 only to have both HUD and numerous other federal courts, including a later Eleventh Circuit decision in Heimmerman,4 reject it. Indeed, as the Eighth Circuit observed in Glover,5 a subjective formulation of kickbacks could render Section 8(c) a "nullity" and turn the interrelated parts of Section 8 "upside down." RESPA Section 8(a) cannot be read in isolation, especially when Section 8(c) begins with the admonition that nothing in [Section 8] shall be construed "as permitting certain payments."

Yet that is exactly what Director Cordray did in his PHH ruling.

The Bureau's argument before the D.C. Circuit—that a violation of Section 8(a) flows from a reinsurance program whose claimed purpose is to generate business and get referrals—is akin to saying that a corporation is a tax cheat or tax evader if it follows the existing tax code framework with the intent of maximizing its deductions and credits and minimizing its liabilities.

To focus on whether parties to a program that involves an exchange of payments formed that program to generate referrals and encourage business is to make every program a potential RESPA violation. Section 8(c), which the Bureau disregards, is critically important. If fair market payments have no safe harbor within Section 8(c), lenders and mortgage brokers, title insurers and agents, insurance companies and their agents, and all the related participants in the residential real estate process must weigh potential criminal liability as a cost of doing business with each other, with no clear notice as to what is prohibited. Congress clearly set out to avoid that very result.


1. Statement of Policy 2001-1: Clarification of Statement of Policy 1999-1 Regarding Lender Payments to Mortgage Brokers, and Guidance Concerning Unearned Fees Under Section 8(b), 66 Fed. Reg. 53,052, 53,055 (Oct. 18, 2001) (also referencing Statement of Policy 1999-1 Regarding Lender Payments to Mortgage Brokers, 64 Fed. Reg. 10,080, 10,084 (March 1, 1999).

2. 66 Fed. Reg. at 53,055; see also 64 Fed. Reg. at 10,086.

3. Culpepper v. Irwin Mortg. Corp., 253 F.3d 1324 (11th Cir. 2001).

4. Heimmerman v. First Union Mortg. Corp., 305 F.3d 1257, 1263-64 (11th Cir. 2002).

5. Glover v. Federal Standard Bank, 283 F.3d 953, 965 (8th Cir. 2002).

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