Within days after the Consumer Financial Protection Bureau
started operations, a truckload of boxes from the Department of
Housing and Urban Development arrived at the CFPB Office of
Enforcement. Those boxes held evidence from HUD investigators and
the Minnesota Department of Insurance that cast doubt on the
legitimacy of mortgage lenders steering consumer loans only to
mortgage insurers who bought reinsurance from that mortgage
lender's affiliate. Those facts looked like a Real Estate
Settlement Procedures Act Section 8 violation, a law that prohibits
kickbacks in the home loan industry. With the country still
fired-up about the financial crises, Enforcement attorneys dove
into the files. No one suspected in 2011 that HUD had just
delivered to the CFPB a truckload of trouble that would, five years
later, cause the D.C. Circuit to strip the agency of the Dodd-Frank
Act provision that kept the CFPB's single director safe from
the President's whims.
On October 11, 2016, the D.C. Circuit, in PHH Corp. v.
CFPB, held that the single-director agency was
unconstitutionally structured. The court's order crossed-out
with a red pen the provision that limited the President's
authority to remove the Director only "for cause,"
leaving the financial watchdog otherwise intact. The court
also ruled that the CFPB must work within a three-year statute of
limitations for most of the laws it enforces.
The 110-page court decision, however, missed the chance to
answer the troublesome questions contained in those boxes from HUD.
The DC Circuit vacated the Director's decision entirely,
including over a dozen points of appeal that CFPB enforcement
counsel and PHH raised to the Bureau Director. Furthermore, the
order left the residential mortgage industry with a rather
simplistic interpretation that RESPA Section 8 allows captive
reinsurance arrangements so long as the amount paid by the mortgage
insurer for the reinsurance does not exceed the reasonable market
value of the reinsurance.
The pronouncement restored the law of the land for the
last 40 years. Yet other than a discussion of retroactivity
and "just kidding" agency actions, the order did not shed
light on how, exactly, one should go about assessing reasonable
market value of products like reinsurance - or what bona
fide payments look like in an era of internet pop-up ads, lead
generators, fee-shifting, Zillow, and marketing service agreements.
It left open other issues, as well. In particular, the D.C. Circuit
court decision leaves unanswered:
when a RESPA Section 8 violation
actually accrues (e. at loan origination or when the
kickback is paid);
whether the CFPB and private parties
should evaluate the market value of payments under a referral
agreement for the term of each agreement, for each single loan, or
over the entire course of the parties' dealings; and
whether the CFPB can impose Civil
Money Penalties for violations that occurred after the
agency's July 21, 2011 birthdate, and within the
three-year statute of limitations.
Finally, there's the new question of whether the tolling
agreement between the CFPB and PHH that suspended the statute of
limitations beginning on January 25, 2012 remains in effect in
light of the D.C. Circuit's order.
For now, mortgage lenders, title insurers, and others in
residential real estate can return to business as usual with regard
to monitoring for illegal RESPA kickbacks. The CFPB will probably
seek review from the entire appellate court, perhaps going up to
the Supreme Court. And it will likely revisit its RESPA Section 8
determinations in-house to come out with a similar, yet differently
justified result for PHH. That's the typical approach. Finally,
it's almost certain that after the D.C. Circuit decision, the
CFPB will amend RESPA's implementing regulation, Regulation X,
to answer the above questions and to prevent the kind of
pay-to-play arrangements that appeared in the captive mortgage
reinsurance matters. After all, there was a lot more in those boxes
from HUD than just evidence about PHH.
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