RESPA Compliance after PHH Decision

Transcription

1 RESPA Compliance after PHH Decision Mortgage Compliance Professionals Association of America February 16, 2018 Mitchel Kider thewbkfirm.com 1

2 Overview Current regulatory environment Changes at the CFPB PHH Investigation, Enforcement Action & Appeal D.C. Circuit Panel and En Banc Rulings Implications of PHH ruling for Industry Arrangements thewbkfirm.com 2

3 Current Regulatory Environment Trump Administration wants to roll back regulations on whole, Dodd-Frank regulations in particular. Many calling for Congress to make financial regulatory reform a priority. Bills introduced in Congress to eliminate or severely diminish role/authority/reach of CFPB. Mick Mulvaney (Acting CFPB Director) implemented temporary hiring and rulemaking freeze The freeze has expired, but Mulvaney has since obtained OMB approval for Schedule C hires political appointees who will assist him (previously, Director was the only political appointee). Fundamental change to CFPB Less independent, more subject to control of administration. New CFPB philosophy and priorities under Mulvaney: January 2018 memo to staff sea change in CFPB approach to enforcement, supervision and rulemaking CFPB will no longer push the envelope of the law to send a message to regulated entities. CFPB will conduct a review of all of its activities and will: Bring enforcement actions where quantifiable and unavoidable harm to consumer exists. Focus on formal rulemaking instead of regulation by enforcement. Prioritize areas of focus based on consumer complaints. Engage in quantitative analysis to consider costs and benefits to consumers and covered persons when determining whether to intervene in given situations. thewbkfirm.com 3 3

4 Current Regulatory Environment Broad review of CFPB policies and operations: January 17, 2018 Press Release CFPB will issue call for evidence on whether it is fulfilling its functions to best protect consumers: CFPB will publish Requests for Information (RFIs) seeking comment on enforcement, supervision, rulemaking, market monitoring, and education activities. Opportunity for public to submit feedback and suggest ways to improve outcomes. On January 24, CFPB issued its first RFI on CIDs. Comments must be received within 60 days after RFI is published E.g.: seeks suggestions regarding formulation, issuance, or modification of CIDs, including information on alignment with processes used by other agencies. CFPB has since published RFIs on the efficiency and effectiveness of its (1) rules of practice for adjudication proceedings, (2) enforcement processes, and (3) supervision program. Recent zero funding request for CFPB January 17, 2018 Mulvaney indicated that CFPB will not need any funding for next 3 months since CFPB currently has sufficient reserves ($177.1 million) and projected expenses are approx. $145 million for 2 nd quarter of 2018 fiscal year. thewbkfirm.com 4 4

5 CFPB Strategic Plan Issued earlier this week The Strategic Plan FY seeks to reign in aggressive nature previously adopted by CFPB. Goal is to fulfill the Bureau s statutory responsibilities, but go no further. Objectives, Goals, and Evaluations of Particular Note Regularly identify and address outdated, unnecessary, or unduly burdensome regulations in order to reduce unwarranted regulatory burdens. Focus supervision and enforcement resources on institutions and their product lines that pose the greatest risk to consumers based on the nature of the product, field and market intelligence, and the size of the institution and product line. Will this apparent change in focus affect CFPB s supervision and enforcement activities? Enhance internal policies that facilitate integration of the Bureau s supervision and enforcement functions. Will this integration affect the Bureau s enforcement functions? Permanent director on the horizon? thewbkfirm.com 5

6 PHH CFPB Investigation Preliminary Investigation PHH matter began as a CFPB investigation and, later, as an administrative enforcement action before the Bureau s Office of Administrative Adjudication, beginning in Mortgage Reinsurance Borrowers contributing less than 20% down toward their mortgage are often required to obtain mortgage insurance. In some instances, the mortgage insurer obtains reinsurance from an entity affiliated with the lender (e.g., captive reinsurer ). Underlying Issue Whether premiums paid to a captive reinsurer from mortgage insurers who had received referrals from a lender affiliated with the reinsurer violated RESPA. Section 8(a) of RESPA designed to prohibit kickbacks and unearned fees in exchange for referrals relating to a real estate settlement service. thewbkfirm.com 6

7 Key RESPA 8 Provisions RESPA Prohibits Referral Fees Section 8(a): Prohibits giving or accepting any fee, kickback or thing of value pursuant to any agreement or understanding 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 Section 8(b): Prohibits giving or accepting any portion/split/percentage of any charge made or received for the rendering of real estate settlement services in connection with a transaction involving a federally related mortgage loan other than for services actually performed Settlement services : Any service provided in connection with a real estate settlement including, w/o limitation, origination of mortgage loan, mortgage broker services, real estate agent services, handling of closing or settlement, title services, any service for which settlement service provider requires borrower or seller to pay, etc. Section 8(c)(2): Nothing in this section shall be construed as prohibiting payment to any person of bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed thewbkfirm.com 7

8 Administrative Adjudication Notice of Charges Notice of charges filed by CFPB Enforcement in early 2014 Alleges that PHH violated RESPA by referring loans to mortgage insurers who subsequently obtained reinsurance from a PHH subsidiary. CFPB Rejection of HUD Guidance PHH relied upon agency guidance issued in 1997, which expressly permitted captive reinsurance arrangements, so long as the reinsurance provided was commensurate with the risk assumed by the reinsurer. CFPB rejected the guidance, despite formally adopting it when stepping into HUD s shoes with respect to RESPA after passage of Dodd-Frank. Administrative Trial Occurred three-month period before an in-house Administrative Law Judge, who presided over the matter. thewbkfirm.com 8

9 ALJ Decision & Appeal to Director Cordray Recommended Decision Pursuant to Dodd Frank, the decision of the ALJ is not final Issues a Recommended Decision that may be reviewed de novo by the CFPB s single Director, Richard Cordray. ALJ ordered $6.4 million in disgorgement, but sided with PHH on some legal issues. Administrative Appeal to CFPB Director Richard Cordray Each party appealed the Recommended Decision Director Cordray s scrapped the Recommended Decision and wrote a new opinion that diverged on issues of fact and law. Ordered over $109 million in disgorgement (more than 17-times the relief granted by the Recommended Decision). Ruled that RESPA s 3-year statute of limitations did not apply to CFPB administrative proceedings, and so considered conduct as early as thewbkfirm.com 9

10 Unsustainable Implications of Cordray s Decision CFPB Overturns Prior Guidance (upon which PHH relied) and applied new interpretation of RESPA retroactively Section 8(c)(2): Nothing in this section shall be construed as prohibiting payment to any person of bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed The Director ruled that Section 8(c)(2) s exception could not be relied on as affirmative defense if there are any referrals, whatsoever. CFPB s argument if settlement service provider receives referrals from 3rd party, it cannot otherwise do business with that party because CFPB will attribute compensation to that party to the referrals, even if settlement service provider paid fair market value for services actually rendered. Result of the Decision: Even if payments for services provided are commensurate with services received, if payments were made for purposes of obtaining referrals, then such payments are not only for compensable services and constitute kickbacks. Departs from past guidance, which had specifically instructed providers that similar reinsurance agreements were legal under RESPA. thewbkfirm.com 10

11 Appeal to D.C. Circuit Administrative Exhaustion and Appeal Upon its appeal of the Recommended Decision, PHH had exhausted its remedies before the CFPB. PHH moved the Director for a stay of the order pending judicial review. Director Cordray denied the motion. Appeal and Motion for Stay before D.C. Circuit PHH filed a petition for review to the D.C Circuit PHH also sought and received a stay of the Director s order pending judicial review by the circuit court. The D.C. Circuit found that PHH had shown that its appeal exhibited a likelihood of success on the merits, and that it would be irreparably harmed if a stay of the Director s order was not granted. thewbkfirm.com 11

12 D.C. Circuit Key Rulings In October 2016, a three-judge panel of the D.C. Circuit ruled in PHH s favor across the board. Court ruled Director Cordray s interpretation of RESPA was contrary to law The Director s interpretation of RESPA Section 8(a) and 8(c)(2) is contrary to the plain text/language of the statute. Section 8(c) specifically bars the aggressive interpretation of Section 8(a) advanced by the CFPB in this case and was designed to provide certainty to businesses in the mortgage lending process. Statutory language proscribes only payment for referrals; does not prohibit other transactions b/t settlement service providers payment for services actually performed are permitted, so long as the payments received are reasonable market value of services performed. thewbkfirm.com 12

13 D.C. Circuit Key Rulings Court ruled the CFPB violated PHH s due process rights by attempting to apply a new interpretation of RESPA retroactively: Held that even if CFPB s interpretation of Section 8(c) were permissible, applying that interpretation retroactively to PHH violated due process. The decision impermissibly applies new interpretations of RESPA to retroactively punish past conduct expressly permitted by HUD guidance and regulations. D.C. Circuit: When a government agency officially and expressly tells you that you are legally allowed to do something, but later tells you just kidding and enforces the law retroactively against you and sanctions you for actions you took in reliance on the government s assurances, that amounts to a serious due process violation. The rule of law constrains the governors as well as the governed. thewbkfirm.com 13

14 D.C. Circuit Key Rulings Court ruled administrative enforcement proceedings by the CFPB are subject to statutes of limitations CFPB bound by RESPA s three-year statute of limitations for all government enforcement actions, even if brought in administrative proceeding. This ruling has important implications all 18 consumer-protection statutes enforced by the CFPB. Ruled for cause removal provision under single-director structure of CFPB is unconstitutional (since overturned) The Dodd-Frank provision making CFPB Director removable only for cause is unconstitutional. President must be able to remove executive officers at will so that he is accountable to the people. thewbkfirm.com 14

15 En Banc Review by D.C. Circuit The CFPB appealed, and the three-judge panel s rulings were vacated pending a rehearing of the case before the full circuit court. January 2018 full D.C. Circuit Court of Appeals reinstated the three-judge panel s decision, holding: That the CFPB s interpretation of RESPA Section 8 is contrary to law and violated PHH s due process rights; and That RESPA s three-year statute of limitations applies to both administrative enforcement proceedings and civil actions in court. Concurring opinion In a concurring opinion, three judges agreed that, although they believed Director Cordray had discretion to re-interpret RESPA, the CFPB ran afoul of the due process clause by failing to give PHH adequate notice before imposing $109 million in disgorgement penalties for past conduct. Thus, the entire court was in agreement that the retroactive application of the former Director s new interpretation of RESPA violated PHH s constitutional right to due process. thewbkfirm.com 15

16 En Banc Review by D.C. Circuit Full D.C. Circuit reversed constitutional ruling On rehearing en banc, a seven-judge majority of the appeals court overturned the panel decision, concluding that the for-cause removal provision was not unconstitutional. The court reasoned that for-cause protections for the heads of independent agencies, including financial regulators, had been upheld since 1935, when the Supreme Court, in Humphrey s Executor v. United States, sustained the constitutionality of the independent Federal Trade Commission (FTC). The en banc court did not find the distinction between the single-director structure of the CFPB and the multi-member structure of the FTC sufficiently significant to parse the Supreme Court s decision in Humphrey s to reach a different outcome. thewbkfirm.com 16

17 Impact of PHH Decision on Industry Arrangements RESPA 8 governs virtually all origination-based relationships, including: Marketing services (e.g., MSAs, co-marketing arrangements) Office/desk rental arrangements Purchasing/selling leads Brokering activity Affiliated businesses (ABAs) & joint ventures (JVs) Referrals by any person (including consumers, non-profits, relocation companies, affinity groups, other non-settlement service providers) Interactions among lenders, real estate agents, home builders, title companies shopping lists for consumers? thewbkfirm.com 17

18 Marketing Services Agreements (MSAs) Previous HUD guidance recognized legality of MSAs subject to some restrictions, e.g.: No payments for direct marketing to particular home buyers May pay agent for services when services are: (1) actual, necessary & distinct from primary agent services, (2) directed to general public (e.g. ads on website), & (3) not nominal services Compensation must be reasonably related to value. Under Cordray s CFPB, there were heightened risks for MSAs & similar arrangements because CFPB actions reflected new 8(c)(2) interpretation. But now that (1) CFPB s interpretation rejected by a federal appellate court, and (2) Cordray has resigned likely that CFPB s position/approach will soften dramatically. NOTE: State banking departments & attorneys general are showing concern/interest in RESPA oversight Dodd-Frank gives the states independent authority to enforce RESPA for regulated entities under their jurisdiction. Regardless, RESPA has been in effect for 40+ years unless & until Congress changes law, parties receiving & giving things of value in exchange for referrals will remain subject to gray area of law & its penalty provisions thewbkfirm.com 18

19 Co-Marketing Arrangements Generally, co-marketing is when two or more parties are represented in one marketing piece, e.g., real estate agent & lender represented in same flyer or online banner ad Co-marketing generally is permissible under RESPA if certain parameters are met Key parameters: Each party must pay pro rata share of the marketing (e.g., if both parties are each represented 50/50, each is responsible for half the advertising expense) No defraying/discounting of expenses that otherwise would be incurred by persons in a position to refer settlement services or business Some additional considerations, among others: Pro rata share based on the proportionate split of FMV for the creation/design, printing, mailing, and other services in connection with ad Charge to each provider whose goods or services are advertised should be equal to that provider s share of ad cost in direct proportion to its prominence in ad Marketing fees generally reasonable in amount to FMV of services actually performed in the relevant marketplace thewbkfirm.com 19

20 Office Rental Arrangements These may include arrangements in which a person/entity that is in a position to refer/accept the referral of settlement service business rents office space within the building/office space of another person/entity that is in a position to refer/accept the referral of such business RESPA 8 requires a company to determine that office rental payment bears reasonable relationship to general market value of rental space provided & is not disguised referral fee may include appropriate proportion of cost for office services actually provided to tenant (e.g., secretarial services, conference rooms, utilities, telephone, internet, other office equipment) General market value = rent that non settlement service provider would pay for same amount of space & services in same or comparable building If rental payments exceed general market value of space provided, excess amount will be considered to be for referral of business in violation of 8(a) Other issues: clearly delineate between spaces; adhere to branch office requirements; etc. thewbkfirm.com 20

21 In Summary Regulatory environment is in a state of transition, as is our federal government Impact on your businesses remains unknown There are things you can do to help yourself in this difficult environment: Make compliance your top priority on a company-wide basis on every level of the company Stay informed Train and re-train to stay on top of evolving regulatory requirements Work with integrity & no shortcuts Questions? thewbkfirm.com 21

22 Mitch Kider thewbkfirm.com 22