Court Slams CFPB For Overreach on RESPA Referrals

October 11, 2016

The real estate industry won a major referral-law victory in court this week when a federal appeals court shot down a controversial Sec. 8 anti-kickback enforcement action taken by the Consumer Financial Protection Bureau last year.

In a decision that aligns with arguments by NAR and other industry groups, the court said the CFPB incorrectly levied a $109 million fine on a mortgage company, PHH Corp., for entering into an arrangement with mortgage insurers to refer customers to them if they bought reinsurance from PHH-affiliated reinsurers.

At the time it handed down the fine, the CFPB said the “tying” arrangement between the companies amounted to an illegal referral arrangement under Sec. 8(c)(2) of the Real Estate Settlement and Procedures Act. Sec. 8 prohibits payments of anything of value for referrals of business in connection with real estate settlements.

The CFPB argued that, even though the mortgage insurers paid fair market value for the reinsurance, the arrangement nevertheless constituted an anti-kickback violation because the intent of the arrangement was referrals.

The issue is especially of concern to real estate professionals who enter into marketing service agreements with lenders or other settlement service providers, since they receive fees for marketing the partner’s services.

In its lawsuit against the CFPB, PHH argued that the arrangement was lawful under Sec. 8(c)(2), as interpreted and applied by the U.S. Department of Housing and Urban Development, which administered RESPA until 2013, at which time CFPB took over the function.

The court agreed with PHH that HUD’s interpretation of Section 8(c)(2) — not the CFPB’s — is correct, referring to the question as “not a close call.” The Court also held that the CFPB overreached by applying its novel (and incorrect) interpretation retroactively to PHH conduct that occurred prior to the time of that interpretation, since PHH was acting in accordance with the law as previously set forth in administrative interpretations and regulations issued by HUD. According to the court, the arrangement is lawful under RESPA as long as the services provided are bona fide and paid for at fair market value.

“Today’s decision offers much-needed clarity on the legality of marketing service agreements,” says NAR President Tom Salomone. “It makes clear that MSAs are compliant with RESPA provided that payment for goods and services actually furnished or performed is made at fair market value. We’re hopeful this will address any uncertainty moving forward and offer a clear road ahead for any of our members who have entered into MSAs with settlement service providers. We will continue to monitor this case and the further appeals that are likely, and continue to communicate to REALTORS® on what this means for them and their business.”

The court ordered further review of the case to determine if in fact the services were priced at a fair market value.

—Robert Freedman, REALTOR® Magazine