In a recent October Research, LLC webinar titled “PHH: Now We Know,” compliance experts Brian Levy and Loretta Salzano walked attendees through highlights of compliance lessons from the D.C. Circuit Court of Appeals’ en banc ruling in PHH Corp. v. CFPB.
The pair discussed the implications for interpretation of Section 8(c)(2), the constitutionality of the bureau and what the prevailing interpretation means for structuring RESPA compliant partnerships.
“It’s been a long journey of arguing and waiting and fighting and countless lawyers and legal fees, and this last month we finally got an opinion which, I would say, is a win for the industry on all issues,” said Salzano, founding partner at Franzen and Salzano. “Yes, we’re all good with (Section) 8(c)(2).”
The original ruling, challenged by PHH Corp. on appeal, was issued by then-CFPB Director Richard Cordray, who said that there was no exception from Section 8(c)(2) which would allow RESPA compliant relationships between referral sources. The final D.C. appellate court ruling determined that was incorrect.
“Clearly 8(c)(2) is still an exception, as long as you’re paying reasonable value,” said Levy, of counsel at Katten & Temple, LLP.
“And we were all nervous about that,” Salzano added. “Because the idea was that Cordray said no, no, you can’t ever do this with a referral source. It somehow takes it outside of the exception. Now at least we all know 8(c)(2)’s not as clear as we might like, but at least we have some guardrails.”
In addition to the ruling on 8(c)(2), Salzano said the appellate court determined that the CFPB did not provide due process for PHH Corp. to comply with its interpretation of RESPA because it retroactively penalized the company for a new interpretation.
“Those new interpretations can’t be applied retroactively,” Salzano said. “When you change the rules that can only be prospectively so everyone knows where the guardrails are and how to proceed going forward.”
The issue of the CFPB’s constitutionality also brought greater focus to the case, Levy said.
“While the industry was most focused on the RESPA implications, this constitutional issue is going to have broad implications,” he said. “What the holding concluded was that the CFPB’s single-director structure is constitutional. How they got there, how they analyzed this question was complicated.”
The majority ruling on constitutionality was accompanied by three concurring rulings and two dissenting opinions as the justices sought to navigate the administrative case law used to come to the decision.
“To follow through on it you need to know your high school civics lessons about the Constitution or maybe, if you’re of a certain generation like myself, it’s more like your Schoolhouse Rock memories,” Levy said. “Although my favorite was ‘I’m only a bill’ and that didn’t really apply to this.”
The issue of constitutionality came down to an issue of accountability, Levy said.
“Is the ability to appoint this director every five years, the ability to terminate the director based on a for-cause type termination, is that sufficient accountability to the electorate? Does it prevent the president from executing the laws of the country?” Levy asked. “So you have these justices walking up on the head of a pin, up and down, about how much accountability to the executive or legislative branch is enough to pass constitutional muster.”
As the industry begins to parse the opinion, Salzano said it will be looking at RESPA compliance through a familiar filter.
“It’s going to bring us back to a time when we knew 8(c)(2) was good, we knew that we could rely upon guidance from HUD and from the CFPB, whether it’s in the form of policy statements or other documents … in order to build compliant programs,” she said.
That’s important, Levy added, because of the way the industry has awaited guidance in this space.
“We clearly are seeing the market more interested in relationships among referral sources, and there still is a need to do that in a compliant fashion,” he said. “The states are probably going to be very active in enforcing RESPA, (CFPB acting director Mick) Mulvaney invited them to take a greater role in enforcing consumer protection laws. You can bet a lot of them will take him up on that.”
To order a recording of the webinar “PHH: Now We Know,” click here.