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Case Law

Court rules against Cordray interpretation of RESPA

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Case Law
Wednesday, January 31, 2018

“The panel opinion, insofar as it related to the interpretation of RESPA and its application to PHH and Atrium in this case, is accordingly reinstated as the decision of the three-judge panel on those questions.”

With those 35 words, the world of RESPA interpretation has once again been turned upside down.

“The bigger news for settlement service providers is that the en banc court reinstated the three-panel Circuit Court opinion that Section 8(c)(2) is indeed an exemption from the anti-kickback prohibitions of Section 8(a) of RESPA provided reasonable payments are made in return for services actually performed or goods actually furnished,” Mayer Brown Partner Phillip Schulman told RESPA News.

Former Consumer Financial Protection Bureau (CFPB) Director Richard Cordray made the first change with his dramatic reinterpretation of RESPA in the PHH Corp. ruling, and a three-judge appellate panel rejected that interpretation in its 2016 ruling in PHH Corp. v. CFPB.

However, the three-judge panel’s decision had been vacated when the en banc panel of the D.C. Circuit Court of Appeals agreed to hear the case. In reinstating the decision, the court has brought RESPA interpretation back to the Department of Housing and Urban Development standards long recognized by the industry.

“This is a big and expected victory for the long held interpretation of RESPA Section 8 and its exemptions,” RESPRO President and Executive Director Ken Trepeta told RESPA News. “RESPRO is pleased with the en banc court’s decision on the RESPA portion of the case.”

One concurring opinion brought a different view of the statutory ruling in the case. Read about it here.

In addition, the en banc panel reversed the three-panel ruling on the constitutionality of the CFPB, saying “Applying binding Supreme Court precedent, we see no constitutional defect in the statute preventing the president from firing the CFPB Director without cause. We thus uphold Congress’ choice. “The Supreme Court’s removal-power decisions have, for more than 80 years, upheld ordinary for-cause protections of the heads of independent agencies, including financial regulators. That precedent leaves to the legislative process, not the courts, the choice whether to subject the bureau’s leadership to at-will presidential removal. Congress’ decision to provide the CFPB director a degree of insulation reflects its permissible judgment that civil regulation of consumer financial protection should be kept one step removed from political winds and presidential will. We have no warrant here to invalidate such a time-tested course.”

Click here for more on the constitutionality, including why the CFPB director does not have more power than any government official other than president

Asked for reaction to the ruling, a CFPB spokesman said, “We are analyzing the decision.”

Cordray himself chimed in on Twitter after word of the ruling came out.

“Seeing the DC Court of Appeals has issued a strong opinion today favoring the independence of the CFPB,” he wrote. “Some other statutory issues mixed. Much to talk about here, more than can be said in a quick Twitter feed. A historic ruling, maybe soon on its way to the Supreme Court.”

Bringing back HUD’s interpretation

In the three-court panel’s ruling on the statutory issues in RESPA of the PHH case, it found that the CFPB’s retroactive application of its RESPA Section 8 interpretation, when it departed from HUD’s  prior interpretations issued in 1997, violated  “bedrock principles” of due process.

“The Due Process Clause does not countenance the CFPB’s gamesmanship,” the court stated within its opinion written by Circuit Judge Brett Kavanaugh. “As Justice Kennedy eloquently explained in a related scenario:  ‘If retroactive laws change the legal consequences of transactions long closed, the change can destroy the reasonable certainty and security which are the very objects of property ownership. … Groups targeted by retroactive laws, were they to be denied all protection, would have a justified fear that a government once formed to protect expectations now can destroy them. Both stability of investment and confidence in the constitutional system, then, are secured by due process restrictions against severe retroactive legislation.’ ”

The court also made it very clear that the CFPB is subject to RESPA’s three-year statute of limitations, regardless of whether it brings its case through an administrative action or through court.

“First of all, the Dodd-Frank Act incorporates the statutes of limitations in the underlying statutes enforced by the CFPB in administrative proceedings,” the court stated. “And under the Real Estate Settlement Procedures Act, a three-year statute of limitations applies to all CFPB enforcement actions to enforce Section 8, whether brought in court or administratively.”

In rather scathing terms, the three-panel court later reasoned: “Of course, there is good reason Congress did not say that the CFPB need not comply with any statutes of limitations when enforcing the Real Estate Settlement Procedures Act administratively. That would be absurd. Why would Congress allow the CFPB to bring administrative actions for an indefinite period, years or even decades after the fact? Why would Congress create such a nonsensical dichotomy between CFPB court actions and CFPB administrative actions? The CFPB has articulated no remotely plausible reason why Congress would have done so.”

In fact, for the three-panel court, the basic statutory question in the case was not even a close call.

The court states, “The text of Section 8(c) permits captive reinsurance arrangements where mortgage insurers pay no more than reasonable market value for the reinsurance. Section 8(c) contains a broad range of exceptions, qualifications and safe harbors to Section 8(a). As relevant here, Section 8(c) creates a safe harbor, stating: ‘Nothing’ in Section 8 ‘shall be construed as prohibiting’ the ‘payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.’ See 12 U.S.C. § 2607(c)(2). Nothing means nothing.”

Click here for more industry reaction to Wednesday's ruling

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12 USC Section 2605 or Section 6 is titled Servicing of mortgage loans and administration of escrow accounts. It pertains to qualified written requests, notices of transfer of servicing and the administration of escrow accounts.
An arrangement that involves a person who is in a position to refer business as part of a real estate settlement service and who has an interest in a settlement services provider.

In the arrangement, the person, who has either an affiliate relationship with or a direct or beneficial ownership interest of more than one percent in a settlement services provider, directly or indirectly refers business to that provider or influences a consumer to select that provider.
An arrangement that involves a person who is in a position to refer business as part of a real estate settlement service and who has an interest in a settlement services provider.

In the arrangement, the person, who has either an affiliate relationship with or a direct or beneficial ownership interest of more than one percent in a settlement services provider, directly or indirectly refers business to that provider or influences a consumer to select that provider.
A mortgage disclosure that lists all estimated charges and fees associated with your loan. In addition to fees and charges, it will list your loan amount, mortgage rate, loan term and estimated monthly payment. Your escrows due at closing for insurance and taxes will also be outlined. Mortgage lenders are legally required to provide a GFE within three days of receiving your application.
A mortgage disclosure that lists all estimated charges and fees associated with your loan. In addition to fees and charges, it will list your loan amount, mortgage rate, loan term and estimated monthly payment. Your escrows due at closing for insurance and taxes will also be outlined. Mortgage lenders are legally required to provide a GFE within three days of receiving your application.
Under RESPA Section 2605(e)(1)(B), a qualified written request is a written correspondence that includes: 1) the name and account of the borrower, or has enough information to allow the servicer identify that information; and 2) a statement of the reasons for the belief of the borrower that the account is in error or provides sufficient detail to the servicer regarding other information sought by the borrower.

A QWR cannot be written on a payment coupon or other payment medium supplied by the servicer.
Under RESPA Section 2605(e)(1)(B), a qualified written request is a written correspondence that includes: 1) the name and account of the borrower, or has enough information to allow the servicer identify that information; and 2) a statement of the reasons for the belief of the borrower that the account is in error or provides sufficient detail to the servicer regarding other information sought by the borrower.

A QWR cannot be written on a payment coupon or other payment medium supplied by the servicer.
Under Regulation X, required use means a situation in which a person must use a particular provider of a settlement service in order to have access to some distinct service or property, and the person will pay for the settlement service of the particular provider or will pay a charge attributable, in whole or in part, to the settlement service.

However, the offering of a package or (combination of settlement services) or the offering of discounts or rebates to consumers for the purchase of multiple settlement services does not constitute a required use. Any package or discount must be optional to the purchaser. The discount must be a true discount below the prices that are otherwise generally
12 USC Section 2607 or Section 8 is titled Prohibition against kickbacks and unearned fees. It prohibits fees or kickbacks for referrals. It also prohibits accepting a portion of fee except for services actually performed. Section 8 provides information on what payments are allowed under this section and the penalties for violations.
12 USC Section 2608 or Section 9 is titled Title companies; liability of seller. This section states that a seller cannot require, as a condition of selling the property, that title insurance be purchased by any particular title company. Section 9 states that a seller who violates this section is liable to the buyer for treble damages.
12 USC Section 2609 or Section 10 is titled Limitation on requirement of advance deposits in escrow accounts. It governs escrow accounts including notifications and statements to borrowers. Section 10 also sets out penalties for those who violate the section.
Under RESPA, settlement service includes any service provided in connection with a real estate settlement. The statute provides a list of services.

Under Regulation X, settlement service means any service provided in connection with a prospective or actual settlement. The regulation provides an extended list of services as compared to the statute.
RESPA Section 3 provides that a thing of value includes any payment, advance, funds, loan, service or other consideration

Regulation X says thing of value includes: monies, things, discounts, salaries, commissions, fees, duplicate payments of a charge, stock, dividends, distributions of partnership profits, franchise royalties, credits representing monies that may be paid at a future date, the opportunity to participate in a money-making program, retained or increased earnings, increased equity in a parent or subsidiary entity, special bank deposits or accounts, special or unusual banking terms, services of all types at special or free rates, sales or rentals at special prices or rates, lease or rental payments based in whole or in part on the amount of business referred, trips and payment of another person’s expenses or reduction in credit against an existing obligation.
A form used by a settlement or closing agent itemizing all charges imposed on a borrower and seller in a real estate transaction. This form represents the closing transaction and provides each party with a complete list of incoming and outgoing funds. RESPA requires the HUD-1 to be used as the standard real estate settlement form in all transactions in the U.S. involving federally related mortgage loans.
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