| Of Interest

A&B ABstract:

Last week, the Consumer Financial Protection Bureau (CFPB) issued an advisory opinion to address the applicability of the Real Estate Settlement Procedures Act (RESPA)’s Section 8 – the anti-kickback provision – to operators of certain digital technology platforms that enable consumers to comparison shop for mortgages and other real estate settlement services. These platforms include those that generate potential leads for the platform participants through consumers’ interactions with the platform, referred to by the CFPB as Digital Mortgage Comparison-Shopping Platforms.

The Advisory Opinion

The Advisory Opinion is an interpretive rule issued under the CFPB’s authority to interpret RESPA and Regulation X, including under section 1022(b)(1) of the Consumer Financial Protection Act of 2010, which authorizes guidance as may be necessary or appropriate to enable the CFPB to administer and carry out the purposes and objectives of federal consumer financial laws.

The Advisory Opinion provides that an operator of a Digital Mortgage Comparison-Shopping Platform violates RESPA section 8 if the platform provides enhanced placement or otherwise steers consumers to platform participants based on compensation the platform operator receives from those participants rather than based on neutral criteria.

More specifically, the Advisory Opinion states that an operator of a Digital Mortgage Comparison-Shopping Platform receives a prohibited referral fee in violation of RESPA section 8 when: (1) the Digital Mortgage Comparison-Shopping Platform non-neutrally uses or presents information about one or more settlement service providers participating on the platform; (2) such non-neutral use or presentation of information has the effect of steering the consumer to use, or otherwise affirmatively influences the selection of, those settlement service providers, thus constituting referral activity; and (3) the operator receives a payment or other thing of value that is, at least in part, for that referral activity. In other words, where the platform’s operator presents lenders based on extracted referral payments rather than the shopper’s personal data or preferences or other objective criteria, the platform has violated section 8 of RESPA. The CFPB provides two (2) examples of prohibited conduct:

Platform operator presents a lender as the best option because that lender pays the highest referral fee. However, the shopper is led to believe the lender was selected based on their shared personal data or preferences.
Platform receives payments from lenders to rotate them as the top presented option regardless of whether the highlighted lender is the best fit for the shopper.

Furthermore, if an operator of a Digital Mortgage Comparison-Shopping Platform receives a higher fee for including one settlement service provider compared to what it receives for including other settlement service providers participating on the same platform, the CFPB views this as evidence of an illegal referral fee arrangement (absent other facts indicating that the payment is not for enhanced placement or other form of steering). Ultimately, where a platform’s formula is designed to steer shoppers to use providers in which the operator has a financial stake, the platform has violated section 8 of RESPA.

Takeaway

The CFPB is concerned that Digital Mortgage Comparison-Shopping Platforms, particularly popular during a time of increasing mortgage interest rates, may attempt to take advantage of consumers rather than provide them with a neutral and fair presentation of the providers that may best meet their mortgage or other settlement needs. Any entity involved, even tangentially, in the mortgage settlement process, should ensure that services are offered based on neutral criteria rather than the compensation received from a third-party provider.

A&B ABstract:

On October 7, 2020, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) rescinded Compliance Bulletin 2015-05, RESPA Compliance and Marketing Services Agreements (“Bulletin 2015-05”). In addition, the Bureau published Frequently Asked Questions (“RESPA FAQs”) on the Real Estate Settlement Procedures Act (“RESPA”) Section 8 topics in an effort to “provide clearer rules of the road and to promote a culture of compliance.”

Background on Bulletin 2015-05

The Bureau issued the Bulletin 2015-05 on October 8, 2015, under then-Director Richard Cordray, in an effort to remind participants in the mortgage industry of the prohibition on kickbacks and referral fees under RESPA and to describe “the substantial risks posed by entering into marketing services agreements” (“MSAs”). At the time, the Bureau characterized Bulletin 2015-05 as a nonbinding general statement of policy that merely articulated considerations relevant to the Bureau’s exercise of its supervisory and enforcement authority. Consequently, Bulletin 2015-05 was not issued pursuant to the notice and comment rulemaking requirements under the Administrative Procedures Act (5 U.S.C. § 553(b)).

Through Bulletin 2015-05, however, the Bureau presented an ostensibly novel interpretation of RESPA Section 8 to caution against MSAs altogether.

For example, RESPA Section 8(c)(2) expressly provides that “[n]othing in this section 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.” Similarly, Regulation X, 12 CFR § 1024.14(g)(iv), provides that “Section 8 of RESPA permits . . . 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.” Moreover, HUD’s long-standing interpretation of Section 8(c)(2) provided that Section 8(c)(2) only allows “the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or services actually performed,” i.e., permitting only that compensation which is reasonably related to the goods or facilities provided or services performed” (HUD RESPA Statement of Policy 2001-1).

In contrast, the Bureau’s prior interpretive position was that the opportunity to enter into an MSA by contract was itself a thing of value, regardless of whether the resulting agreement provided for payment for bona fide services at fair market value. The Bureau relied on this interpretive theory in issuing Bulletin 2015-05, which effectively took the position that if a person is in a position to receive referrals from a third party, they could not otherwise do business with that party because the CFPB would attribute compensation paid to that party to be for referrals, even if the person paid fair market value for services actually rendered, because, the CFPB believed MSAs “are designed to evade” RESPA, such that engaging in MSAs poses a “substantial legal and regulatory risk of violating RESPA,” even where the MSA is “technically compliant with the provisions of RESPA.”

A three-judge panel of the D.C. Circuit Court, in PHH Corp. v. CFPB, rejected the Bureau’s theory, as it unanimously overturned then-Director Cordray’s interpretation of RESPA, holding that tying arrangements are ubiquitous and that Section 8 permits captive reinsurance arrangements so long as mortgage insurers pay no more than reasonable market value for reinsurance. The Court noted that the “CFPB’s interpretation of Regulation X is a facially nonsensical reading of Regulation X,” since Regulation X makes clear that, if a provider “makes a payment at reasonable market value for services actually provided, that payment is not a payment for a referral.” (emphasis in original).

The inconsistency between the Bureau’s apparent misinterpretation of Section 8, as espoused in Bulletin 2015-05, and longstanding HUD interpretations (and the D.C. Circuit’s decision in PHH Corp.), led to calls for rescission of Bulletin 2015-05.

Bureau’s Rescission of Bulletin 2015-05

In rescinding Bulletin 2015-05, the Bureau acknowledged that the bulletin “does not provide the regulatory clarity needed on how to comply with RESPA and Regulation X.” Consistent with the rescission, Bulletin 2015-05 no longer has any force or effect. The Bureau noted that its rescission of Bulletin 2015-05 does not mean that MSAs are per se or presumptively legal. Rather, whether a particular MSA violates RESPA Section 8 will depend on specific facts and circumstances, including the details of how the MSA is structured and implemented. The Bureau made clear that MSAs remain subject to scrutiny, and that the CFPB remains committed to vigorous enforcement of RESPA Section 8.

RESPA FAQS

Contemporaneous with its rescission of Bulletin 2015-05, the Bureau issued FAQs pertaining to compliance with RESPA Section 8. The FAQs provide an overview of the provisions of RESPA Section 8 and respective Regulation X sections, and address the application of certain provisions to common scenarios described in Bureau inquiries involving gifts and promotional activities, and MSAs.

With respect to MSAs, the FAQs provide guidance on the following questions:

What are MSAs?
What is the distinction between referrals and marketing services for purposes of analyzing MSAs under RESPA Section 8?
How do the provisions of RESPA Section 8 apply when analyzing whether an MSA is lawful?
What are some examples of MSAs prohibited by RESPA Section 8?

Notably, the FAQs provides that under RESPA Section 8(c)(2), if the MSA or conduct under the MSA reflects an agreement for the payment for bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed, the MSA or the conduct is not prohibited. Thus, RESPA Section 8 does not prohibit payments under MSAs if the purported marketing services are actually provided, and if the payments are reasonably related to the market value of the provided services only.

Takeaway

While rescission of Bulletin 2015-05 is likely to be welcomed by the industry and help to restore confidence in the viability of MSAs under the current legal landscape, it remains to be seen how the Bureau’s priorities on RESPA Section 8 enforcement will change. Companies should consider reviewing existing MSAs to ensure compliance with the Bureau’s new guidance. Moreover, it should be noted that the Bureau specifically designated its new FAQs as “compliance aids” as opposed to official interpretations. Under the Bureau’s policy statement on Compliance Aids issued earlier this year, the Bureau states only that it “does not intend to sanction, or ask a court to sanction, entities that reasonably rely on Compliance Aids.” An interpretive rule issued by the Bureau, to the contrary, affords market participants a clear legal safe harbor from liability under RESPA.