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   ARTICLE   |   From Scotsman Guide Residential Edition   |   January 2017

New Day Coming for MSAs

Marketing services agreements may be revived in the wake of a court ruling against the CFPB


The Consumer Financial Protection Bureau (CFPB) recently had its wings clipped. The setback for the regulator was the result of a ruling by the U.S. Court of Appeals for the District of Columbia in a case involving PHH Mortgage Corp.

The appeals court ruling was the first significant judicial rebuke of the CFPB, which has been known to impose enormous penalties on mortgage companies. In many cases, those penalties have been so onerous that affected companies could not afford to effectively defend their positions.

The appeals court ruling not only provided relief to PHH, it also could help to revive the use of so-called marketing services agreements (MSAs). The real estate industry had been forced to abandon MSAs for the most part because of compliance risks and uncertainty stoked by prior CFPB enforcement actions.

RESPA clampdown

In PHH’s case, the company had set up a system that required mortgage insurers to use PHH’s re-insurance affiliate for the loans being insured. While this practice may be questionable on other legal grounds, the U.S. Department of Housing and Urban Development (HUD) had determined previously that the payments by the mortgage insurers to PHH’s captive reinsurer did not represent indirect kickbacks to PHH under section 8(a) of the Real Estate Settlement Procedures Act (RESPA). Notwithstanding HUD’s position, its successor regulator, the CFPB, commenced its own administrative review of the practice, and its administrative law judge determined that the practice was a RESPA violation.

Beyond this, CFPB Director Richard Cordray, in reviewing the administrative law judge’s recommended decision, wrote his own decision and took some extraordinary actions. The director analyzed and reinterpreted RESPA’s services-rendered exception to prohibited referrals as structured in the PHH case.

Cordray’s view was that the services-rendered exception in RESPA was not complete in and of itself. Rather, he believed that compliance with the so-called 8(c)(2) exception was only a first step, and he determined that additional referral-fee scrutiny of such deals was required under Section 8(a) of RESPA — even when uncompensated referrals were occurring between the parties involved. 

The director further asserted that the CFPB was not constrained by RESPA’s statute of limitations for violations when the CFPB was acting through its administrative-hearing process rather than through the courts. Based on these novel legal interpretations, Cordray increased the administrative law judge’s recommended penalty against PHH from $6.4 million to $109 million dollars.

PHH appealed Cordray’s decision to the federal appeals court in Washington, D.C., where a panel of three judges issued a decision that was a significant setback for the CFPB. In addition to determining that the director of the CFPB must, for constitutional reasons, be removable at the will of the U.S. president, the court also reversed Cordray’s interpretation of the Section 8(c)(2) services-rendered exemption in RESPA. The court determined that the director’s interpretation contradicted the clear language of the statute and ignored decades of precedent.

Cordray’s assertion that there was no statute of limitations on CFPB enforcement actions at the administrative level also was rejected. The court’s ruling reinstated a time limit on how far back the CFPB can look to review possible RESPA violations and impose fines. The court’s determination on the services-rendered exception in the PHH case also has direct applicability to evaluating the compliance of MSAs under RESPA.

Safe harbor

Historically, the CFPB has been highly critical of MSAs, creating a high-risk compliance environment that has caused many service providers to withdraw from these relationships. MSAs typically involved industry professionals, such as Realtors and title companies, entering into marketing pacts, which augmented client referrals — and fee generation.

Over the past two years, the CFPB began to assert a new view of MSAs under RESPA by means of consent orders. It chose to use this unilateral process to essentially restate the law rather than going through the public-comment process of amending the RESPA regulations.

The position of the CFPB was that a services-rendered relationship, such as an MSA, even if ostensibly valid under Section 8(c)(2), violated Section 8(a) of RESPA when there were referrals of settlement-service business (i.e., title insurance services) between the parties. This violation of the referral-fee prohibition section of RESPA was deemed by the CFPB to be occurring even if no payments were being made for the referrals. The CFPB director determined that compliance alone with the services-rendered exception provision was not a safe harbor, because the services-rendered agreement itself (the MSA) was now considered to be a thing of value for the referral relationship.

For now, the PHH decision has eliminated the rationale upon which the CFPB had challenged services-rendered relationships, including MSAs.

Over the prior two years, as the CFPB signaled its evolving view of RESPA and MSAs, many companies in the real estate industry began to withdraw from such pacts and other services-rendered relationships —  beyond limited joint advertising. The fact that the CFPB could challenge an otherwise valid MSA by asserting that it was entered into with the intent to provide compensation for referrals was considered to be subjective and an unacceptable compliance risk.

As noted by the federal court in the PHH case, however, the CFPB’s new interpretation disregarded HUD’s longstanding regulations, policies and interpretations on the elements of a valid services-rendered relationship under Section 8(c)(2) of RESPA. The interpretations by HUD also had been upheld in several other federal court decisions. The most recent statement by HUD in this area was its Interpretive Rule in June 2010. This pertained to the compensation of real estate brokers by home-warranty companies for marketing and other services rendered.

Under HUD’s interpretation, the fact that uncompensated referrals might be contemplated or were occurring under a services-rendered relationship, such as an MSA, was not a factor. In the same respect, the appeals court in its PHH case ruling found that the services- rendered provision of Section 8(c)(2) of RESPA represent a complete exemption. It is a safe harbor, not the first step toward analyzing if a services-rendered agreement is itself an item of value being given for referrals.

Options ahead

The PHH decision  has the effect of reinstating HUD’s position on services-rendered agreements based on the plain and clear wording of the services-rendered exception under Section 8 (c)(2) of RESPA. Hence, the court found no reason to defer to the interpretation of the CFPB as the federal agency with presumed expertise administering RESPA.

The ruling in the PHH case on the services-rendered exception is so obvious that there is virtually no chance the CFPB will prevail on appeal as to this aspect of the court’s decision. The determination by the court to give unrestricted removal authority of the director to the president also is likely to remain in effect, which could result in a dramatic change in the attitude of the CFPB with respect to MSAs given the change in the administration. In any event, even if the removal authority aspect of the court’s decision is reversed, it will not affect the court’s reversal of the director’s reinterpretation of RESPA.

The CFPB filed for a rehearing before the full nine-member appeals court in late November. At the time of this writing, the court had not responded to the request for a new hearing. The CFPB focused on the constitutional aspect of the PHH decision that the director can be removed at the will of the president, arguing that removal of the director by the president limits the authority of Congress, which required removal only for cause when setting up the agency.

The removal issue is less relevant, however, than the chances of a reversal on the interpretation of the services-rendered exception in RESPA, which are minimal even if the full appeals court chooses to deal with the removal question.

If the full court does not rehear the case, the CFPB could appeal directly to the U.S. Supreme Court. Recent rulings by the U.S. Supreme Court, however, express its view that federal agencies, when considering regulatory changes of policy, should maintain consistency with prior administrative interpretations — unless there are compelling reasons for a change; and, it has recognized the reliance of regulated parties on prior agency interpretations.

If the CFPB does not obtain a reversal via appeal to the full panel of judges, the three-judge panel’s ruling will remain the law, but only in the District of Columbia circuit. If the CFPB appeals to the U.S. Supreme Court, and the appeal is rejected or it loses after a hearing, the decision by the U.S. Court of Appeals for the District of Columbia would become binding across the country. Hence, in light of the composition of the U.S. Supreme Court, the CFPB may leave the appellate court decision in effect as is, resulting in uncertainty for the rest of the country.

•  •  •

For now, the PHH decision has eliminated the rationale upon which the CFPB had challenged services-rendered relationships, including MSAs. It basically restores what the industry believed to be the correct interpretation of RESPA.

As the CFPB adapts to the PHH decision, the political realities have created an opportunity for progress in bringing back legitimate RESPA-compliant MSAs. The CFPB and the real estate industry would be best served if some accommodation could be reached by the parties as to what the boundaries of a bona fide, non-abusive MSA should be without reinterpreting RESPA.


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