RESPA and UDAAP Enforcement Following The PHH Decision: What To Expect

As anyone who is associated with the residential real estate settlement services industry can appreciate, resolution of the PHH case by the full bench of the D.C. Circuit Court of Appeals^[1] has brought much-needed clarity and reason to fundamental issues under the Real Estate Settlement Procedures Act (RESPA). This includes clarifying that Section 8(c) of RESPA really is an exemption and that the time limit for the government to bring a RESPA enforcement action administratively is three years—the same as for a government enforcement action that is brought in court.

The majority’s en banc opinion did not re-analyze these RESPA issues but instead—no doubt in recognition of the thorough and well-reasoned RESPA and due process analysis by the three-judge panel in 2016^[2]—reinstated the panel’s decision on those points.^[3]  The majority also confirmed that the single-director structure of the Consumer Financial Protection Bureau (CFPB) is constitutional and that its director can only be fired by the president for cause.^[4]

Recent changes in the CFPB have raised questions about the agency’s future priorities and what to expect in terms of RESPA enforcement

In late November, before the PHH opinion was issued, the CFPB’s former director, Richard Cordray, stepped down and Mick Mulvaney (who also serves as head of the Office of Management and Budget) assumed control as the CFPB’s acting director.^[5]

Under Cordray’s leadership, the CFPB was considered to be an aggressive enforcer, despite being a relatively new agency. In its first half-dozen years of existence, the CFPB employed its considerable powers and leverage to extract one settlement after another in highly publicized consent orders, and also maintained an active consumer complaint database, topping one million complaints by mid-2017. The CFPB placed particular emphasis on the exercise of its “UDAAP” authority—i.e., the authority to take action against unfair, deceptive, or abusive acts and practices^[6]—and used the flexible nature of the UDAAP concepts to articulate sometimes controversial legal claims, including against persons who were on the periphery of the CFPB’s jurisdiction, at best.^[7]

The CFPB also asserted controversial RESPA theories in numerous enforcement actions. In an early RESPA enforcement action, the CFPB settled RESPA claims alleging that marketing services agreements (MSAs) between Lighthouse Title Agency, Inc. (Lighthouse) and various real estate brokers violated Section 8(a)’s prohibition on referral fees. Although the MSAs provided for payments to be made based on marketing services rendered on behalf of Lighthouse, the CFPB alleged that the payments were at least partially based on the number of referrals the brokers generated for the title agency. The CFPB contended that the MSAs were a “thing of value” executed as a quid pro quo for referrals and, therefore, illegal, regardless of whether valuable marketing services were provided.  This raised alarm bells throughout the industry because it showed the CFPB’s willingness to disregard RESPA Section 8(c)(2)—which exempts compensation for goods or facilities actually furnished or for services actually performed—if the CFPB viewed the underlying payment as pretextual.  (Of course, this same disregard of the Section 8(c)(2) exemption later resurfaced in Director Cordray’s problematic adjudication of the PHH appeal.) Other troubling CFPB RESPA theories manifested in the RealtySouth,^[8] Eghbali,^[9] Prospect Mortgage, and Meridian matters, as well as in the CFPB’s altogether unhelpful 2015 Compliance Bulletin on MSAs.

Industry regularly raised concerns about the CFPB’s “regulation by enforcement” tactics and the general lack of clarity and guidance from the agency. Nevertheless, in 2016, Director Cordray warned industry that it would be “compliance malpractice for executives not to take careful bearings from the contents of [the CFPB’s consent orders] about how to comply with the law.”

Now, Mulvaney has made clear his intention to end the CFPB’s “regulation by enforcement” era. In a memo that was reproduced in an op-ed piece in The Wall Street Journal, Mulvaney said that the CFPB on his watch will stop trying to push the envelope in regulating the consumer finance industry.

Indeed, the CFPB appears to be dialing back its efforts in various areas, such as payday lending^[10] and fair lending.^[11] When faced with his first opportunity to make a quarterly request for CFPB operating funds from the Federal Reserve, Mulvaney requested zero dollars—an abrupt shift from Cordray’s previous approach.^[12]  The CFPB also has solicited information to evaluate several of its functions to date, including the issuance of civil investigative demands (the agency’s primary investigative tool for seeking information, documents and testimony), with Mulvaney citing concerns about due process and the need for the CFPB to critically examine its policies and practices.

Given these recent developments, many members of the residential real estate settlement services industry have wondered if the CFPB will now let up on RESPA enforcement, with some even wondering if we are headed for a “wild west” environment where anything goes.

Speculations about a new era of lax RESPA/UDAAP enforcement, while understandable, are overstated in significant ways.

The CFPB will continue to back away from the kind of novel and aggressive RESPA and UDAAP theories that became the defining characteristic of the agency under the leadership of its former director. Nevertheless, the CFPB’s five-year Strategic Plan, recently issued under Mulvaney, while trumpeting the need for “free, innovative, competitive, and transparent consumer finance markets,” still has consumer financial protection as its primary focus, and still prioritizes regulation, supervision, and enforcement as tools for the CFPB to utilize. We expect the CFPB to continue to fulfill this mandate, albeit by returning to more mainstream enforcement theories and claims.

Moreover, state attorneys general (state AGs) and private plaintiffs are poised to fill enforcement gaps. Under the Dodd-Frank Act, state AGs became co-enforcers of federal consumer financial laws, including RESPA and the federal UDAAP prohibition.  A number of state AGs took advantage of this concurrent public enforcement authority by pursuing enforcement actions with the CFPB, such as the 2015 Genuine Title action brought jointly by the CFPB and the Maryland AG. Many state AGs continue to be vocal supporters of federal consumer protection efforts.  In January 2017, after the CFPB appealed for en banc review of the PHH panel decision, a coalition of state AGs^[13] unsuccessfully moved to intervene in the PHH case, correctly perceiving that the new administration might not support the CFPB’s position in the case.  In December 2017, various AGs^[14] filed an amicus brief in support of deputy director Leandra English’s lawsuit to became acting director of the CFPB, and a similarly-constituted AG group^[15] then wrote to President Trump to express “unwavering support for the critical mission” of the CFPB and make it clear that state AGs will continue to “vigorously enforce” state and federal consumer protection laws regardless of changes to the CFPB’s leadership or agenda.

In February 2018, speaking at the National Association of Attorneys General, acting Director Mulvaney reportedly said that the CFPB would be “looking to the state regulators and state [AGs] for a lot more leadership when it comes to enforcement.”

Moreover, Section 8 of RESPA is still a magnet for the plaintiffs’ class action bar. This is due to the statutory provisions and certain case law interpretations that can be argued to provide for automatic damages of three times the value of the settlement services involved in the violation—an amount that quickly yields millions of dollars in alleged class action damages.  In addition, RESPA Section 8 contains an attorney’s fee provision, which courts have (erroneously, in our view) interpreted to permit plaintiffs—but generally not defendants—to recover attorney’s fees when they prevail in RESPA cases.^[16]

Will we finally see meaningful RESPA guidance from the CFPB?

A key “unknown” at this juncture is whether the CFPB will issue much-needed regulatory guidance on RESPA-sensitive programs among real estate settlement service providers, such as MSAs and advertising agreements, lead purchasing/sharing arrangements, transaction management systems, and possibly even sham joint venture issues. Providing clear and easy-to-follow RESPA rules is challenging because a RESPA Section 8 analysis tends to be very fact-specific and often involves an inherent “reasonable valuation” aspect.  Nevertheless, some form of advisory opinion/business review letter program would go a long way.  And such guidance may be critical if Mulvaney’s mission to end regulation by enforcement is to succeed.  At this juncture, however, the “new” CFPB has not had much to say in the RESPA arena and we believe core RESPA violations will continue to be enforced vigorously, one way or the other.

[1] PHH Corp. v. Consumer Fin. Prot. Bureau, No. 15-1177, 2018 U.S. App. LEXIS 2336 (D.C. Cir., Jan. 31, 2018).

[2] PHH Corp. v. Consumer Fin. Prot. Bureau, 839 F.3d 1, 50-55 (D.C. Cir. 2016).

[3] PHH Corp., 2018 U.S. App. LEXIS 2336, at *21 (reinstating the three-judge panel opinion insofar as it related to the interpretation of RESPA and its application to the case).

[4] PHH Corp., 2018 U.S. App. LEXIS 2336, at *12 (“Because we see no constitutional defect in Congress’s choice to bestow on the CFPB Director protection against removal except for ‘inefficiency, neglect of duty, or malfeasance in office,’ we sustain it.”) That holding reversed the panel’s determination that the CFPB structure was unconstitutional but could be remedied by striking the “for cause” provision. PHH Corp., 839 F.3d at 37. When the CFPB appealed, seeking review from the full court, the Trump administration made headlines when it switched sides to oppose the CFPB’s position, urging a finding of unconstitutionality.

[5] Shortly before Cordray stepped down, he promoted his chief of staff, Leandra English, in an effort to position her as acting director of the CFPB. However, President Trump named Mulvaney to the position of acting director instead, citing the authority to do so under the Federal Vacancies Reform Act. English brought suit in federal court, seeking a preliminary injunction to prevent Mulvaney from replacing her as acting director. The court denied the request for preliminary relief but agreed to give the lawsuit expedited review; the case remains pending as of this publication. Ultimately, the president will appoint a new permanent director, with the advice and consent of the Senate, to a five-year term.

[6] See, e.g., the CFPB’s five-year strategic plan issued in 2013, under Cordray, which listed UDAAP regulation as one of the agency’s top goals and articulated the need to make sure companies cannot “build a business model around unfair, deceptive, or abusive practices.”

[7] For example, in 2014, the CFPB settled UDAAP claims against certain wireless carriers—entities typically regulated by the FCC—under a theory that the carriers’ alleged conduct of allowing third-party merchants to place unauthorized charges on customers’ phone bills was “unfair.” Further, while the CFPB is not a data security regulator, in 2016 it settled UDAAP claims against a data processor for alleged misrepresentations to consumers about its data security practices.

[8] The RealtySouth settlement resolved a RESPA claim based on the notion that a real estate broker’s affiliated business arrangement disclosure form was inadequate because it differed in typography and language from the RESPA regulation’s model form and also contained some language marketing affiliates.  The CFPB alleged that referrals from the broker’s agents to a title affiliate resulted in “increased distributions to the entities’ shared parent company” (although there was no indication that such distributions were based on anything other than the parent’s ownership share) and imposed a fine of $500,000.   However, in a subsequent copycat class action complaint against those respondents, a federal court dismissed a substantially identical RESPA claim, holding that the ABA Disclosure form at issue had been legally sufficient and the business arrangement was exempt. See White v. JRHBW Realty, Inc., No. 2:14-cv-01436-RDP, 2015 U.S. Dist. LEXIS 123432, at *8-9 (N.D. Ala. Sept. 16, 2015).

[9] In this 2016 RESPA consent order, the CFPB claimed that an individual mortgage loan officer received illegal kickbacks for escrow referrals. The loan officer was not accused of getting anything directly from the escrow company; instead, the CFPB contended that there was a “manipulation” of escrow fees whereby certain customers were offered a discount upon the loan officer’s request while escrow costs to other consumers were increased artificially.  The CFPB alleged that the consumer discounts were a “thing of value” to the loan officer because they enabled him to offer certain customers “no cost loans,” thereby allowing him to ultimately make more loans.  This settlement caused significant concern and consternation from industry about how to properly analyze consumer discount programs, long viewed as permissible and pro-competitive.

[10] In January 2018, the CFPB announced that it would be reconsidering its final payday lending rule, and the agency also has dropped a number of pending lawsuits against payday lenders. See generally http://www.latimes.com/business/la-fi-cfpb-overhaul-20180205-story.html.

[11] Mulvaney is moving the CFPB’s Office of Fair Lending and Equal Opportunity (OFLEO) under his own direct oversight and advising its staff to focus on issues like “education,” rather than enforcement. See https://www.wsj.com/articles/trump-administration-shuffles-cfpbs-lending-discrimination-operations-1517522254. Previously, the OFLEO was an equal division alongside supervision and enforcement. While Mr. Mulvaney has stated that the CFPB will continue to enforce fair lending regulations (albeit not through the OFLEO), this reorganization is widely regarded as a downshift in fair lending as an examination and enforcement priority.

[12] This move is unlikely to have much practical effect because the CFPB has significant cash reserves, but it is consistent with other signaled desires to change the agency’s direction. In the previous quarter, Richard Cordray had requested $217.1 million in operating funds for the CFPB.

[13] The 17 movants included AGs from Connecticut, Delaware, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Mississippi, New Mexico, New York, North Carolina, Oregon, Rhode Island, Vermont, Washington, and the District of Columbia.

[14] This consisted of 18 AGs from California, the District of Columbia, Connecticut, Delaware, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Vermont, and Washington State.

[15] AGs from New York, California, Connecticut, District of Columbia, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Mexico, North Carolina, Oregon, Vermont, Virginia, and Washington State.

[16] 12 U.S.C. § 2607(d)(1) (persons charged for the settlement service involved in the violation may recover an amount equal to three times the amount of any charge paid for such settlement service); and 2507(d)(5) (in any private action brought pursuant to this subsection, the court may award to the prevailing party the court costs of the action together with reasonable attorney’s fees)(emphasis added). But see Lane v. Residential Funding Corp., 323 F. 3d 739, 747-48 (9th Cir. 2003)(construing the plain language of Section 8(d)(5) to only permit attorney’s fees for defendants if the plaintiff’s action is found to be frivolous, unreasonable, or without foundation).