CFPB Loses Motion For Reconsideration In Borders Case: Its Next Steps May Provide Insight Into The Mulvaney Enforcement Strategy

Following Borders & Borders PLC’s (Borders) successful summary judgment motion last summer, the Consumer Financial Protection Bureau (CFPB or Bureau) filed a motion for reconsideration with the federal district court in Kentucky, arguing that the court had misconstrued the affiliated business arrangements (ABAs) exemption under RESPA section 8(c)(4). Late last week, the court not only rejected the Bureau’s motion,[i] but also surprisingly departed from its previous analysis with respect to the ABAs in question. The decision touches on several important RESPA issues and may help reveal the contours of the Bureau’s new RESPA enforcement strategy going forward.

How We Got Here

The Bureau filed its case against Borders in October 2013, challenging the legality of a series of joint ventures, formed by various local real estate and mortgage companies (Joint Venture Partners or JVPs) and Borders. Specifically, the Bureau alleged that the profit distributions made by the joint ventures to the JVPs were disguised kickbacks designed to compensate for referrals (i.e., the referral of real estate closing business to Borders). The Bureau further claimed that the parties did not qualify for the “safe harbor” provision of RESPA Section 8(c)(4) because the joint ventures were not bona fide “providers of settlement services” within the meaning of RESPA.

In granting Borders’ motion for summary judgment, however, the court rejected the Bureau’s theory. The court instead found that, while the Bureau had established a prima facie RESPA Section 8(a) violation against Borders for providing referrals to their JVPs’ joint ventures, the profit distributions to the JVPs were paid pursuant to legitimate affiliated business relationships and, therefore, were protected under Section 8(c)(4) of RESPA.[ii] The Bureau subsequently moved the court to reconsider its decision.

The Reconsideration Decision

On reconsideration, the court backed away from the underlying reasoning in its summary judgment decision. In contrast to its initial finding that Borders’ referrals to the various joint ventures in return for the JVPs’ referral of closing business to Borders satisfied the elements of RESPA Section 8(a) but were nevertheless exempt under section 8(c)(4), the court found on reconsideration that Borders’ referrals did not constitute a thing of value because consumers had 30 days to decide whether to purchase title insurance in accordance with Borders’ recommendation. In other words, because any benefit to Borders was completely dependent on the consumers’ decision whether to purchase title insurance from the recommended joint venture or some other title agency, it was insufficient to qualify as a “thing of value” under RESPA. This is a potentially significant holding because it suggests that the practice of reciprocal referrals—i.e. company X referring settlement service business to company Y if Y will refer a different settlement service to X or its affiliates—does not give rise to a viable Section 8(a) claim.

Nevertheless, even assuming that referrals of title insurance to the joint ventures were things of value, the court held in the alternative that the referrals would be exempt from attack, not under the 8(c)(4) ABA exemption, but under Section 8(c)(2)’s exemption for services rendered. In so holding, the court followed the D.C. Circuit’s reasoning in the recent PHH case,[iii] which held that Section 8(c)(2) applied to the reinsurance program at issue there. In the court’s words in the Borders decision:

The [PHH] Court determined that the mortgage insurer was not providing payments in exchange for referrals, but in exchange for reinsurance, which it actually received. Although the Court acknowledged that “[PHH’s] actions create[d] a kind of tying arrangement”—that is, PHH only agreed to refer consumers to a mortgage insurer if the mortgage insurer purchased reinsurance from PHH’s subsidiary—the Court concluded that RESPA “does not proscribe [such] a tying arrangement, so long as the only payments exchanged are bona fide payments for services and not payments for referrals.” The Court explained that a payment is bona fide if it amounts to “reasonable market value” for the service provided.[iv]

Using this analogy, the court found that where consumers made payments to the joint ventures that then distributed profits from those transactions to the JVPs, the payments—as in PHH—were not made in exchange for referrals but in exchange for title insurance. The court further found that the payments could be presumed bona fide because there was no evidence that the consumers paid more than fair market value for title insurance.[v]

Future Enforcement Implications

As the Bureau has pulled back on its enforcement practices in several areas, such as payday lending and lending discrimination, many in the industry have wondered whether the Bureau would similarly stop enforcing cases that are based on more aggressive interpretations of RESPA. A clue should come soon because the Bureau will have to decide within the next 30 days whether to appeal this decision or, consistent with Director Mulvaney’s recently announced no regulation by enforcement policy, first clarify the RESPA rules and policy statements. The latter approach would include clarification of the applicable Sham Controlled Business Guidelines,[vi] which the Sixth Circuit (the court to whom the Borders case would be appealed) has in the past refused to enforce.[vii] The degree to which other courts follow or distinguish the court’s recent decision in Borders and/or its earlier analysis of the ABA exemption may also be instructive as to where the RESPA lines should be drawn.

[i] Consumer Fin. Prot. Bureau v. Borders & Borders, Case No. 13-cv-01047, 2018 U.S. Dist. LEXIS 46906  (W.D. Ky. Mar. 21, 2018).

[ii] Consumer Fin. Prot. Bureau v. Borders & Borders, Case No. 13-cv-01047, Dkt. No. 158 (W.D. Ky.  July 12, 2017).

[iii] PHH Corporation v. CFPB, 839 F.3d 1 (D.C. Cir. 2016).

[iv] Consumer Fin. Prot. Bureau, 2018 U.S. Dist. LEXIS 46906, at *10-11 (emphasis in original) (internal citations omitted).

[v] Id. at * 11.

[vi] RESPA Statement of Policy 1996-2 Regarding Sham Controlled Business Arrangements,61 Fed. Reg.29258 (June 7, 1996).

[vii] See Carter v. Welles-Bowen Realty, Inc., 736 F.3d 722 (6th Cir. 2013).