Ukraine reminds the free world
First, I apologize for being unable to come up with a new topic for these Musings while the Russian invasion of Ukraine is top of mind. My typical rants about mortgage regulatory overreach, subjectivity and unfairness seem far too petty in comparison to the tyranny, violence, and human suffering we are witnessing unfold in Ukraine in real time. In fact, the price being paid by the Ukrainian people to remind the free world of our own recent history of war and inhumanity is tragic and shameful. Nevertheless, I think it is good that it appears that US and its European allies have been reminded to act[1]on the maxim that eternal vigilance is the price of liberty. If you forgot the past, never learned it, or just thought human evolution had advanced beyond a time where evil-minded borderline personality autocrats would impoverish and mislead their own citizens to brutally invade and seek to conquer nearby countries and/or to subjugate and oppress, well, there goes your proof.[2]
RESPA inspiration
Anyone who has had the misfortune to meet me in the last 30 years (or if you are reading this) knows I am a total RESPA nerd.[3] I don’t understand why everyone else in the mortgage and settlement service industry isn’t similarly nerded out by RESPA and its counterintuitive, anti-competitive, and legally inconsistent affectations in the name of dubious consumer protection, but I guess I’m different because, among other things, I hate kale.[4] So yeah, I’m going to talk about RESPA again.
I was inspired to again muse about RESPA by two recent unrelated court decisions: (i) Kallai v. Jatola Homes,[5] a recent RESPA kickback related decision from an Ohio federal district court, and (ii) Wooden v. United States (03/07/2022) (supremecourt.gov),a recent US Supreme Court decision that has absolutely nothing to do with RESPA. I’ll get to the Kallai decision later, but Wooden is a case under the Armed Career Criminal Act (ACCA)[6]that only a law professor could love in terms of how you can carefully modify facts to highlight different angles of a law’s application on an exam. I learned about Wooden on one of my favorite The Dispatch podcasts (Advisory Opinions[7]) by two “wicked-smaht”[8]self-avowed legal nerds and good people, Sarah Isgur and David French. That also got me to thinking about how RESPA can be ripped apart and put back together the same way.
The Wooden case involved a criminal who robbed 10 storage units in a single facility one night and the issue was whether 10 storage units each represented a separate “occurrence” under the ACCA. Wooden admitted to his crimes but was harshly sentenced under a repeat offender law that provides enhanced penalties for crimes having more than 10 “occurrences”. All 9 SCOTUS justices unanimously concluded that Mr. Wooden’s actions didn’t qualify as separate “occurrences” for the purposes of those harsher penalties[9], but there were some concurring opinions that got me thinking about RESPA.
Kavanaugh, motivation and mens rea
It wasn’t exactly a famous case like Brown v. Board of Education, Roe v. Wade, or even Kramer vs. Kramer[10], but, among RESPA nerds, no decision looms larger than the DC Circuit’s interpretation of RESPA Section 8 (c) (2)’s “services rendered exception”[11]authored by current SCOTUS Justice Brett Kavanaugh in PHH Corporation v. CFPB. This was his “Nothing means nothing” opinion which unequivocally concluded that payments to referral sources for “goods, services or facilities” are not prohibited by RESPA as long as the payments do not exceed the reasonable value for the services[12]. Kavanaugh’s opinion was a head front rejection of the Richard Cordray-era CFPB’s preferred interpretation of 8 (c) (2) which would have assumed such payments were not “bona fide” if made to a referral source.[13]
With that as background, my personal favorite Musing last year was the one about Ted Lasso and motivation under RESPA[14]. Similarly, in all of my RESPA presentations and training sessions over the years[15] my biggest mantra is about knowing your narrative and motivation. In other words, when it comes to RESPA violations, what’s in your head about why you are doing something can be just as important as the act you are doing. Meanwhile, in the Woodson case, Kavanaugh wrote a concurring opinion[16]focusing on the issue of mens rea[17] (criminal intent or evil mind)[18].
Specifically, Kavanaugh says,
The deeply rooted presumption of mens rea generally requires the Government to prove the defendant’s mens rea with respect to each element of a federal offense, unless Congress plainly provides otherwise… To be sure, if a federal criminal statute does not contain a “willfulness” requirement and if a defendant is prosecuted for violating a legal prohibition or requirement that the defendant honestly was unaware of and reasonably may not have anticipated, unfairness can result because of a lack of fair notice. That scenario could arise with some malum prohibitum federal crimes[19], for example. But when that fair notice problem arises, one solution where appropriate could be to require proof that the defendant was aware that his conduct was unlawful. Alternatively, another solution could be to allow a mistake-of-law defense in certain circumstances—consistent with the longstanding legal principle that an act is not culpable unless the mind is guilty. I would, however, continue to vigorously apply (and where appropriate, extend) mens rea requirements, which as Justice Robert Jackson remarked, are “as universal and persistent in mature systems of law as belief in freedom of the human will and a consequent ability and duty of the normal individual to choose between good and evil.
RESPA and mens rea
Long story short, Kavanaugh is saying that mens reais a key element of a crime and that you need be making a choice to do evil. RESPA has criminal penalties, thus it is a (malum prohibitum) criminal statute, but the criminal aspect almost never comes up. Meanwhile, RESPA has been around for over 40 years and is required learning for virtually every licensed person in the home business, so to say you were unaware of RESPA isn’t going to fly with anyone. Still, this guilty mind thing is fascinating.
So, what does RESPA mens rea look like? An agreement to provide a thing of value in return for a referral of settlement service business. For example, mortgage originator Maggie tells Realtor Rosie she will pay $500 for each borrower referral. Rosey says, ”Great! I accept.”, and refers borrower Bob to Maggie who promptly hands her $500 in cash. This scenario has all the elements: there’s an agreement, thing of value[20] and a referral. Moreover, both Maggie and Rosie know (or should know) they are violating RESPA and do it anyway. It gets more fun if we change the facts a bit.
Kallai and the “attempted” RESPA violation
Everyone knows that attempted murder is still a crime even though no one got murdered. That’s all about mens rea and taking actions to further that evil mind. So, what if we take the same facts about Maggie and Rosie, but after Maggie goes the ATM to get cash to pay Rosie, she gets robbed and never pays Rosie the $500? Enter the Kallai decision noted earlier. As described by Varon and Keas[21],
The Kallais’ claim was that the selling builder, with the direction and approval of its affiliated title company, promised to give real estate agents with a certain brokerage firm a monetary bonus at a later time for successful referrals of buyers or sellers to the title affiliate …. Both parties used the title affiliate at the closing of the Kallais’ purchase. By all indications, the promised bonus had not actually been paid at the time the case was filed. [emphasis added]
So, is Maggie and Rosie’s “attempted” RESPA violation still a violation if Rosie never gets paid? The Kallai decision says “Yes”. Merely offering to violate RESPA could be a violation because the offer is a thing of value[22]. Per Varon and Keas,
In Kallai, the court concluded that the claimed promise to pay bonuses to real estate agents for successful referrals itself was “consideration” that was given to the agents. But …, is an unenforceable promise really a thing of value? It is a close call, legally speaking, but if the agent were found to have relied on the promise and made the referral, it is likely to qualify.
Since Rosie relied on Maggie’s promise of the $500 in making her referral of Bob, the Kallai decision says they are both guilty of violating RESPA; not merely “attempting” to violate RESPA. In Kallai, mens rea it would seem, coupled with clear actions in furtherance of completing the crime were sufficient to find a violation.
A “perfect” RESPA thought crime.
Now let’s change the facts a bit more to create the “perfect” RESPA “thought crime”. Rosey and Maggie are good friends from high school, and they socialize often. Rosie likes to refer her clients to Maggie only because she does a great job and has low rates. Because they are extremely RESPA careful, when they get lunch or dinner together, Rosie and Maggie always go “Dutch”. Rosie and Maggie also have agreed to do co-marketing together and share costs proportionally. But, Rosie secretly wishes she could get something in return for all those referrals and Maggie secretly feels guilty that she can’t legally pay Rosie for all of the business she has sent her way. So, to assuage some of her guilt, Maggie spends more on a gift for Rosie’s 50th birthday party versus what she would normally spend[23] for another friend.[24]
Does the motivation alone behind Maggie’s gift change its nature to create a RESPA thought crime? What if Maggie just bought a more modest gift with the same thoughts? Does Maggie’s mens rea/guilty mind take a perfectly fine[25] gift and turn it into a thing of value in return for referrals? Does it matter if Rosie had said no gifts on the invitation, but still accepted Maggie’s gift anyway? And how might Justice Kavanaugh view Maggie’s and Rosie’s mens rea? Does “Nothing means nothing” really mean nothing? That is, does “evil” intent matter under RESPA if you still meet the 8 (c)(2) exception’s requirements?
Regardless of Kavanaugh’s clear language in the PHH case or his thoughts on mens rea in Wooden, I wouldn’t count on CFPB’s RESPA enforcement team having the same 8(c)(2) interpretation in the face of facts reflecting RESPA mens rea/evil intent[26]. So, I hope Maggie and Rosie (and everyone else who deals with RESPA) can always articulate a good narrative about their motivations in any event.
[1]How freedom could be so taken for granted is a massive failure of freedom loving people and countries worldwide. Humans are not born all good and learn to be evil. We are born tribal, bigoted and nepotistic. If you don’t teach children the importance of freedom and justice for all, they will only seek it for themselves. See e.g., Just Babies: The Origins of Good and Evil: Bloom, Paul: or The Federalist Papers.
[2]Joe Jackson’s “Is she really going out with him?” contains the line, “They say that looks don’t count for much. If so, there goes your proof.” That’s another way of saying “res ipsa loquitur”.
[3] The MEGO I get at parties when people ask what I do for a living is a thing to behold.
[4] Similarly, I recently decided that there is nothing a yellow bell pepper offers that a red or orange pepper can’t do twice as well.
[5]For an outstanding discussion of the Kallai case by two of the best RESPA attorneys around (Foley’s Jay Varon and Jennifer Keas), please see Federal Court Reads Between the Lines To Allow Unusual RESPA Section 8 Claim To Move Forward | Blogs | Consumer Class Defense Counsel | Foley & Lardner LLP. I wouldn’t call Varon and Keas RESPA nerds, but that article, well, res ipsa loquitur.
[6]Since I don’t believe I have any criminal defense attorneys or prosecutors who read this blog, I hope none of you ever have a reason to know anything about this federal law.
[7] I would recommend Advisory Opinions for anyone interested in the law, law school or SCOTUS jurisprudence. I would not recommend it for everyone else.
[8] I thought it was the Ben Affleck character who said, “my boy’s wicked smaht”, but nope. Watch for yourself.
[9]There goes your proof that SCOTUS justices won’t accept a tortured reading above an obvious interpretation. Then again, I’ll probably eat those words on another case.
[10]That particular “Kramer” video link probably wasn’t the one you expected, but it’s a great one nonetheless. “Why don’t you just tell me what movie you would like to see?”
[11] As I have noted previously, the “services rendered” exception is also the tenuous basis by which mortgage brokers can be paid for delivering a mortgage applicant to wholesale lender too, so it is essential that payments do not exceed reasonable value.
[12]Kavanaugh accepted HUD’s old interpretation of “bona fide” to mean “actual, necessary and distinct” services.
[13] CFPB’s October 2020 RESPA FAQs largely reflects CFPB acceptance of Kavanaugh’s interpretation, although CFPB left some wiggle room in those FAQs to find issues with arrangements they determine to be skirting the law. The “Nothing means nothing” language of Kavanaugh’s decision, however, leaves no such wiggle room.
[14]If website analytics are to be believed, many of you seemed to agree.
[15]Come see me and avowed RESPA nerd Loretta Salzano at RESPRO’s Annual Conference for the latest iteration.
[16] A “Concurral” as David French coined in a recent Advisory Opinions podcast.
[17]Please, no jokes about women’s rea.
[18]Kavanaugh’s concurrence was in response to another concurrence by Justice Gorsuch about the equitable rule of lenity in criminal statutes.Some very astute RESPA observers will also recall that the rule of lenity came up in the PHH Case too but didn’t get much traction.
[19]Like RESPA. [Musings author’s addition-not in original quotation]
[20]$500 cash is a thing of value. Please don’t @ me about that.
[21]See fn. 5 infra
[22] This one could inspire a first year Contracts exam question illustrating the legal concept of “consideration” in agreements. Is the RESPA “thing of value” the same thing as “consideration”?
[23]Perhaps a RESPA cognizant valuation company like MLinc Mortgage Solutions could develop a model for valuing what a “reasonable” gift amount to a referral source would be for a particular occasion (birthdays, weddings, X-Mas etc.) given someone’s relationship to the person receiving the gift (family, close friend, lover etc.).
[24] “A Chanel purse?!! You shouldn’t have.”
[25] ‘Perfect’, like Trump’s call with Zelensky.
[26]See e.g., CFPB’s Prospect Mortgage consent order.