I’m not sure why I latched on to the Rolling Stones for this edition, but I hope you’ll click through to at least one song/video that will bring back a happy memory, make you smile or, if you are one of my younger readers, introduce you to one of the greatest rock bands of all time. Anyway, I’ve spent the last couple Musings discussing the state of financial service regulation under the Biden Administration and my curious obsession with getting inside Rohit Chopra’s very different consumer protection mind. But I’d like to think this particular rolling stone blogger gathers no moss.
After the flurry of Supreme Court decisions at the end of June, readers may want to hear me wax about Constitutional issues. For example, I could discuss the difference between a “Major Question” and the “Non-delegation Doctrine” as articulated by SCOTUS in the West Virginia vs. EPA decision which dramatically altered the landscape for administrative law and regulatory authority[2].Yet, as said best in perhaps the greatest Stones song line of all time, “[Y]ou can’t always get what you want”. And it seems to me that what everyone “needs” from me is more RESPA content.
Subtlety and weak endorsements
Subtlety can sometimes much more powerful than being direct. It allows the reader/listener to interact with the words to come to their own conclusions rather than simply having to concede a point. Along those lines, I was accused of a “humble brag” subtlety in my recent Musings discussion of being taught anti-trust from now former Justice Stephen Breyer coupled with a footnote about CFPB Director’s Wharton MBA degree. To be clear, there was no intent to raise an intermural Ivy League dominance debate in that discussion.[3] That was purely in that reader’s head, not mine.
With subtleties in mind, if I were to offer an intentionally weak endorsement such as, “That place has the best gas station sushi in Alabama”, you should not feel compelled to go try it. Speaking of endorsements[4]and the deep South, according to New Orleans native and owner of all of the best RESPA lawyer website URL’s, Marx Sterbcow[5], there is a gas station in the Big Easy that actually does have outstanding sushi. Aside from totally blowing up the sublime imagery that Alabama gas station sushi provides, I wouldn’t be surprised if that is actually true in New Orleans where they take food quite seriously.[6]On the other hand, Marx may want to get his stomach checked for worms.
An obvious RESPA issue?
Getting back to the Rolling Stones motif and RESPA, to start me up, I was recently asked to assess RESPA implications of a Facebook posting[7]from a realtor in the Pacific Northwest about an expense paid trip she was taking to Detroit. The posting said, “… on our way to UWM for a fun event with a few of our amazing realtor partners! Thank you UWM for the expense paid treat!” Yikes. Normally, this softball RESPA issue would be occasion for me to “paint it black” and again express my sympathy for UWM’s compliance attorneys,[8]as I did hereand here.
But, I really can’t get no satisfactionfrom pointing out obvious RESPA issues. So, rather than causing their 19th nervous breakdown[9], I’m going to offer my help in turning what might look like a blatant RESPA anti-kickback violation into something defensible. Unfortunately, as noted in a previous Musing, it seems you have to break an egg to make an omelet in the RESPA world. So, first, I offer apologies to my friend Jeremy Potter, who, while he no longer issues his Saturday (or any other day of the week) Cup of Something[10]about tech, housing and Detroit, still remains as the leading unpaid and unauthorized spokesman for the Detroit Housing, Convention and Business Bureau[11].
Narrative again?
To those not already initiated in the Levy School of RESPA Compliance (LSRC)[12]now is the time (on Shprockets?) when I am going back to the evergreen topics of RESPA narrative and intent. In the most charitable narrative possible, it would appear UWM set up this deal with the intent to fly to Detroit realtors who work with UWM’s mortgage brokers (who may also have received a free trip) to ostensibly teach them about how to work with UWM and to learn about all the wonderful products and services they offer. In this case, RESPA compliance depends on UWM and its broker partners being able to show that this trip to Detroit was really all about the marketing of UWM’s products and services and not some boondoggle just to party.
Unfortunately for Detroit, UWM’s narrative essentially depends on a trip to Detroit being a chore and work, not a place someone would go as a reward or for fun that would be a “thing of value”. Ultimately, to prove out that they were not providing a thing of value in return for referrals, UWM needs to backhandedly slap its hometown with its RESPA compliance narrative. Alas, to Jeremy’s point, and no doubt to the chagrin of UWM’s compliance folks, based on curated life type Facebook postings it looks the realtors and mortgage brokers, in fact, had fun in Detroit, so that’s bad for RESPA compliance and good for Detroit.
RESPA and consumer protection history
We’re 47 years into Real Estate Settlement Procedures Act of 1974;[13]the gift that keeps on giving for mortgage regulatory lawyers. Back when RESPA was enacted the debate among academics in the relatively new consumer protection field was whether disclosure or prescriptive rules were the best means of ensuring consumer protection. In fact, RESPA contains a bit of both theories, but as for its anti-kickback provisions, disclosure was soundly rejected in favor of an outright prohibition [14]. While various parts of RESPA have been amended over the years, the part that hasn’t really changed[15]at all is RESPA’s Section 8 prohibition on referral fees.
Fed egg-headery
Fast forward from 1974 to circa 2009 (and we’re still way in the past), when I was on a banker visit to Capitol Hill. Behavioral economics was becoming more of a thing and Cass Sunstein’s“nudging” theories for regulation[16]were gaining some traction among academics. On that visit, I remember asking one of the more egg-heady types from the Federal Reserve[17]if they believed that disclosure was still the best way to protect consumers. The Fed guy firmly replied, “Yes, that is still our belief”[18].
As someone with an undergraduate economics degree from a large midwestern state flagship university with an outstanding economics department[19], I agree that, in theory, disclosure works well[20]to cause good (efficient) consumer outcomes. But, as a practical minded 30-year mortgage business veteran (and cynical lawyer and blogger), I would now say that the words “in theory” do way too much heavy lifting in that sentence.
Faith in a disclosure regime to yield desired consumer protection outcomes is often misplaced by economists who “assume a can opener”.[21]From an economic efficiency perspective, disclosures only work if the consumer both reads and understands them. If you assume the opposite (i.e., no one reads disclosures) then all the regulation does is create a gotcha regime for regulators and class action attorneys without real consumer protection of any kind. The truth is somewhere in between, but the fact remains that most people do not read disclosures and wasting a lot of regulatory brain cells and billions of dollars in industry compliance implementation costs on disclosure improvement is folly.
RESPA reform now! (said virtually no one in the last 20 years)
Yet, RESPA’s anti-kickback rule might be one area where disclosure actually could achieve better economic efficiency. As I have noted previously, and despite an well-written scholarly article and presentation seeking reform of RESPA’s anti-kickback rule by former HUD and MBA official Ken Markison[22], there is virtually no constituency for such reform within industry or consumer groups[23]. Still, someone really ought to look at whether in 2022 disguised referral fees increase costs to consumers as Congress concluded in 1974, or if RESPA now acts as an impediment to commerce that actually increases costs.
Other RESPA topics
Meanwhile, I have lots of people interested in the LSRC’s thoughts about mortgage origination joint ventures, affiliates, required use, builder incentives, marketing services agreements, office leases and similar RESPA compliance topics, but we should probably have a client relationship if you need that guidance.
[1] Gimme Shelter is probably the only Rolling Stones song remotely related to housing (it actually isn’t at all), but I worked at Shelter Mortgage Company, LLC for 15 years (about 2 or 3 owners ago), so there’s that too.
[2] I expect to have more on this topic as well as agency deference in future Musings. This letter from the ABA and other banking trades certainly gained significantly more gravitas following SCOTUS’ EPA decision.
[3] That said, however, for my readers who care about business school rankings, I did enjoy pitting Wharton against Stanford and University of Chicago business schools in footnote 4 of the last Musings.
[4]Also a RESPA segue.
[5]Mr. Sterbcow’s website claims, “Mr. Sterbcow is the only attorney in the State of Louisiana to have earned an L.L.M. in Real Estate law from the highly acclaimed John Marshall Law School’s Center for Real Estate Law in Chicago.” As a Chicago native, I am aware of the highly acclaimed John Marshall Law School, but if something is truly highly acclaimed, why would you need to tell anyone that?
[6] I will add that certain gas station food options in Wisconsin can also be quite good. Check out a Kwik-Trip if you’re ever passing through.
[7]I’m not on Facebook, but I know some very RESPA savvy marketing people who apparently are.
[8] What’s puzzling me is the nature of UWM’s [RESPA] game.
[9] Ok. I’m done. That’s my last Stones reference. I’ve got it under my thumb.
[10]Hey Jeremy, your former SCOJ readers miss you.
[11] I made up this entity, but they should totally pay him.
[12] I made that up too. It’s not a real school, but if you’ve ever heard me speak or read one of my Musings about RESPA, you’re initiated in the LSRC.
[13]Can you guess what year RESPA was signed into law? It became effective, however, June 20, 1975.
[14] A referral fee for a settlement service is still illegal even if you disclose it to the consumer. I know that makes no sense in light of how mortgage brokers operate, but I’ve covered that ground before.
[15]Save for the affiliated business exception added in the 80s and 90s.
[16]There is an important distinction between a helpful regulatory “nudge” in the right direction as suggested by Sunstein and the kind of annoying and pestering approach modeled by “noodges” like Elizabeth Warren.
[17]Pre-Dodd-Frank, the Fed housed the consumer protection academic gurus of Washington’s regulators. They were a lot of old-school PhD level economists with a few demi-Marxist idealogues (like whoever designed the 2011 LO Comp Rule) sprinkled in to create rules that don’t allow the market to function properly. The DC consumer protection gurus of today are now mostly at CFPB, and don’t seem nearly as egg-heady anymore. Perhaps that’s because they are more lawyers than economists. Notably, however, the CFPB director isn’t a lawyer.
[18] I should have responded with, “Really? Assume a can opener!”That, of course, is the punch line to a joke about how an economist would suggest to open a can of food while stranded on a desert island. Every economist worth a darn has heard that one.
[19]Hail to the Orange. Hail to the Blue. Go Illini!
[20] I wrote my law school thesis as a 3L on the efficiency of mandated disclosures in charitable solicitation (i.e. disclosure of how much actually goes to the needy vs. how much goes to administrative or solicitation expense). Former HLS Dean, Robert Clark, was my faculty advisor on that. I remember Dean Clark asking me if I was good at math because it was going to be an egg-heady formula-based economics proof. Clark chuckled at my lack of math skills and added, “well do your best in your argument”. I got an A- on the paper, so I wasn’t totally off.
P.S. I had Dean Clark for Corporations Law as 2L, and I will never forget that he sang a song about fraudulent conveyances put to operatic music. I wish I could find a recording of that on You-Tube, but I did find this article about him. https://today.law.harvard.edu/an-unmatched-curiosity-of-mind-and-humbleness-of-spirit/
[21] See footnote 18 above.
[22] I was unable to find a copy of Mr. Markison’s article online, but he may be able to send it to you if you ask nicely.
[23] For example, I distinctly remember when former RESPRO Executive Director Sue Johnson staged an economist debate in DC where the economist tasked with arguing for the efficiency of disclosed referral fees was nearly chased out of the room.