CFPB and RESPA
Anyone who has read these Musings regularly or who remembers the RESPA related Consent Orders of the CFPB’s Richard Cordray Era (2012-2016)[1]knows that RESPA seems to bring out the worst in CFPB regulatory enforcement and interpretation. I’m not impugning CFPB’s motivations with that comment[2], just merely noting that they almost always fumble the ball on interpreting RESPA’s Section 8 (a) anti-kickback rule (perhaps the nation’s oldest housing industry consumer protection law), especially when it comes to RESPA’s 8 (c)(2) “payment for services rendered” exception.
In fact, whether they are trying to modernize RESPA[3]for the new internet, algorithm, and AI driven world, or extend RESPA to be a tool for punishing perceived ethical abuses or conflicts of interest in the settlement industry, as far as I am concerned, when it comes to its history of RESPA interpretation, CFPB is the regulator equivalent of the Dallas Cowboys’ placekicker missing 4 extra points in a row in a playoff game.[4]
I won’t repeat again the entire history of how CFPB ignored or downplayed RESPA’s 8 (c)(2) exception and has used regulation by enforcement to sidestep administrative process and judicial oversight in favor of its own RESPA interpretations. My previous Musings offer plenty to read about that.[5]
2020 RESPA FAQs got it right.
CFPB finally split the RESPA uprights in October 2020 when they issued the RESPA FAQs. That, however, was only after Cordray’s RESPA interpretations were intercepted[6]by current Supreme Court Justice Brett Kavanaugh at the DC Circuit in the 2018 PHH case[7]. Still, finding those RESPA FAQs on CFPB’s RESPA “compliance resources” landing page isn’t easy. Curiously[8], on the other hand, you can still easily find the poorly reasoned October 2015 Compliance Memo that CFPB revoked when they issued the RESPA FAQs on that landing page. So, despite the express purpose of the FAQs being to answer RESPA compliance questions, you’ll have to hunt to find the FAQs on the CFPB’s RESPA page by traversing through multiple links[9]. With all of that as background, I am writing to tell you that CFPB recently missed another RESPA extra point[10].
CFPB’s Digital Mortgage Shopping RESPA Advisory Opinion
February 7, 2023, the CFPB issued its RESPA Advisory Opinion on Online Mortgage Comparison Shopping Tools (consumerfinance.gov) (the “AO”) which is essentially immediately effective. The CFPB, more or less, invented the AO format a few years ago[11] and to my knowledge this is the first time it has been used in connection with RESPA (Updated 2/25/23). CFPB provided no advance opportunity to comment on the AO (at least not publicly), so if my comments here seem overly critical, it is partially because I am a little miffed[12] they did this without industry input and there is no procedural mechanism for seeking changes after it has been issued. As noted below, this should have been an easy analysis (using UDAAP principles), and the consumer protection goals are worthy, but unfortunately, with this AO, CFPB sent another RESPA interpretation wide-left[13]. That said, the AO is well written and reasoned and CFPB showed its work this time. They just got it wrong,… again.
Non-neutral = Referral?
In a nutshell, the AO says that digital mortgage shopping websites may violate RESPA if the platform operator: 1) presents one or more service providers in a non-neutral way that steers consumers to those providers, and 2) gets paid for that referral activity. Per the AO,
“By non-neutrally using or presenting information, the Operator impedes the consumer’s ability to engage in meaningful comparison of options and, …, the payment received by the Operator for such preferences or presentation of options is not merely for compensable services; instead, it is, at least in part, for referral activity.”
CFPB’s AO defines consumer steering through non-neutral[14]presentation of lenders as being a “referral.”[15]The AO leans heavily on an old (June 1996[16]) HUD Computer Loan Origination Policy Statement (the “CLO Policy”) in making that determination, but goes beyond the CLO Policy’s limited scope. Specifically, the AO notes that the CLO Policy, “recognized that these types of non-neutral presentations of information on a CLO platform may constitute a referral.” In that regard, however, the AO also quoted the CLO Policy as saying that settlement service providers, “may pay CLOs a reasonable fee for services provided by the CLO to the settlement service provider, such as, having information about the provider’s products made available to consumers for comparison with the products of other settlement service providers.”
Payment for services or payment for referrals?
Identifying the existence of a referral is one thing, but identifying whether payments are made “for services rendered” (permitted under RESPA 8 (c) (2)) or instead are in return for a referral (illegal) is a separate inquiry. Under a long-standing RESPA 8 (c)(2) interpretation incorporated into Reg X[17], determination of whether payments are for services rendered should assess whether the payments received exceed the reasonable value of the services rendered (without regard to the value of the referral). Amounts in excess of the reasonable value for services can be viewed as payment for referrals.[18]
One of the biggest problems of the Cordray era consent orders (including his overruled PHH opinion and that awful 2015 Compliance Memo) was that CFPB sought to flip the burden of proof for finding a RESPA violation when services are obtained from referral sources. CFPB seemed to believe that illegality can be assumed when services are provided from a referral source. That is, as articulated by Cordray, a payment for services could not be “bona fide” if made to a referral source. This interpretation, however, was expressly rejected by the DC Circuit in PHH.
AO overrules DC Circuit?
Yet, the AO seems to return to this rejected Cordray presumptive violation idea in analyzing non-neutral shopping sites, going beyond the CLO Policy and ignoring the binding precedent[19]of the DC Circuit’s PHH interpretation of 8 (c)(2) compliance. Rather than saying a payment could be evidence of a violation, CFPB’s AO infers that payment for services to a non-neutral comparison site is, at least in part, for the referral,
“[w]hen (1) a Digital Mortgage Comparison-Shopping Platform non-neutrally uses or presents information about one or more settlement service providers participating on the platform, (2) that non-neutral use or presentation of information has the effect of steering the consumer to use, or otherwise affirmatively influences the selection of, those settlement service providers, thus constituting referral activity, and (3) the Operator receives a payment or other thing of value that is, at least in part, for that referral activity, the Operator is receiving a payment that is not merely for compensable services …. The reason is commonsensical … [i]t is reasonable to infer that the settlement service provider is paying for the enhanced placement on the platform rather than merely … compensable services.” [emphasis added]
Absent reference to the reasonable value analysis, CFPB appears find a presumptive violation if the site is non-neutral. Of course, the CFPB does not have the power to overrule the DC Circuit. Still, I can’t square CFPB’s assumption of a payment for referral with PHH’s clear mandate that “nothing means nothing” when it comes to permitting payment (not to exceed reasonable value) for services, even if the services are provided non-neutrally by a referral source.
RESPA or UDAAP
Again, I am not taking issue with CFPB’s desire to protect consumers using the laws it is responsible to enforce, but RESPA isn’t Silly Putty® where you can bend and shape the law to say whatever CFPB enforcement staff wants it to say[20]. On the other hand, the AO could have explained why neutrality is critical under a UDAAP analysis. UDAAP is a lot more like Silly Putty® than RESPA, and, unlike RESPA, UDAAP has no criminal penalties and so would not be open to a vagueness challenge based on the equitable rule of lenity[21].
To be sure, there are real consumer UDAAP concerns with mortgage shopping sites that, as the AO puts it, “puts their thumb on the scale” but hide the ball on why they favor one mortgage company over another. It’s no different than travel sites or anything else that seemingly provide unbiased consumer choices, but use “dark patterns” or overt endorsements that are nothing more than a reflection of who will pay the site the most for the clicks. The AO’s footnote #37 recognizes that UDAAP may demand those sites to disclose why they are ranking one provider higher than another to enable the consumer to make an informed choice, but that RESPA violations cannot be cured with disclosure.
Why care?
If there are legitimate consumer protection goals achieved by the AO with respect to non-neutral mortgage shopping sites, what is the difference whether we get to the right result through RESPA or UDAAP? First, nowhere is it truer than in connection with government action that the process is more important than the outcome. I will probably return to that fundamental maxim in future Musings, but the bottom line is that a fair process creates durable outcomes that people can have confidence in even if they disagree with the outcome. But that’s a broader topic for another day.
My present concern with this AO is how it may impact RESPA interpretation outside of the specific context of mortgage shopping websites. This AO, in my estimation, is the camel’s nose under the tent for many other common RESPA-laden industry practices that involve non-neutral referrals, most notably mortgage brokering and lead sharing. I’m going to focus on mortgage brokering below, but lead sharing sites and lead sellers will also want to look closely at the AO and consider the implications, not just for mortgages, but all other settlement services as well.
How is mortgage brokering different from online shopping?
The RESPA logic of this AO can be applied directly to what mortgage brokers (and many mortgage bankers) do every day by offering mortgage loan options to consumers that are anything but neutral[22]. As I have covered many times since starting these Musings[23], mortgage brokers often are provided with all manner of incentives to work with particular wholesalers that clearly defy any objective measure of neutrality[24]. One only need to take notice of how UWM and Rocket Mortgage are competing to see that broker neutrality is contrary to the business model.
Meanwhile, to get around LO Comp’s restrictions on payment variation, most mortgage brokers have arranged to have different commission rates with different wholesalers. Does that jibe with the AO’s inference that higher payments for placement can be evidence of a payment for referral? It seems problematic. I don’t know why it matters in the RESPA context whether services are provided online or in person by a mortgage broker or employed loan officer. If CFPB believes neutrality in referrals can be applied under RESPA to a computer-based process, why not make the short hop, skip and a jump to application of that RESPA interpretation to mortgage brokers in human form? As a reminder, even if CFPB doesn’t want to go there, RESPA is enforceable by private class action attorneys and mortgage brokering was the subject of nationwide RESPA litigation prior to the HUD’s1999 Policy Statement.[25]
CFPB may not be looking beyond these online shopping sites, but RESPA says nothing about whether a referral should be neutral or not: only that one cannot pay or be paid for a referral. RESPA is clear about what it prohibits (payment for referrals), and the PHH decision is clear about how to interpret the 8 (c)(2) exception to permit payment for services. So, at least from my perspective, CFPB’s AO missed the extra point by finding a neutral referral requirement that doesn’t exist in the text and reflects an entirely new regulatory interpretation that is inconsistent with judicial interpretation of the 8 (c) (2) exception for services.
Post Script for the nerdiest of the nerds
One final note to potential RESPA defendants (or industry associations who care about RESPA or administrative law generally[26]); if and when CFPB is the agency and/or RESPA is the law in question that goes up to SCOTUS with a challenge to the Chevron or Auer deference standards (it could happen-we came close with PHH) please remember to make a mens rea (narrative) argument for Justice Kavanaugh and based on his concurrence in the Wooden case discussed in Musings Ed. 43, you’ll want to revisit the rule of lenity argument for Justice Gorsuch as well.
[1] See e.g., consent orders for Lighthouse Title, Prospect Mortgage, David Eghbali, etc.
[2] I have written about RESPA and motivation elsewhere in these Musings: see e.g., Edition 35 or Edition 43, but if you want insights on the CFPB’s motivations in connection with RESPA (albeit not the Section 8 part of RESPA), check out Edition 27: which was a Musing uniquely designed to appeal to certain CFPB Star Trek fan(s). See also fn. #21 infra for another pandering Trekkie reference.
[3]Perhaps the problem is that RESPA itself has outlived its usefulness by defying the empirical premise upon which it is based. That is, do referral fees really increase settlement costs for consumers today in 2023 vs. the pre-internet, pre-NMLS licensed mortgage broker era of 1972 when it was enacted? Could disclosed referral fees actually reduce settlement service costs today?
[4] I just love the Manning brothers’ speechless reactions in that video when he misses the 4th one. Giving the kicker a third attempt was dicey enough, but I would fire the coach who sends that guy out a 4th time. C’mon man, just go for 2 already.
[5] See, e.g., https://mortgagemusings.com/f/ed28-billions-fair-fights-the-cfpb
[6] It was a “pick6”.
[7]Famously, Kavanaugh’s decision told Cordray and CFPB that when it comes to RESPA’s 8 (c)(2) services rendered exception that, “’Nothing’ means nothing”. I still contend that the 2015 RESPA Compliance Memo was overruled and rejected by the PHH Decision, so the later revocation was largely a fait accompli.
[8]Some things (such as the RESPA Advisory Opinion discussed below) also seem to get posted to that RESPA compliance page immediately, while the FAQs took about a year to be posted and, again, are buried a few links inside.
[9] Or just return to this Musings edition for the link I provided above and again here: https://www.consumerfinance.gov/compliance/compliance-resources/mortgage-resources/real-estate-settlement-procedures-act/real-estate-settlement-procedures-act-faqs
[10]The Cowboys kicker missed his first extra point in the Cowboys’ next playoff game too. Interestingly (if you like my Cowboy kicker analogy), that one was blocked.
[11]85 FR 77987 (Dec. 3, 2020)
[12]”Miffed” is a mild expression of the feeling that one can have when Constitutional rights of notice and due process (opportunity to be heard) are cavalierly handled by imperious administrative agencies. Nevertheless, fortunately, these Musings allow me to use self-help to obtain the opportunity to be heard directly as I am confidently hopeful that at least some CFPB staff will see this.
[13] I could have said “wide-right” here, but “wide-left” seemed more appropriate.
[14] While not addressed in this Musing (and speaking of Silly Putty®), I have serious questions about the malleable nature of a “neutrality” obligation in light of the challenges in identifying truly neutral criteria and who gets to decide what is neutral. Sure, APRs can be objectively ordered, but what if companies were ranked on more subjective criteria such as commitment to diversity and/or minority lending. Even alphabetized lists are not entirely neutral.
[15]While I disagree with that conclusion, I concede that CFPB has the right to interpret RESPA and Reg X to make a determination as to what is a referral provided that determination is in compliance with the standards for deference under Auer and Chevron as the same are interpreted by the judicial system and, in particular SCOTUS in the coming months. More on Auer and Chevron later in this edition, but if you don’t know what those cases relate to, don’t worry. I expect they won’t be nearly as important anymore soon enough.
[16]Notably, the CLO Policy precedes HUD’s 1999 Policy Statement about minimum required services to earn a fee in a mortgage broker context.
[17] The “reasonable fee” for “actual, necessary and distinct services” regulatory treatment of the 8(c)(2) exception predates the 1996 CLO Policy and was recognized and reinforced by PHH and the 2020 FAQs.
[18] 12 CFR 1024.14(g)(2) (Reg X) (providing that fees in excess of reasonable market value can be evidence of a RESPA section 8 violation).
[19] I’m not an appellate lawyer but from an administrative law perspective, is there any argument to be made as to why the DC Circuit is not controlling authority on the CFPB’s interpretative AO?
[20]Also useful for plantar fasciitis? https://walkwellstaywell.wordpress.com/2012/10/03/silly-putty-stretching-for-plantar-fasciitis/
[21]See my discussion of a SCOTUS Justice Gorsuch concurrence about the equitable rule of lenity in footnote 18 of Ed #43: Of Evil Minds & RESPA (mortgagemusings.com). I also gave mention to Foley attorneys Jen Keas and Jay Varon in that edition. Thanks for the recent insights, Jen!
[22]Again, true neutrality is chimera; nearly impossible to achieve with human decisioning. Vulcans, maybe; but not humans.
[23]See e.g., Edition #2: RESPA, a whole(sale) lot of trouble (mortgagemusings.com)
[24]See fn. # 14 infra, for discussion on whether neutrality can truly be objective.
[25] HUD RESPA Statement of Policy 1999–1 Regarding Lender Payments to Mortgage Brokers, 64 FR 10080, 10087 (Mar. 1, 1999). Again the wholesale and broker industry owes a debt of thanks to RESPA nerds, Ken Markison and Rod Alba for that relief.
[26]See list of amicus curiae in PHH