Building and Maintaining a Residential Closing Practice in the Wake of PHH and Prospect

Back in the day, navigating RESPA[1] waters wasn’t always clear, but there were well-established principles derived from interpretations of the statute, its implementing Regulation X,[2] HUD[3] guidance and consistent public enforcement actions. These sources established relatively safe harbors for closing attorneys to implement when seeking to establish or grow their residential closing business from referral sources. This tenuous stability vanished after Congress established the Consumer Financial Protection Bureau (“CFPB”) with former Ohio-AG Richard Cordray at the helm. Director Cordray has steered the ship off HUD’s course with unprecedented legal interpretations, exorbitant financial recoveries and strong arm tactics – all leaving settlement service providers reeling. The best example of Director Cordray’s creativity is found in PHH,[4] and the CFPB’s four consent orders related to Prospect[5] demonstrate its tenacity in ferreting out unwitting witnesses whose stories undermine institutional practices aimed at RESPA compliance. Both the PHH case and the Prospect consent orders make clear that no amount of “i” dotting and “t” crossing is a complete shield from liability when entering into marketing service agreements (“MSAs”); co-marketing arrangements; desk rental, conference room rental and office lease arrangements; and perhaps even mutual referral arrangements with real estate brokers, real estate agents, builders and others in a position to refer to you title and closing business (together, “referral sources”).

A Quick RESPA Primer

In essence, Section 8 of RESPA prohibits giving a thing of value to any party pursuant to an agreement or understanding for the referral of settlement service business.[6] RESPA also includes exceptions from this prohibition, such as payments to attorneys and title companies,[7] payments under appropriate affiliated business arrangements (“ABAs”)[8] and normal promotional and educational activities.[9]The most sweeping of the exceptions to RESPA’s Section 8 prohibitions is found in the “8(c)(2)” exception for “the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or services actually performed.”[10] This clear statutory language is the basis for MSAs, lead purchases, desk rentals, office leases and a host of other arrangements between referral sources and closing attorneys.

A Quick Primer on PHH

PHH maintained an ABA it structured pursuant to HUD guidance in order to provide title reinsurance. The CFPB investigated PHH, found the arrangement to be in violation of RESPA and imposed a penalty of $6 million (the amount of the venture’s profit). PHH appealed, which required appeal to Director Cordray. Director Cordray ruled, among other things, that RESPA Section 8(c)(2) is only a clarification of and not an exception to RESPA’s Section 8(a) prohibitions and he increased the penalty to $109 million![11] In essence, Director Cordray interpreted RESPA as prohibiting a settlement service provider from giving any thing of value to a referral source even if for legitimate goods, facilities and services. According to Director Cordray, if there is a referral in the transaction, Section 8(c)(2) cannot cure it. Under Director Cordray’s interpretation, it would be a federal crime to pay a referrer even for bona fide marketing services, office space, mortgage brokerage services and more.

Not surprisingly, PHH appealed to the DC Circuit Court of Appeals, and in October of last year, the Court throttled the CFPB in a big win for the industry. In summary, the Court declared the CFPB’s structure unconstitutional. Moreover, it found that the CFPB violated due process in its retroactive application of a new interpretation, abused its power in ignoring the statute of limitations and incorrectly interpreted RESPA Section 8(c)(2).

Unfortunately, the CFPB dug in – appealing the DC Circuit Court’s holding which has been vacated pending the Court’s en banc review. The fact that the full panel’s request for briefs does not include the Section 8(c)(2) issue bodes well for the industry as did the oral arguments on May 24, 2017.

Interestingly, the DOJ asked to be heard at the May 24 hearing to argue its position asserted in its amicus brief supporting the District Court’s interpretation of the Constitutional issue that the Director should be removable at the will of the President.[12] This is a shift from the prior administration’s position. While some interpreted the DOJ’s action as a good sign that the CFPB Director will be more accountable in the future, from the oral arguments, it does not seem that the full court is anxious to declare the CFPB unconstitutionally structured.

Speculating the outcome from oral arguments is dangerous, but my best guess is that the full Court will rule in favor of the CFPB’s constitutionality and RESPA’s 8(c)(2) safe harbor. We will have to wait months to see if I’m right! Even then it is almost certain that yet another appeal will follow.

The CFPB has indicated that the Court’s ruling on PHH will prevail only in the DC Circuit. In the meantime, even though the holding overturning Director Cordray’s interpretation of Section 8(c)(2) was vacated, the CFPB has tiptoed around the 8(c)(2) issue as was evident in its enforcement actions related to Prospect. All four consent orders were void of any reference to Section 8(c)(2).

A Quick Primer on the Prospect Consent Orders

While the constitutionality of the CFPB and the RESPA Section 8(c)(2) interpretation hang in the balance, the CFPB has not been resting on its laurels. Still, it has not gone so far in its public consent orders to declare MSAs, co-marketing arrangements, desk rentals and offices leases between referral sources and settlement service providers as per se illegal. Instead, the CFPB’s investigation of Prospect’s arrangements with real estate brokers and one mortgage loan servicer allegedly revealed illegal schemes coupled with legal initiatives. As a result, the CFPB imposed substantial penalties on the parties involved: $3.5 million against Prospect; $180,000 and $50,000 against each of the real estate brokers; and $265,000 against a mortgage servicer.

The Prospect consent orders drive home some familiar themes.

1. No matter the strength of your foundation for RESPA compliance supported by well-drafted legal documents, valuations by independent third party valuations and periodic monitoring, the testimony of one ignorant witness can blow it all out of the water. Therefore, it is imperative to provide RESPA training to employees and agents of both parties to any MSA, lease, co-marketing or similar arrangement.

2. Do not couple or layer arrangements or initiatives – even those that are permissible under RESPA. For instance, steer clear of entering into an MSA and a lease with the same broker.

3. Contracting for an endorsement is tantamount to paying for a referral and thus prohibited. Do not write into any agreement with a real estate broker or builder that they will recommend you to their clients, refer business to you or designate you as their “preferred” law firm.

4. While it might be worth more to you to have a broker promote you to its agents than give you a platform to market to the public, years of regulatory actions demonstrate the danger of this approach. Keep your paid pitches directed to the general public.

5. Similarly, years of regulatory enforcement actions tell us that regulators think real estate agents have magical persuasive powers over their clients. Don’t arrange for a broker or agent to distribute your marketing materials to individual clients/consumers. Instead, contract for display of your marketing materials to the general public.

Best Practices

Some were happy to see the CFPB whack real estate brokers and hope it will discourage “What have you done for me lately?” requests from brokers and agents. In a move likely motivated at least in part by the Prospect consent orders, on April 11, 2017, the National Association of Realtors published a list of Do’s and Don’ts for real estate professionals when engaging in co-marketing activities via social media and other web-based marketing tools.[13] The educational piece is intended to help real estate professionals comply with RESPA when co-marketing.

Co-marketing and joint advertising raise unique concerns especially as technology develops making it more difficult to determine how to allocate all costs on a pro rata basis. Consider all services plus prominence when allocating co-marketing costs. When the pitching-in party is featured “below the fold” or is visible only after scrolling, that could be a problem if the parties split equally the cost of the platform or ad. Zillow made public that it is in the midst of a CFPB investigation part of which involved co-marketing, but the CFPB has published no guidance on co-marketing.

If you are considering one of the many initiatives aimed at putting cash in a referral source’s pocket, implement appropriate best practices to minimize risk.

1. Adopt appropriate policies and procedures.
2. Utilize appropriate contracts.
3. Pay only for bona fide services and never based on referrals or transactions.
4. Avoid endorsements.
5. Check for required licenses.
6. Conduct due diligence.
7. Eliminate misleading or deceptive statements.
8. Monitor for performance before making payments.
9. Follow your third party vendor management and compliance management systems policies.
10. Check privacy policy and information sharing to ensure all are legally compliant and as promised.
11. Train your team and counterparties so that they understand RESPA and the compliance pitfalls. Many of the consent orders are fraught with smoking guns.
12. Document, document, document!
13. Don’t forget attorney advertising rules!


Despite the CFPB’s “regulation by enforcement,” the anvil has yet to fall on many customary approaches to market closing and title services to and through referral sources. Gratefully, Georgia law firms are not subject to periodic RESPA compliance exams and should be able to minimize their risk by following the letter of the law, reading the tea leaves in administrative guidance documents and implementing best practices. After all, we are lawyers!

[1] The Real Estate Settlement Procedures Act of 1974; 12 USC § 2601 et seq.
[2] 12 CFR § 1024.1 et seq.
[3]Prior to the creation of the Consumer Financial Protection Bureau, the United States Department of Housing and Urban Development (“HUD”) was the administrative agency charged with interpreting and enforcing RESPA. HUD promulgated the current rules implementing Section 8 of RESPA, provided guidance in the form of FAQs, interpretations in response to industry questions, policy statements and other guidance documents.
[4] PHH Corp., Admin. Proceeding, 2014-CFPB-0002 (2015).
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[6] Many of the terms in the prohibition are defined. “Thing of value” is broadly defined and interpreted to mean more than money and has no de minimus exception. An agreement need not be formal and may be established by a course of conduct. Settlement services include title and closing services provided in connection with most consumer purpose residential closings. This anti-kickback/anti-referral fee prohibition applies not only to traditional referral sources, such as real estate agents, but any person, including a borrower. 12 USC § 2607(a).
[7] 12 USC § 2607(c)(1).
[8] 12 USC § 2607(c)(4).
[9] The exception for normal promotional and educational activities is set forth in Regulation X, not RESPA, and requires that the activity not be conditioned on referrals and that it not defray expenses of those in a position to refer settlement service business. 12 CFR § 1024.14 (g)(1)(vi).
[10] 12 USC § 2607(c)(2).
[11] This amount represented “ill gotten gains” before expenses and claims paid, ignored the statute of limitations, and retroactively applied CFPB’s new interpretation.
[12] Under current federal law, the Director is removable only for cause which requires neglect, abuse of power or malfeasance.

Loretta Salzano,
Founder of Franzén & Salzano, has been named Top Compliance Lawyer by Mortgage Compliance Magazine

The above article was published in the GRECCA Summer 2017 Newsletter.

Posted in Articles & Publications


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