Noting that “[t]he basic statutory question in this case is not a close call,” the D.C. Circuit has held that a bona fide payment by one settlement service provider to another does not violate Section 8(a) of the Real Estate Settlement Procedures Act (RESPA) if the payment is reasonably related to the market value of the goods, services, or facilities provided. See PHH Corp. v. Consumer Financial Protection Bureau (D.C. Cir. Oct. 11, 2016). The court’s conclusion was mandated by the unambiguous text of Section 8(c) of RESPA, along with the U.S. Department of Housing and Urban Development’s (HUD’s) long-standing interpretations of the same statutory provision.

In its underlying decision, the Consumer Financial Protection Bureau (CFPB or Bureau) determined, for the first time and at odds with its predecessor HUD, that Section 8 of RESPA prohibits captive reinsurance agreements even if the mortgage insurers paid no more than reasonable market value for the reinsurance. The CFPB then applied its interpretation retroactively to conduct that occurred before the Bureau notified the public of its new interpretation. The D.C. Circuit agreed with the appellants (collectively, “PHH”) that the CFPB both misinterpreted the plain language of Section 8, but also violated due process by applying its interpretation retroactively.

With respect to statutory interpretation, the court read Section 8(c) as unambiguously permitting captive reinsurance arrangements “where mortgage insurers pay no more than reasonable market value for the reinsurance.” By stating that “[n]othing” in Section 8 “shall be construed as prohibiting” a “payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed,” Section 8(c) creates a safe harbor for payments where a referral is involved . 12 U.S.C. § 2607(c). The court succinctly held, “[n]othing means nothing.” It stated further that HUD’s earlier interpretation of Section 8(c) is “commonsensical:” whether a payment is a bona fide payment for services, rather than a disguised payment for referral, may be evaluated by whether the payment represents the reasonable market value of the service provided. Any payment in excess of market value is not for the service, the court noted.

The CFPB had determined in the underlying decision that, if a referral was involved in a transaction, any payment made was for that referral in violation of Section 8, regardless of whether it was reasonably related to the market value of services provided. Flatly rejecting the CFPB's reasoning, the court noted that RESPA’s statutory framework does not prohibit tying arrangements in which one entity agrees to refer business to another conditioned on the purchase of a service from an affiliated entity at reasonable market value. Section 8(a) does not “proscribe a tying arrangement, so long as the only payments exchanged are bona fide payments for services and not payments for referrals.” As the court repeated in its decision, “[a] bona fide payment means a payment of reasonable market value.” That the payment may be part of “a tying arrangement does not make the payment any less bona fide….”

In reaching its decision, the court steered the CFPB back to Section 8(c) as plainly written and consistent with the decisions of other Circuit Courts of Appeal throughout the country.[1] “Congress explicitly made clear in Section 8(c) that” transactions that involve referrals “were lawful so long as reasonable market value was paid and the services were actually performed.” The court agreed with PHH and supportive amici curiae by stating that “Section 8(c) specifically bars the aggressive interpretation of Section 8(a) advanced by the CFPB.” Section 8(c) “was designed to provide certainty to businesses in the mortgage lending process,” a certainty that had been based on years of relying on the plain language of Section 8(c), including as repeatedly interpreted by HUD both informally and in Regulation X.

Indeed, the court acknowledged what industry participants have known for a long time: “referrals often enhance the efficiency of the homebuying process.” And further:

[T]ying arrangements can be beneficial to consumers and the economy by enhancing efficiencies and lowering costs…. [RESPA] allows vertical integration of lenders and other settlement service providers under its affiliated business provisions. If such vertical integration is allowed, it would not make much sense to conclude that similar vertical contractual relationships are proscribed. (emphasis in original)

The court’s interpretation of Section 8 is consistent not only with the plain language of the statute but also with Regulation X as implemented by HUD and later adopted by the CFPB itself,[2] the purpose of the statute, and Congressional intent.[3] Indeed, because Section 8(c) “eliminates any potential ambiguity” that may have been presented by Section 8(a) standing alone, the court rejected the CFPB’s assertion that its new interpretation of Section 8 was entitled to Chevron deference and further suggested that the CFPB’s apparent belief that reinsurance arrangements are harmful should be addressed to Congress and the President “when exercising legislative authority.”

Finally, the court concluded that, even if the CFPB’s interpretation of Section 8 were consistent with the statute, the Bureau violated PHH’s due process rights by retroactively applying the new interpretation to conduct that had already occurred. At the time that PHH was engaged in the captive reinsurance arrangement that the CFPB penalized, it was entitled to rely on HUD’s “consistent and repeated interpretation of Section 8,” which was widely known and relied upon by the mortgage lending industry through letters, guidance, and regulation. “The retroactive application of the CFPB’s new interpretation violated the Due Process Clause” because “PHH did not have fair notice of the CFPB’s interpretation of Section 8 at the time PHH engaged in the conduct at issue here.” This, according to the court, is “Rule of Law 101.”