This article first appeared in Law360 on October 8, 2020 - CFPB U-Turn On Mortgage Marketing May Repair Industry Ties
Law360 (October 8, 2020, 3:11 PM EDT) — On Oct. 7, the Consumer Financial Protection Bureau rescinded a 2015 bulletin that “reminded participants in the mortgage industry of the prohibition on kickbacks and referral fees under the Real Estate Settlement Procedures Act.” The announcement has the potential to be significant for mortgage industry participants because the CFPB may be signaling that it will take a more industry-friendly approach to scrutinizing marketing services agreements, or MSAs, for RESPA compliance.
Without additional action from the CFPB, or support from state regulators and clarity about the next administration, it is likely premature to expect that any settlement service providers will drastically change their approach to MSAs and RESPA compliance. Practitioners may want to advise their clients to seek additional clarity from the CFPB through no-action letters or other public statements prior to entering into any new MSAs. Here’s what you need to know.
What the CFPB Said in its Announcement & Why?
In a brief blog post announcing the rescission of the bulletin, Bryan Schneider, associate director of the CFPB’s Division of Supervision, Enforcement and Fair Lending, stated that MSAs remain subject to RESPA scrutiny and are not presumptively legal.
While the 2015 bulletin did not state that MSAs are presumptively legal — or illegal — the tone of the 2015 bulletin, along with contemporaneous enforcement actions and published supervisory highlights, did make clear that the CFPB staff was, at that time, willing to bring enforcement actions against companies that entered into MSAs that were disguising illegal referral agreements.
After the publication of the 2015 RESPA memo, certain settlement service providers that lawfully relied on MSAs to promote their businesses expressed their displeasure with the approach the CFPB had taken regarding MSAs. Many practitioners advised clients that given the 2015 memo, the CFPB was likely to object to the use of any MSAs in the mortgage industry.
This week’s announcement may have been offered by the CFPB as a step toward reconciling a relationship between regulators and an industry that has at times been marked by tension.
The CFPB also published FAQs that restated the CFPB’s expectations for companies to comply with RESPA and its implementing Regulation X. The FAQs include useful summaries of RESPA Section 8 and Regulation X. These FAQs are another deliverable in a long line of practical compliance tools that the CFPB has published that are aimed at providing clarity to new or smaller industry participants that are seeking regulatory guidance on how to navigate compliance with consumer financial laws and regulations, including RESPA.
As an example, the CFPB stated in its FAQs that it is permissible under RESPA for settlement service providers to give gifts and discounts to consumers that elect to use their services, so long as those giveaways are not conditioned on the expectation or requirement that the consumer refer business to the service provider. These FAQs also include examples of MSAs that would constitute RESPA violations.
While the CFPB had published similar examples in earlier publications, including the 2015 memo, supervisory highlights, and commentary to Regulation X, consolidating these examples on one FAQ page will prove useful to companies conducting their own in-house compliance reviews without the aid of outside counsel.
What to Expect Moving Forward
Although the CFPB has rescinded its earlier RESPA Section 8 bulletin, the CFPB continues to express its commitment to enforcing RESPA against companies that use MSAs to disguise referral arrangements. The CFPB did not go so far as disavowing any prior RESPA Section 8 enforcement actions or stating that it would not scrutinize MSAs for RESPA compliance moving forward.
Time and additional guidance from the CFPB will tell us whether this is a meaningful shift in the CFPB’s approach to enforcing RESPA or if this action was merely a move toward adopting a more friendly tone with industry participants.
Regarding the enforcement landscape, state regulators and private litigants are also permitted to bring lawsuits to enforce certain RESPA violations. With an uptick in enforcement actions by state regulators since 2017, companies may be hesitant to embrace MSAs even if they become comfortable with the CFPB’s posture toward these agreements.
If key attorneys general offices signal a willingness to be more passive in their review of MSAs and the CFPB’s approach becomes a trend that is adopted by courts hearing consumer-initiated RESPA actions, then you may start to see settlement service providers relying more on MSAs to promote their businesses.
Those changes in RESPA litigation and enforcement trends, however, are not going to take place before Election Day. Industry participants who may be inclined by this announcement to revisit their use of MSAs will likely wait until after the election is decided to make any significant changes in their approach to RESPA compliance and MSA usage.
Given the U.S. Supreme Court‘s decision in Seila Law LLC v. CFPB regarding the constitutionality of the CFPB’s structure, Democratic presidential candidate Joe Biden, if elected, would have the authority to install a new CFPB director upon his inauguration.
If a new president elects to appoint new leadership at the CFPB, the CFPB will likely revisit certain decisions made during Director Kathy Kraninger’s tenure at the CFPB, including this week’s RESPA announcement.
Further, this week’s announcement and FAQs leave enough room for interpretation that a new administration could leave the announcement in place as a helpful compliance guide for industry participants while also pursuing a more aggressive enforcement strategy. For now, it’s safe to say that you won’t see many industry participants rushing to enter into MSAs if they weren’t already willing to do so before the CFPB announcement.