A federal appellate court recently struck down efforts by the Consumer Financial Protection Bureau (CFPB) to outlaw captive-reinsurance arrangements. Some observers believe the ruling throws open the door to similar payment scenarios. In truth, the decision offers real estate businesses only limited comfort.
The case involved PHH Corporation, a mortgage lender that created a wholly owned subsidiary, Atrium Insurance Corporation. The subsidiary provided mortgage reinsurance to mortgage insurers that insured PHH’s mortgages. (Lenders often require borrowers with less than 20% equity in their homes to purchase mortgage insurance.) Here is the “captive” part: PHH frequently referred borrowers to mortgage insurers that patronized Atrium.
The question before the United States Court of Appeals for the D.C. Circuit was whether that situation violates RESPA Section 8. That law prohibits payments for referrals. The court found that, under the safe-harbor provision in Section 8(c), captive-reinsurance situations, which are “tying arrangements,” are lawful as long as the amount paid for the reinsurance is reasonable. Indeed, informal opinions from the U.S. Department of Housing & Urban Development (HUD) previously said as much. The court also ruled that the CFPB violated PHH’s right to due process by retroactively imposing liability for a practice that HUD had previously deemed lawful.
While some industry participants are likely to breathe easier as a result of the decision, they should not uncork the champagne just yet. For one thing, the notion of a “reasonable” payment is as slippery and undefined as can be. What is reasonable to one judge or jury may not be reasonable to another. Many earlier courts have recognized that RESPA is not a price-control statute and that using it to police unreasonable fees inevitably causes it to become one
For another matter, RESPA imposes a penalty of three times the entire settlement cost at issue, not a forfeiture of the supposedly unreasonable portion of a charge. That means a creative plaintiff’s lawyer will argue that $500 title premium that is five percent excessive ($25) results in a $1,500 RESPA award, plus attorneys fees. So the idea of hiding behind a reasonable fee is not as safe as some companies might like it to be.
What should you do? Whether the PHH decision will withstand anticipated appeals is unclear. So don’t bank on it just yet. If it remains in place, and you need to figure out a reasonable fee for your tying arrangement, make sure you understand the range of similar fees and then put yours in the middle. That will give you solid grounds to later dispute any claims of unreasonableness.