Members of the real estate industry have been celebrating the most recent federal-court ruling involving PHH Corporation. That decision seems to expand a RESPA safe harbor for services actually performed. But that ruling, while appearing to favor the industry, could cause as many problems as it solves.In a recent decision, the full United States Court of Appeals for the D.C. Circuit reinstated an earlier panel ruling about a popular safe harbor under the Real Estate Settlement Procedures Act (RESPA). The safe harbor, under RESPA Section 8(c)(2), protects a person from liability under that statute if that individual received a “bona fide salary or compensation” in exchange for “services actually performed.” The PHH ruling allows a company to invoke that safe harbor as long as the services performed were priced at fair market value. As the panel from the D.C. Circuit explained in its decision, which involved payments for mortgage reinsurance:
How do we determine whether the mortgage insurer’s payment to the lender was a bona fide payment for the reinsurance rather than a disguised payment for the lender’s referral of a customer to the insurer? As HUD had long explained, the answer is commonsensical: If the payment to the lender-affiliated reinsurer is more than the reasonable market value of the reinsurance, then we may presume that the excess payment above reasonable market value was not a bona fide payment for the reinsurance but was a disguised payment for a referral. Otherwise, there is no basis to treat payment of reasonable market value for the reinsurance as a prohibited payment for the referral—assuming, of course, that the reinsurance was actually provided. In other words, in the text and context of this statute, a bona fide payment means a payment of reasonable market value.
But the fair-market-value measure is no panacea. Industry veterans remember the RESPA battles in the early 2000s about mark-ups (passing along third-party charges while adding additional amounts to them) and overcharges (charging unreasonable or unlawful amounts for a service that a person performed himself). Regarding overcharges, RESPA’s legislative history is clear that Congress did not intend that law to be a price-control statute. But as soon as a court asks whether a particular charge is unreasonable, RESPA takes on price-control characteristics.
And clever class-action lawyers proved to be especially creative in arguing that certain charges were unreasonable or higher than fair market value. Their arguments were often successful in creating factual disputes that allowed otherwise meritless cases to survive years longer than they should have.
So while the new PHH decision gives real estate businesses an important tool they can use to fight off potential RESPA liability, it is one whose value might not arise until long after a business first needed it.