The decision provides the mortgage industry with much-needed clarity allowing it to continue to pay captive reinsurers at a reasonable rate without violating Section 8 of RESPA.
The Consumer Financial Protection Bureau (CFPB) took over responsibility for enforcing RESPA from the Department of Housing and Urban Development (HUD) in 2011.
HUD had perceived RESPA’s anti-tying and kickback prohibitions, Section 8(c), as permitting captive reinsurance arrangement in exchange for “bona fide payments”, which prohibited such arrangements with the mortgage insurers if the insurer paid the reinsurer more than the “reasonable market rate”.
In 2014, CFPB initiated and won an administrative enforcement proceeding against US mortgage lender PHH, alleging they violated Section 8 when the firm paid a reasonable market rate to its captive reinsurer, defining the payments as “kickbacks”.
PHH appealed to the DC Court of Appeals and in October 2016 a three-judge panel ruled in PHH’s favour, finding that the CFPB’s structure was unconstitutional and their definition of Section 8(c) was incorrect.
The CFPB appealed the result to the DC Circuit Court, which ruled en banc on 31 January 2018 that the CFSB’s structure was constitutional, but their interpretation of section 8(c) was incorrect.
The Circuit Court’s stance on section 8(c) clarified that the mortgage industry can continue to pay reasonable market rates to captive reinsurance agencies without violating RESPA.
In addition, the findings should reassure the industry that it can rely on administrative opinions and guidance without being held retroactively liable for violating new interpretations.