A U.S. Court of Appeals for the D.C. Circuit issued a ruling recently that is sending shock waves throughout the real estate lending industry. The legal issue arose when the Consumer Financial Protection Bureau (CFPB) fined PHH $109 million for violations against the Real Estate Settlement Procedures Act (RESPA). This law demands transparency in the real estate loan settlement process. This serves to inform and protect the consumer. But equally important, is the part RESPA plays against kickback schemes in the real estate investment market.
PHH vs. the Consumer Financial Protection Bureau
PHH is a New Jersey-based mortgage lender. In early 2014, CFPB charged that PHH had perpetrated a long-term mortgage insurance kickback scheme reaching as far back as 1995. It alleged that PHH referred its mortgage loan clients to specific mortgage insurers for kickbacks in the form of reinsurance fees. CFPB claims that PHH netted up to 40 percent of the insurance premiums that clients paid out to the insurers. This scheme enriched PHH and inflated the mortgage insurance premiums of its consumers.
Initially, CFPB fined the lender $6.4 million. PHH pursued an administrative appeal with the Bureau. Not only did the company lose, but CFPB Director Cordray also increased the penalty to $109 million. PHH then appealed to the D.C. Circuit Appellate Court. This is the recent ruling many are talking about. The appellate court overturned the CFPB decision, allowing PHH to claim victory.
What will this mean for RESPA and Kickbacks?
The court decision challenges the legality of certain business relationships in the real estate loan industry. The set-up PHH enjoyed relied upon marketing services and affiliate business agreements, rather than clear-cut kickback arrangements. This places their practices in a murky legal area. CFPB views these arrangements as a means to circumvent RESPA. But the court ruling doesn’t agree. Now, industry insiders wonder whether other lenders will use this argument to return to pre-RESPA business practices that will drive insurance premiums up, harming consumers.
If you are considering an Alabama real estate purchase, it’s important that you know your rights. An experienced RESPA attorney can help you understand how the law protects you. If you are involved in a transaction and your lender is trying to send you towards a specific insurer, title company or other associated service provider, don’t take action before you speak to a lawyer.
Sources: https://www.johnstonecarroll.com/Consumer-Law/Real-Estate-Settlement-Procedures-Act-RESPA.shtml, http://www.investopedia.com/terms/r/real-estate-settlement-procedures-act-respa.asp, http://files.consumerfinance.gov/f/201503_cfpb_regulation-x-real-estate-settlement-procedures-act.pdf, http://www.consumerfinance.gov/policy-compliance/enforcement/actions/phh-corporation/, https://www.washingtonpost.com/realestate/after-court-ruling-secret-payoff-schemes-may-raise-settlement-costs/2016/10/18/c89a192a-946e-11e6-9b7c-57290af48a49_story.html