But first, a short poem.
Politics
BY WILLIAM BUTLER YEATS (1938)
'in our time the destiny of man presents its meanings in political terms.' THOMAS MANN
How can I, that girl standing there,
My attention fix
On Roman or on Russian
Or on Spanish politics,
Yet here's a travelled man that knows
What he talks about,
And there's a politician
That has both read and thought,
And maybe what they say is true
Of war and war's alarms,
But O that I were young again
And held her in my arms.
Political Discussions?
In the midst of what has to be the most newsworthy political season since 1968, I frequently get asked to amplify one dire narrative of our political issues or another.[1] Sorry, but while I have political leanings that a close reader of these Musings can decipher, apocalyptic politics is not what is spurring[2]me to write today.
Instead, the human insight of that emotional intelligent W.B. Yeats poem helped to remove me from the incessant insincerity and animosity of our current political narrative doomscrolling back to the sensibility that profound meaning is found in knowing oneself rather than positionally arguing narratives in the public sphere. That is, in 1938[3], faced with the dire European ethos of the depression era and the inevitability of fascism’s looming armed conflict with liberal democracies that would become WWII,[4]Yeats could only focus his work thoughts on the beauty of a woman. So it is, I guess, with my own attention deficits and distractions.[5]Metaphorically (and professionally), “that girl standing there” for me is RESPA.
Eat your vegetables
Enough about Yeats and (not) commenting about our current political situation. Still, I need to warm up this metaphorical RESPA dish a bit more before serving it. So, as a reminder: I still hate kale even though everyone says it is a super healthy food to eat. More broadly, green vegetables are essentially inedible without salt, but with the right amount can be fine. However, with some bacon, shallots, honey, balsamic vinegar, roasting or pan frying, brussels sprouts can be downright spectacular!
Why am I talking about eating vegetables? Because I just realized that the information I provide in these Musings is (hopefully) like serving you yummy vegetables: essential to know stuff for mortgage industry, with enough snarky bacon, funny shallots, and roasty interesting prose to get the information past your face without realizing you’re actually eating your vegetables. No amount of salt, bacon or honey, however, will make these RESPA vegetables taste good.
HUD's RESPA interpretations undressed by Chevron
Despite a disputable ability to offer non-lawyers (and lawyers) an accessible glimpse at the legal reasoning and implications of SCOTUS decisions,[6]most of you would rather hear me talk about RESPA. In fact, based on the readership metrics I get, RESPA is a huge crowd pleaser.[7] So, I have returned to it again and again,[8] often to question and challenge how the CFPB’s interpretative clothing of RESPA differed from my own.
Well, it’s been a few months since I last wrote a RESPA related Musing, but now CFPB’s RESPA interpretations have been undressed[9]by SCOTUS’s entombment of Chevron deference to agency interpretation. So now, as foreshadowed in my last Musings, I’m going to speculate a bit on how that critical administrative law change could impair some key regulatory RESPA interpretations that depended on Chevron deference when made by HUD in the late 1990s and early 2000s. Despite their dubious statutory support, with the benefit of dference, those old HUD RESPA interpretations have been relied upon by the mortgage industry for over 25 years in guiding RESPA compliance management systems. I will provide two key examples of how those interpretations are now jeopardized.
Is mortgage brokering Illegal?
The question of whether mortgage broker fees amounted to a RESPA violation[10]was the subject of nationwide class actions in the mid-1990s. That issue was settled 25 years ago when, in 1999 and 2001, HUD issued Policy Statements (the “Broker Policies”) concluding, after due consideration (and with the benefit of Chevron deference), that as long as mortgage brokers: (i) perform at least 5 out of 12 services (including taking the borrower’s application), and (ii) get paid no more than reasonable value for those services that the mortgage broker can get paid by a lender for a referral. Actually, that’s not quite right. The broker technically is not getting paid for the referral, but rather, can get paid for those “services”.
Yet, even back in 2020, in just the second edition of these Mortgage Musings I expressed my discomfort with continuing to square mortgage brokering with RESPA’s anti-kickback prohibitions. In other words, given how easy it is to broker loans today, practically speaking, being a mortgage broker might be nothing more than getting paid to refer a loan to a lender. Over time, this has been a recurring topic in these Musings. It is an issue which I feel the industry (wholesalers and brokers) as well as the regulator who is responsible for RESPA interpretation have all failed to appreciate and may soon regret their inaction.[11]
Lender to lender exemption needed
Since Chevron deference is now off the table, the question of whether mortgage brokering as currently practiced is a RESPA violation will be likely decided by the next court to hear that claim. It is hard to imagine that a court would agree with that 25 year old fiction offered by the Broker Policies that when a broker performs 5 out 12 outdated services (many that now can be obtained with the push of a button) that it somehow (magically?) allows to the broker to be paid for those services in an amount tied to the value of the loan referred.[12] Perhaps, a court still might say that the mere act of taking the application is sufficient as a “service” to get paid a broker fee, but even that "service" is dubious when most borrowers complete their own applications online.
As I said back in 2020 and many times since, with the end of Chevron deference nigh, CFPB and industry could have prevented this looming disaster by creating an express exemption for licensed (or exempt) lenders to refer to other licensed (or exempt) lenders just as real estate brokers have such an exemption to refer customers to each other.[13] Like HUD before it, CFPB has the express power from Congress to exempt certain transactions under RESPA, but has been very reluctant to enable any RESPA covered transaction payments whatsoever.[14] Apparently, the CFPB’s enforcement division’s desire to never give up any potential claim for violations, even to facilitate what policymakers consider desirable market behaviors, always seems to control over compliance certainty for business (and other regulators).[15] In fact, CFPB officials may not have even all been on the same page when it quietly announced last September a variety of select HUD-issued interpretations and policy statements that, “continue to be applied today by the CFPB” (the “HUD Policy Statements”). No matter, none of the HUD Policy Statements will have the benefit of deference in the case of any court challenge and the next decision could be UWM’s case.
Is the 10-part “sham” test worthless?
Similarly, another one of the HUD Policy Statements that industry has used to establish its compliance management for RESPA is the 1996 Sham Joint Venture Policy Statement (the “Sham Policy”). For affiliated business arrangements seeking to comply with the RESPA safe harbor provisions, the Sham Policy was an overlay HUD designed to prevent and detect evasion of RESPA’s referral fee prohibitions by creating what HUD identified as factors indicating whether an arrangement was really a “sham”[16] lacking the substance and risks of a real business.
Ironically, even under the old Chevron deference standard, in a highly textualist decision that Federalist Society members can love, 10 years ago, a 6th Circuit court decided that the Sham Policy was not enforceable as a proper interpretation of the plain language of RESPA.[17] This decision was later reinforced[18] in a case brought by the CFPB.[19] Those cases, however, were viewed as outliers in a world of Chevron deference such that every good RESPA attorney would still advise their clients that to ignore the Sham Policy would be at their peril. Today, that 6th Circuit analysis looms large in being the only judicial interpretation of the Sham Policy. That said, CFPB ignored the PHH decision for many years and some state enforcement officials seem to have their own interpretations of RESPA whipped up by advocates for consumers or competitors.
Trouble for compliance professionals
Now, I wouldn’t say the Sham Policy is worthless, but the lack of deference makes it a much less reliable compliance measurement stick to evaluate whether RESPA is being evaded in an affiliated business arrangement. But, lawyers and compliance professionals practicing in the affiliated business arrangement area will have a much harder time providing guidance that answers the question “where does it say I can’t do that?”.[20] Frankly, this exposes a (Musing-worthy) broader issue for how the entire compliance community will need to evolve in absence of Chevron deference to agency pronouncements. Stay tuned to these Musings to see how I cook these compliance vegetables post-Chevron.
[1] Why people want to read or hear about what I think about politics is beyond me. Has anyone ever changed another person’s mind in a political argument? We all seem to have these blind spots that no amount of persuasion can enlighten. Best I can do is explain my own thinking, but I don’t expect anyone to care. If you want to know what I think you can just read The Dispatch.
[2]Yeats’ recognition of his own “attention deficits” is a common theme of his poetry in his later years. See also, The Spur.
[3]1938 is the year my father was born.
[4] Notably, Yeats did not mention Germany in this poem. “War and war’s alarms”, however, was all due to Germany in 1938. My guess is that by that year you couldn’t have a conversation about German politics as if each side had a point. Nazism couldn’t be defended on any level in polite society. Perhaps Yeats only wanted to include examples on the right or left of the time that deserved political discussion at least as he saw it then to make his own point about not wanting to get engaged in the conversation in any event.
[5] Maybe Yeats and I are just really optimists and don’t believe the worst predictions of our time will come true. He was very wrong about that with war and war’s alarms, however.
[6]Mom (and dad) have pretty much given up on understanding my Musings. They just think it’s nice I email every once in a while.
[7]Same for my speaking engagements where RESPA is always a topic folks want me to discuss.
[8]And again, and again, and again and, most recently, in April of this year when I commented on UWM’s highly publicized class action lawsuit.
[9]Yes. I used the words clothed and dressed here carefully, as would a poet. To create real RESPA poetry, however, I will need to find a way to rhyme something with RESPA that isn’t an Italian scooter
[10]It is illegal under RESPA to get paid to refer settlement services.
[11]See footnote 28 here: Ed. # 75: UWM, RESPA & Unclean Hands (mortgagemusings.com)
[12] Also, what to make of all the other “goodies” brokers get from wholesalers like training, systems, trips and swag? And has a wholesaler ever paid a mortgage broker for “services” provided in the absence of loan referrals?
[13] See 12 USC § 2607(c)(3)
[14]This has been extremely frustrating to housing counseling agencies and those who desire to work with them to create homeownership opportunities for many years.
[15]Another common frustration vented in these Musings. See e.g., https://mortgagemusings.com/f/ed-56-compliance-for-thee
[16]Not to be confused with Sham Wow!
[17] Carter v. Wells Bowen Realty, 736 F. 3d 722 (6th Cir. 2013)
[18]Jay Varon and his Foley & Lardner partner Jennifer Keas worked on both cases either as principal attorneys or amicus. Jay is a recently retired RESPA expert whose RESPA knowledge was instrumental for me. I mentioned Jay and Jen in footnote #5 of an earlier RESPA related Musing chock full of law school exam type issues. I wish Jay much success in his new endeavors. BTW, Jen and I will be presenting on RESPA related topics at the RESPRO conference October 7-8 in Washington DC. Looking forward to that one!
[19] Consumer Fin. Prot. Bureau v. Borders & Borders, PLC, Case No. 3:13-CV-1047 (W.D. Ky.)
[20]See also, Ed. #34: Dr. Rick & Lessons in Guidance (mortgagemusings.com) and Ed. #55: Double Dipping and Conflicts of Interest (mortgagemusings.com)
Brian Levy is an attorney with Katten & Temple, LLP licensed in Illinois and Wisconsin who writes the free Levy’s Mortgage Musings blog available at www.mortgagemusings.com. Mr. Levy can be reached by email at blevy@kattentemple.com. Mr. Levy’s blog is copyrighted and presented by Chrisman Commentary with permission. All rights are reserved.