You Can’t Ignore RESPA Section 8(c)

RESPA

It’s been over a year since the Consumer Financial Protection Bureau (CFPB) turned the real estate settlement services industry on its head by announcing in its first ever administrative appeal that Section 8(c) of the Real Estate Settlement Procedures Act (RESPA) was not, as it had long been interpreted, a series of safe harbor exemptions to the prohibitions of Section 8(a) and 8(b), but rather a mere “interpretive tool” with which to interpret the prohibitions.  According to the Director, any Section 8(c)(2) compensation arrangement involving a quid pro quo settlement service business referral violates RESPA, regardless of the underlying services performed or whether the services were priced at fair market value. As has been well-documented on this blog, the CFPB’s PHH decision was rejected by a panel of judges for the DC Circuit — which described its ruling as “not a close call” — and subsequently granted en banc review.  While the court subsequently granted en banc review, the CFPB’s 8(c) interpretation played second fiddle to the constitutional issues at oral argument.  It is unclear whether — or how — the forthcoming en banc decision will support the panel’s eminently sensible RESPA interpretation.

In the meantime, RESPA enforcement  actions (both CFPB actions and district court cases) have not overtly engaged with Section 8(c)(2) issues.  This is understandable.  On the one hand, the federal agency charged with enforcing RESPA has held that 8(c) is not the exemption that it has long been interpreted to be.  On the other hand, a three-judge panel of the DC Circuit handily dismissed such a reading.

Recently, however, a district court in Illinois implicitly rejected the CFPB’s PHH viewpoint and instead applied the longstanding interpretation of Section 8(c)(2) in dismissing a captive reinsurance RESPA claim.

Interpretive Tool is Ignored

In Ill. ex rel. Dowling v. AAMBG Reinsurance, Inc., No. 16 C 7477, 2017 U.S. Dist. LEXIS 84231 (N.D. Ill. June 1, 2017) (“AAMBG”), a private mortgage insurance provider, Triad, was engaged in a captive reinsurance arrangement with AAMBG. Plaintiffs alleged, inter alia, that AAMBG violated Section 8 of RESPA  by accepting reinsurance premiums from Triad because “the projected value of the reinsurance to Triad was far less than the premiums Defendant expected to cede.”  In other words, Plaintiffs’ theory was that Triad’s reinsurance payment to AAMBG amounted to prohibited “kickbacks” that could not be construed as a bona fide payments for services that AAMBG actually performed.  This, in essence, is the Bureau’s enforcement theory in PHH.

To resolve this question in AAMBG, the court necessarily was called upon to determine: 1) whether section 8(c)(2) was available as a safe harbor for AAMBG and, if so, 2) whether AAMBG qualified for the safe harbor by providing bona fide services commensurate with the premium payments it received.

With respect to the first question, the court in AAMBG did not even consider that Section 8(c)(2) should be a mere “interpretive tool.”  Nor did the court reference the ongoing PHH case.   Instead, the court stated in matter-of fact fashion that Plaintiffs needed to address “RESPA’s ‘safe harbor’ provision set forth in Section 8(c) as interpreted by agencies such as [the U.S. Department of Housing and Urban Development or HUD].”   Id. at *12.  Perhaps more illustrative of the current RESPA 8(c) landscape, Plaintiffs did not even attempt to argue that 8(c)(2) is not actually a safe harbor.  Moreover, as the court noted, Plaintiffs “made [no] attempt to show that Section 8(c) does not apply to AAMBG” or that the “agreement to provide reinsurance was illusory.” Id. at *13-14.

With respect to the second question, the court—relying on HUD’s interpretive guideline for reinsurance (which the CFPB Director, in PHH, cast aside)—stated that sharing premiums would be permissible if  the “payments (1) are for reinsurance services actually furnished and (2) are bona fide compensation that does not exceed the value of such services.” Id. at *13 (emphasis added).   This is a straightforward—and traditional—Section 8(c)(2) analysis. While Plaintiffs had neglected to effectively address 8(c) in their briefs, the court nevertheless held that AAMBG took on substantial risk in exchange for the premiums it received based on the contract between the parties.  Specifically, while Triad was liable for the first 4 percent of cumulative net losses, AAMBG—in exchange for premiums paid—was liable for the next 10 percent of all net losses (i.e., net between 4 percent and 14 percent), with any additional losses being covered by Triad.   The court found that “net losses may actually be as high as 14 percent, which would require AAMBG to absorb a net loss of 10 percent and at that point would make AAMBG’s loss two-and-one-half times the loss allocated to Triad … mak[ing] AAMBG’s risk far from illusory.”[1] Id. at *14-15.  In short, the payments made to AAMBG did not amount to a RESPA 8(a) violation because they qualified for safe harbor as bona fide payments for services provided—i.e. the risk assumed.

Moving Forward

The district court’s holding in AAMBG is less renegade than it is tried and true.  While not explicitly addressing PHH or the CFPB, the AAMBG court sided with the same well-established 8(c)(2) interpretation articulated by the DC Circuit panel in PHH. Yet the AAMBG case is still notable, as it is one of the only RESPA Section 8(c)(2) analyses that has been evident since the PHH opinion was appealed to the DC Circuit. Since the DC Circuit panel’s ruling was vacated with the grant of en banc review, the AAMBG court could have expressed skepticism as to the applicability of 8(c)(2)–instead, however, it applied the safe harbor with vigor.   Thus, industry should be encouraged that the court remained constant despite the Bureau’s fluctuation on this important issue of statutory interpretation. In framing its discussion of Section 8(c)(2) as a safe harbor, the district court’s approach is harmonious with how industry, and other courts, have long understood the statute.

What’s more, the analysis in AAMBG appears to support the vitality of 8(c)(2) in another aspect as well.  Just as the DC Circuit panel indicated that the government generally bears the burden of proving that the payments at issue were more than reasonable market value and, thus, were actually disguised payments for referrals, the district court here suggested that a plaintiff must allege and prove that 8(c) does not protect the alleged illegal conduct.  For example, the AAMBG court noted in favor of defendants that Plaintiffs’ amended complaint made no attempt to show that 8(c) did not apply.  An affirmative obligation on plaintiff to disprove the applicability of Section 8(c)(2) makes good sense. Of course, this is all subject to the DC Circuit Court’s forthcoming en banc decision but, for now, we can enjoy this further support for RESPA Section 8(c)(2) from another federal district court.

[1] It is worth noting that the court stated that such an agreement could still be found illusory if Plaintiffs could show that “annual net losses had never, or almost never, exceeded 4 percent so that AAMBG did not make any payments (or very few payments) nor expect to under its reinsurance agreement.” Id. at *14.  This reiterates that Section 8(c) is a safe harbor only when the payments are bona fide.

Second Circuit Court of Appeals Reaffirms Strong Federal Preference for Enforcing Arbitration Agreements in the Evolving Era of Web-based Contracting

Uber

In a big win for the tech industry and app developers, and for other companies seeking to enforce arbitration agreements through web-based interactions, last week the Second Circuit Court of Appeals held that the plaintiff in a putative class action entered into an enforceable arbitration agreement when he registered for Uber Technology, Inc.’s (Uber) app. See Meyer v. Uber Technologies, Inc., et al., Nos. 16-2750-cv, 16-2752-cv (2d Cir. Aug. 17, 2017).  The Uber app publishes Uber’s terms and conditions, which contain a mandatory arbitration clause, via hyperlink on the app’s registration screen.  The lower court had concluded that Uber’s notice of its terms of service was not reasonably conspicuous to users, and thus, users did not unambiguously assent to a mandatory arbitration provision contained in those terms. Id.  The Second Circuit disagreed.  It held that Uber’s publication of its terms and conditions via a conspicuous hyperlink put users on inquiry notice of the relevant terms, including the mandatory arbitration provision.  In reversing the lower court, the Second Circuit did, however, remand the case so that the lower court could determine whether Uber had waived its right to arbitration by engaging in discovery in the case.

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On Remand From Supreme Court in Spokeo, Ninth Circuit Holds FCRA Violation Satisfies Article III Standing

Spokeo

The Ninth Circuit finally weighed in again on Article III standing issues after the remand of the Spokeo case from the United States Supreme Court.  The Supreme Court in Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016), addressed whether a willful violation of the Fair Credit Reporting Act (“FCRA”), absent proof of actual damages, constituted sufficient harm to confer Article III standing to a FCRA plaintiff.  The Court ultimately declined to resolve the question, instead remanding the case back to the Ninth Circuit to consider whether the Spokeo plaintiff’s injuries were sufficiently “concrete” to confer Article III standing.  In so doing, the Court advised that a statutory cause of action does not automatically empower courts to resolve alleged violations of the statute; rather, Article III requires that the statutory violation must cause the plaintiff to suffer harm that “actually exist[s]” and is not merely “abstract” or “procedural.”  136 S. Ct. at 1548-49.

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Back to Basics: A Review of Recent SCOTUS Personal Jurisdiction Jurisprudence

Spokeo

As its term drew to a close, the Supreme Court handed down its latest decision on personal jurisdiction in a case entitled Bristol-Myers Squibb Co. v. Superior Court of Cal., San Francisco Cty.[1]  Over the last six years, the Supreme Court has issued six opinions clarifying the limits of courts’ personal jurisdiction, each invalidating the exercise of jurisdiction.  Given these major, relatively fast-moving developments in such a fundamental area of the law, we thought a brief overview would be helpful for companies to better understand where they can and cannot be sued.  This post will take each of the Court’s recent decisions in turn to give you the brass tacks of what you should know about the holding and conclude with some thoughts about where the Supreme Court might go from here.

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Seventh Circuit Underscores Important Role for Pre-Certification Challenges to Expert Witnesses

Seventh

In order to certify a class action, it is the plaintiff’s burden to prove that all of the requirements of Rule 23 of the Federal Rules of Civil Procedure are satisfied. In some class actions, plaintiffs cannot proceed without expert testimony that can prove, at a minimum, that issues can be addressed based on common evidence.  In those types of cases, courts cannot take a “wait-and-see” approach to shaky expert opinions.  As the Seventh Circuit had made clear, courts must decide Daubert[1] challenges to “conclusively rule on any challenge to [an] expert’s qualifications or submissions prior to ruling on a class certification motion.”[2]  And in Haley v. Kolbe & Kolbe Millwork, Inc., the lower court was listening.  Its decision, which the Seventh Circuit affirmed in full last week, reminds class action defense counsel of the important role pursuing Daubert challenges can play when opposing class certification.[3]

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