Chopra says "lawyers are leeches"
In what was billed as a “fireside chat”[1] at a consumer law conference hosted by the University of Utah Law School two weeks ago, CFPB Director Rohit Chopra chose the occasion to insult the industry regulatory attorneys who deal with the CFPB’s regulations. First, Chopra unequivocally denied the interviewer’s characterization[2]of a Chopra doctrine of “finding creative uses of existing statutory authority to do bold new product projects”. [3]Chopra followed his visibly indignant rejection of the interviewer’s characterization[4] by accusing regulatory lawyers who challenge his interpretations as being “leeches, who relish compliance uncertainty if it boosts their billable hours.”[5]In other words, Chopra is saying his interpretations aren’t wrong, so anyone who challenges those interpretations must be corrupt. In the words of Dana Carvey's Church Lady, “Well, isn’t that special.”
Perhaps Chopra didn’t read my last Musings where I suggested he take an axe to the CFPB’s LO Comp Rule; a Marxist wage fixing scheme entirely at odds with market forces and consumer discounting.[6]On the other hand, maybe he did read that post and didn’t like his leadership being challenged about the right thing to do for consumers. Ok, I know I’m giving myself way too much credit for Chopra’s comments. I'm sure he was talking about other lawyers, but while calling everything a junk fee is one thing, I am curious as to why a technocrat as smart and polished as Chopra would use bloodsucking vermin imagery to describe the lawyers who disagree with his interpretations.[7]
MBA’s RESPA reform white paper
Enough about Chopra’s rude comments about my beloved but beleaguered regulatory lawyer colleagues. On the 50th anniversary of RESPA, I have some important and welcome news to share. The Mortgage Bankers Association has just announced a detailed and well-considered[8] white paper supporting reform of RESPA’s Section 8 referral fee prohibitions. MBA is rolling out this white paper in conjunction with its Annual Conference in Denver starting October 27, 2024. As noted by MBA CEO Bob Broeksmit, “It is time to have a conversation about the purpose and effectiveness of RESPA Section 8.” [9]
Of course, Levy School of RESPA Compliance (LSRC) alumni have already seen many of my conversations about how RESPA prohibits referral fees in settlement services reading this blog. LSRC’ers have heard my rants about how RESPA’s antikickback provisions are often misused and misinterpreted by CFPB and other regulators for petty[10], grossly unfair, confusing, and/or innovation stifling enforcement and policymaking in the housing market.[11] Meanwhile, the full range of the anticompetitive and potentially market disrupting effects of the CFPB’s regulatory failure to clarify the RESPA authority for the role of mortgage brokers remains to be seen.[12]
The MBA’s analysis and practical recommendations for RESPA reform speak for themselves, so I’m not going to summarize that here. Instead, I’m going to provide a classic LSRC training technique where I explain RESPA’s anti-kickback prohibitions using an analogy to illustrate the need for reform and to suggest a different way to think about the role and risks of referral fees. Yes, 50 years after RESPA was enacted it is time to ask whether RESPA’s antikickback prohibitions still make sense today. My analogy to shopping in the health care field will hopefully illustrate the nuance not usually recognized when considering referral fees: namely, the idea that a professional in a position of trust (like a realtor or banker) getting paid to refer a consumer to another provider just seems icky and a betrayal of professionalism, but is that a matter of degree of ickyness rather than something to be totally prohibited in consumer interactions?
Referral fees in health care are corrupt
On an emotional response scale of 1-10 with 10 being “I feel totally betrayed and outraged”[13], and 1 being like “whatever, like spam email”, how would you feel if you found out later that your doctor was getting paid kickbacks for prescribing certain treatments or medications to you over alternatives?[14]I’m guessing most of you would be somewhere in the 7-10 range, because you think doctors provide only impartial professional advice and now you might question their motivations in your treatment. Would you feel any less betrayed if your doctor disclosed those referral fees to you?[15]What if the kickback to the doctor was only $25 or less?[16]Would doctors allow their own corrupt financial interests to cloud what is best for their patients,[17]or do we trust that these professionals care more about their long-term reputation and will do right by us with their professional advice?[18]
Referral fees in health care are beneficial
Alternatively, how would you feel knowing a free medical information website got paid by advertisers per click?[19]I don’t know, but I’m thinking most of you would not feel too outraged or betrayed and would score that in the 1-3 range. There is just something significantly less outrageous about the potential for professional advice to be corrupted when coming from a website than a specific professional. Everyone knows the internet is less trustworthy in general. So, the credibility and trust we place in a professional, like a doctor or lawyer, is greater than the trust we have with anything from a faceless third-party entity on the internet. While most people also understand that “you get what you pay for”, there also is no question that online websites can deliver faster and cheaper medical information than having to call a doctor for routine medical issues that might not be so routine to the patient.[20] Yet, those websites also need to worry about their reputation and have to make money somehow.[21]
So, at least in the context of the market for medical information, referral fees can be beneficial (enabling free and immediate delivery of routine medical information) while at the same time can also be potentially corrupting (e.g., if a doctor is paid to refer patients with certain health issues to surgery where less expensive or less invasive options may be possible). Perhaps there is a role for measuring the degree to which a potentially corrupting influence should be prohibited in professional relationships, but we have not made all licensed professionals fiduciaries, and a lot still depends on the strength of the professional’s moral and ethical compass.
Do referral fees increase costs?
Meanwhile, notwithstanding my framing concerns about referral fees in terms of an analogy about health care conflicts and concerns about potential corruption and betrayal, when RESPA was passed in 1974,[22]Congressional hearings highlighted how referral fees were unnecessarily increasing consumer costs. The classic anecdotal problem cited was realtors getting hidden kickbacks from lenders and title companies for referring homebuyers to higher priced services. RESPA’s proponents cited a lack of transparency in the market with consumers unable to effectively shop for settlement services in a competitive market. In other words, it was a classic economic market failure due to asymmetric information (similar to health care shopping).
In 1974’s opaque market, referral fees may have increased costs, but did not provide useful shopping information to consumers to feel confident in their housing transactions that they were not getting ripped off. But that was 1974. As further noted by MBA’s Broeksmit in announcing the white paper, “At 50 years old, there appears to be little evidence that [RESPA’s] intention of lowering settlement costs has ever occurred, and new marketing technologies and reforms since the passage of the Dodd-Frank Act have rendered it obsolete and costly with few consumer benefits.”
Broeksmit is correct, but market transparency and regulatory protections, were actually ushered in even further back than Dodd Frank with RESPA and TILA in the mid to late 1970s[23]and then supplemented with the Dodd Frank Act (including the TRID closing cost disclosure regime). None of those regulations, however, have ever been shown to reduce costs for consumers.[24] Meanwhile, smartphones, the internet, and immediate electronic delivery of information were unimaginable to RESPA’s drafters. Consumers today are accustomed to getting information on the internet and are not nearly as dependent on real estate professionals (or any other person) when buying a home.
RESPA study and reform are needed
So, with the technology and transparency we have today, the question of whether referral fees increase costs or are they a barrier to lower costs needs to be studied anew. In an electronic internet (dare I add artificial intelligence) information age could a pay for click model (or anything else less outrageous than a concealed payment to a professional advisor) in fact lower the cost of customer acquisition and result in lower costs for consumers overall?
RESPA’s drafters allowed some referral fees
RESPA, however, makes no express distinctions based on the level of outrage or feelings of betrayal caused by the potential for corruption posed by referral fees in the housing industry. But RESPA’s exceptions clearly demonstrate the drafters’ comfort with enabling referral fees in certain situations where the potential conflict of interest causes less outrage and the potential for corruption is lower. The most obvious example of this is the exemption for realtor-to-realtor referrals. Simply put, not all advisor relationships and consumer interactions deserve to be overlayed with fiduciary obligations preventing referral fees. That is, we can all agree that there are circumstances where consumers have enough information that they can be expected to look out for themselves or the risk of corruption is low.[25]
Take for example, the 8 (c)(2) exception[26]for bona fide employee compensation. It would be hard to say a mortgage originator employee is corrupt for getting paid to deliver a customer to their own company, but does the same hold true for an independent mortgage broker getting paid by a wholesale lender for a loan?[27] I can see degrees of concern that are different in those two examples, but perhaps not materially so.[28]
Likewise, consider the 8 (c) (4) affiliated business arrangement (ABA) exception. Under the ABA exception, advisors[29]making a referral to an ABA can profit from the referral, but they can only get paid that profit if 3 conditions are met: (i) they can only have a profit interest in a business[30], (ii)they must disclose the profit interest, and (iii) there can be no requirement that the consumer use the affiliated company. If these conditions are met, Congress determined that the potentially corrupting influence of the conflict is tempered.
Clarity is needed
In addition to varying degrees of opportunity for corruption, some things are not even referrals. Clarity is needed on questions such as whether a lead is a referral or data purchase, and when is a payment in return for a referral and when is it for something else? These and many others are the types of questions where the MBA’s white paper rightly seeks clarity.
So how will CFPB analyze and respond to these recommendations? Sorry, but I don’t have much hope for serious consideration of the MBA’s RESPA reform proposals absent a change in CFPB leadership.
[1]This was false and misleading. It felt more like a scolding lecture.
[2] As I heard it, the characterization of Chopra’s “doctrine” was intended as a complement by former CFPB enforcement attorney and University of Utah - S.J. Quinney College of Law Christopher Lewis Peterson, but it landed poorly for Chopra.
[3]Peterson added, "You seem to look for untapped statutory authorities that have been residing in the U.S. Code, waiting for creative new applications. Is that fair?"
[4] Chopra claimed he only applying the laws as written by Congress.
[5] Chopra actually said that. I am looking forward to his comments at the MBA Annual Conference next week in Denver.
[6]Eliminating the LO Comp Rule (or RESPA Section 8) would hit my income hard, Mr. Chopra. So, I guess any billable hour boosting is on you.
[7] I doubt Chopra was auditioning for a job in a Trump administration by using that kind of fascistic language, but it does make one wonder about the corruption that is caused by absolute power.
[8] As one of the co-chairs of the committees that developed the recommendations, I’ll be helping to present the MBA’s RESPA Reform white paper at the Annual Conference on Monday, October 27.
[9] Frankly, as technology and market dynamics change over time, this is a question CFPB should take seriously about each and every consumer protection law it administers. Don’t hold your breath on that.
[10]Also, while not an apparent CFPB priority, some examiners at the FDIC think open house flyers violate RESPA and demand a proportional expense accounting of the pennies spent by lenders and real estate agents in producing, copying and distributing such items to consumers. Gimme a break. This is co-marketing with expenses on both sides but again, pennies. This is another example where CFPB has utterly failed to instruct other regulators about what is important and what isn’t when it comes to RESPA enforcement.
[11]CFPB got RESPA right when they issued the 2020 FAQs, but even that document failed to recognize the PHH case as controlling precedent on RESPA’s 8 (c)(2) exception, so I gave the FAQs an A minus.
[12] UWM’s case is still pending with its RESPA claims.
[13]My emotional outrage reaction to Director Chopra’s leech comment was an “11”.
[14] An important consideration in health care shopping is the role of health care insurance. I have ignored that role for the purposes of this analogy.
[15] Disclosure takes it down to maybe a 6-8 for me.
[16] The amount of the referral fee is certainly relevant to its corrupting potential.
[17] The famous Hippocratic Oath for doctors doesn’t cover conflicts of interest.
[18]This is not just a theoretical concern. Believe it or not, doctors have a lot more flexibility to accept payments from pharmaceutical companies and medical suppliers than real estate professionals do and there is no plenary federal regulator seeking enforcement actions (but they do face fraud and False Claims Act lawsuits). See e.g., More than half of doctors receive industry payments, with some making millions - Lown Institute.
[19]In other words, paid for each customer referral.
[20]If you’ve ever had a sudden rash or similar allergic reaction you know what I am talking about. Benadryl should have to pay per click.
[21] There’s no such thing as a free lunch.
[22]RESPA was enacted in October 1974, but it became effective on June 20, 1975.
[23]The old HUD-1 and Good Faith Estimate also came into existence due to RESPA.
[24] However, I would posit that the transparency those regulations created has been good for market competition and consumer confidence in housing purchase and finance generally.
[25] I recall a book slamming incident in law school when one student suggested that if judges were going to conclude that certain contracts were “unconscionable” because consumers couldn’t in their right mind ever agree to those terms, at what point can a court question a consumer’s ability to vote? I am beginning to wonder about that myself, but ask me again after the election.
[26]Much of the MBA’s white paper focuses on RESPA’s 8 (c)(2) exception for services rendered, goods and facilities provided, and clarity needed for compliance. CFPB’s 2020 FAQs got 8 (c)(2) right, but CFPB just can’t seem to let go of the old Richard Cordray interpretation of that exception even when the DC Circuit’s PHH decision unequivocally rejected it.
[27]Of course, the UWM case noted in fn. 12 may have something to say about this question.
[28]Like going from a 2 to a 3 on my outrage scale.
[29]Actually, you can own an ABA (or stock in a publicly traded settlement service provider) whether you are a professional advisor or not.
[30] Properly structured and disclosed affiliated business arrangements (ABAs) have a safe harbor from RESPA’s antikickback provisions, but in a “honey badger don’t care” about RESPA fashion, the District of Columbia Attorney General finds unfair and deceptive corruption in DC title ABAs even with disclosure. Wait, did I just use offensive fascist imagery in my effort at humor about the DC AG? Apologies to anyone who is offended.
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.