The Director of the Federal Consumer Financial Protection Bureau (CFPB), Richard Cordray, issued a decision yesterday in the first appeal of a Bureau administrative enforcement action.
Cordray’s decision upholds in part, and reverses in part, a 2014 Administrative Law Judge (ALJ) decision which held that PHH Corp. (PHH) violated the Real Estate Settlement Procedures Act (RESPA) by accepting payments for the referral of a settlement service business pursuant to a captive reinsurance arrangement.
CFPB Enforcement counsel (Enforcement) had alleged that PHH participated in a “mortgage insurance kickback scheme” in violation of RESPA for over a decade. Enforcement claimed that PHH, a mortgage lender, referred borrowers to certain mortgage insurers, who in exchange for the referrals, agreed to purchase reinsurance from a PHH subsidiary at supposedly inflated rates, taking the reinsurance fees as kickbacks. Enforcement also alleged that PHH pressured the mortgage insurers into participating in the arrangement and steered business to them “even when it knew the prices [the mortgage insurers] charged were higher than competitors’ prices.” The PHH matter followed a series of settlements between the CFPB and various mortgage insurers settling similar Enforcement allegations.
PHH and its reinsurance defendants asserted defenses and contested the action, which was tried extensively in the first administrative proceeding held under Title X procedures of the Dodd-Frank Act. ALJ Cameron Elliot of the U.S. Securities and Exchange Commission presided pursuant to an interagency agreement.
In November 2014, ALJ Elliot issued a recommended decision that ruled in favor of Enforcement, but also rejected many of its claims and theories. The ALJ decision held that some reinsurance payments violated RESPA Sections 8(a) and 8(b). The recommended decision granted injunctive relief and ordered PHH to disgorge more than $6 million in damages (Enforcement had sought more than $400 million in disgorgement and civil penalties). CFPB rules provide that recommended decisions in an administrative adjudication are appealed directly to the Director of the CFPB. PHH and Enforcement both appealed the ALJ's recommended decision, and Director Cordray heard argument in early 2015.
In his ruling issued June 4, 2015, the Director affirmed the ALJ’s findings but went much farther in concluding that the captive reinsurance arrangement violated RESPA . He issued a 38-page decision and final order that requires PHH to disgorge $109 million and imposes strict injunctive relief. In so holding, the Director rejected several long standing principles that RESPA case law and HUD policy statements and advice had previously established.
Notable aspects of the Director’s decision include the following:
Respondents may file a petition for review of the Director’s final order in a United States Court of Appeals within 30 days of the service of Director Cordray’s final order. If PHH appeals, the order requires it to pay the disgorgement amount of $109 million into an escrow account.
It is of course unclear what weight if any the courts will give to this decision especially in light of several of the dramatic departures that this decision makes from prior law. The likely appellate process should be a fascinating one with no doubt a great of deal of industry interest and likely amicus participation.
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Jay N. Varon
Jennifer M. Keas