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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.
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:
The Director agreed with the ALJ that no statute of
limitations applies when the CFPB challenges a RESPA violation in
an administrative proceeding; RESPA's three-year
statute of limitations for CFPB enforcement only applies to civil
actions filed in court. This would mean that CFPB Enforcement could
avoid the RESPA statute of limitations by opting to pursue an
enforcement action on the administrative track rather than in a
court of law.
Director Cordray concluded that RESPA section 8(c)(2)
is not an exemption to Section 8 liability, agreeing with
Enforcement that it is a violation of section 8(a) when a lender
makes referrals to a real estate settlement service provider in
exchange for a thing of value (including in consideration for the
purchase of goods or services — at any price), and that such
a violation cannot be saved by Section 8(c)(2).
The Director flatly rejected HUD's 1997 letter regarding
reinsurance, long relied upon by the industry (and credited even by
ALJ Elliot), in which then-Assistant Secretary of HUD-FHA
Commissioner Nicholas Retsinas stated that captive reinsurance
arrangements are permissible under RESPA so long as the Section
8(c)(2) exception for payments in return for goods or facilities
actually furnished or for services actually performed is
satisfied.
Cordray's opinion rejected Enforcement's theory of a
continuing violation, holding that the continuing violation theory
is not applicable to RESPA.
However, Cordray held that PHH committed a separate violation
of RESPA each time it accepted a reinsurance payment on or after
July 21, 2008 – going beyond Judge Elliot's ruling, which
had limited PHH's violations to payments that were connected
with loans that closed on or after July 21, 2008. In so
holding, Cordray declined to follow the leading appellate case,
widely accepted by federal courts and by ALJ Elliot, holding that a
RESPA cause of action accrues at the closing.
Apparently because of the Director's view of section
8(c)(2), he not only enjoined PHH from violating RESPA for fifteen
years, but he enjoined PHH from referring borrowers to any
provider of settlement services if that provider has agreed to
purchase any service from PHH, or make any payment to, PHH, if the
purchase or payment is triggered by the referral.
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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