United States: CFPB Enforces RESPA In Its First Appellate Decision Of The Director

In the first appeal of an administrative enforcement proceeding before the Consumer Financial Protection Bureau ("Bureau"), the administrative law judge (ALJ) concluded that PHH Corporation, a mortgage lender, referred consumers to mortgage insurance companies in exchange for mortgage reinsurance premiums. The ALJ held that these mortgage reinsurance premiums were considered kickbacks—which are a violation of RESPA.

All parties appealed the decision from the ALJ, but the decision that PHH violated RESPA was upheld. However, the violations were on different grounds. On this appeal, PHH's violations were found to warrant injunctive relief and disgorgement of over $109 million. Bureau Director Richard Cordray ("Cordray") affirmed the recommended decision in part, and denied it in part.

Factual and Procedural Background

PHH Mortgage Corp. and PHH Home Loans LLC are owned by PHH Corp. (collectively, "PHH"). PHH is an originator of home mortgage loans. At the time, PHH was one of the nation's largest home mortgage lenders. Besides originating loans, PHH purchased loans that other lenders originated, and sold them into the secondary market.

PHH also established Atrium Insurance Corp., where the employees from PHH were responsible for doing the work. In addition, PHH established Atrium Reinsurance Corp. ("Atrium"), which took over all of the functions of Atrium Insurance Corp.

Five other mortgage insurance companies that received referrals of borrowers from PHH are also involved in this case. United Guaranty Residential Mortgage Co. (UGI), Genworth Mortgage Insurance Corp. (Genworth), Radian Guaranty Inc. (Radian), Mortgage Guaranty Insurance Co., and Republic Mortgage Insurance Co. were interested in protecting their rights with respect to confidential investigative information the companies provided to the Bureau.

Atrium provided a way for PHH to capture a portion of the profits that mortgage insurers were reaping. Atrium was a mortgage reinsurance company that assumed the risk that would otherwise be borne by a mortgage insurer. In return, Atrium would garner a portion of the premiums that borrowers paid to the mortgage insurer. Furthermore, Atrium was a captive reinsurer. Atrium only provided reinsurance for mortgage insurers that insured mortgages generally through PHH—and only for mortgages that PHH received from its own lenders.

In addition, Atrium's reinsurance covered a block of loans—the book year. Although for some book years Atrium paid out more claims than it received in premiums, Atrium still managed to receive more than $150 million in

The Bureau investigated this matter, and subsequently filed a notice of charges with the Bureau's administrative adjudication. The ALJ conducted a hearing and determined the following:

  • PHH orchestrated agreements to refer borrowers to mortgage insurers in return for the reinsurance premiums that the mortgage insurers paid to Atrium.
  • PHH entered into captive reinsurance agreements that violated Section 8(a), and that UGI, Genworth, and other agreements continued beyond July 21, 2008.
  • PHH had shown adequate risk transfer as to only one of the four book years which remained open on or after July 21, 2008.
  • PHH had not shown price commensurability as to any book year.
  • PHH was enjoined from violating Section 8 of RESPA and from entering into captive reinsurance agreements for the next 15 years.
  • PHH was required to disclose all services provided to PHH by any mortgage insurance company since 2004.

PHH and the Bureau's Enforcement Division ("Enforcement') appealed the decision. Cordray issued the ruling in which he affirmed the ALJ's decision in part, and denied in part as discussed below.

Cordray's Analysis

Statute of Limitations

As a preliminary matter, Cordray noted that no statute of limitations applies when the Bureau challenges a RESPA violation in an administrative proceeding. There is a presumption against the retroactive application of statutes, and statutes should not be applied retroactively unless that was Congress' intent.

Cordray also noted that the Bureau cannot retroactively revive claims that HUD would have been time-barred from bringing. The Bureau may seek civil money penalties only for violations that occurred on or after July 21, 2011.

PHH violated Section 8(a) of RESPA by accepting reinsurance premiums on or after July 21, 2008

On appeal, PHH challenged the finding that it referred business to the mortgage insurers. In determining whether a Section 8(a) violation occurred, Cordray considered whether the elements of a RESPA violation were present: 1) A payment or transfer of a thing of value; 2) The payment or transfer was made pursuant to an agreement to refer real estate settlement services business; 3) A referral actually occurs; and 4) The real estate settlement service involves a "federally related mortgage loan."

For the first element, Cordray determined that UGI's, Genworth's, Radian's, and CMG's paid reinsurance premiums to PHH constituted a thing of value.

As to the second element, Cordray found the payments were made pursuant to an agreement to refer real estate settlement services business because there was an agreement made between PHH and the four mortgage insurers.

For the challenged third element, that PHH did not refer business to the mortgage insurers, it was found that PHH referred mortgage insurance business to UGI, Genworth, Radian, and CMG. PHH used its dialer to refer business. PHH also made referrals by imposing a surcharge to its corresponding lenders when the lenders would choose mortgage insurers that were not on the preferred list.

Although PHH argued that it advised borrowers to shop for other mortgage insurers, Cordray disagreed. Indeed, he found that the "Affiliated Business Arrangement Disclosure Statement" provided by PHH to borrowers did not sufficiently provided borrowers with a choice. Cordray reasoned that the borrowers were provided with an illusory choice because PHH would not approve a loan if the borrower selected a mortgage insurer that was not a party to a captive reinsurance agreement.

Lastly, Cordray determined that the loans originated and received by PHH were federally related mortgage loans because they were intended to be sold to Fannie Mae, Freddie Mac, or Ginnie Mae, or were funded by a lender that is regulated by an agency of the federal government.

Cordray concluded that PHH violated Section 8(a) of RESPA when it accepted reinsurance premiums on or after July 21, 2008. Section 8(b) was not discussed. Further, Cordray found that PHH violated RESPA every time it accepted a reinsurance payment from a mortgage insurer because RESPA clearly states that the acceptance of a fee or kickback triggers the violation. Therefore, every acceptance of a payment on or after July 21, 2008, was a violation of RESPA.

Section 8(c)(2) and the HUD letter do not excuse PHH's violation of Section 8(a)

Cordray relied heavily on Section 8(c)(2) and HUD's 1997 letter in this case. Using Section 8(c)(2), the ALJ relied on the HUD letter to support the notion that Section 8 provided PHH with a defense against the Section 8(a) and 8(b) violations.

The HUD letter addressed captive reinsurance agreements, as this case deals with. The ALJ found that even if the captive reinsurance agreement violated Section 8(a), the parties to the agreement could escape liability "if the payments to the reinsurer are for reinsurance services actually furnished or for services performed, and are bona fide compensation that does not exceed the value of such services." Doc. 152 at 6. Interpreting the ALJ in this way was important because PHH was required to prove that Atrium actually furnished reinsurance services to mortgage insurers, and that the price of that reinsurance exceeded the value of the services.

Enforcement argued that making a referral to a real estate settlement service provider in exchange for the purchase of goods or services is a violation that cannot be saved by 8(c)(2). PHH argues that 8(c)(2) exempts reinsurance agreements from 8(a) even if the agreements were entered into in exchange for a referral. PHH also argues that Enforcement's interpretation conflicts with other parts of 8(c)(2), and because this violation can lead to criminal liability, any ambiguity in RESPA should be interpreted in PHH's favor.

Section 8(c)(2)

Looking to the Eleventh Circuit, Cordray agreed that Section 8(c) clarifies 8(a). Section 8(c) does not allow for behavior that 8(a) clearly outlaws—to read 8(c) as an exemption undermines the protections of 8(a) to try and eliminate kickbacks or referral fees that increase the cost of settlement services.

A situation that could give rise to an 8(a) violation is if a party is in the position to make referrals receives payments from, and makes an agreement with, a party that is in a position to receive the referral. However, 8(c)(2) clarifies that this inference is inappropriate if the payment is a "bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed." 12 U.S.C. § 2607(c)(2).

Thus, Cordray determined that Section 8(c) is only relevant if there is a question about whether the parties actually entered into an agreement to refer settlement service business. Here, however, this is not an issue. There is no question that PHH agreed to make referrals to the mortgage insurers that agreed to pay PHH for those referrals by purchasing reinsurance for Atrium.

1997 HUD letter

Cordray rejected the use of the HUD letter. Cordray stated that the letter provided no protection to PHH in the proceeding. The HUD letter was never published in the Federal Register, and is not in such a form as to be binding. The ALJ interpreted the 1997 HUD letter to mean that Section 8(c)(2) provides an exception from liability for conduct that violates Section 8(a).

Further, he found that letter contained inconsistent statements: 1) that if a lender or its reinsurance affiliate is merely given a thing of value by the primary insurer in return for this referral, in monies or the opportunity to participate in a money-making program, then Section 8 would be violated; and 2) if the lender's reinsurance affiliate actually performs reinsurance services and compensation from the primary insurer is bona fide and does not exceed the value of the reinsurance, then such payments would be permissible under Section 8(c)(2).

Cordray found the two sentences to conflict because according to one sentence, the opportunity to participate in a moneymaking program would be enough to find a violation, regardless of what amounts were paid for that opportunity. Thus, besides the inconsistent statements, the statements in the letter do not help PHH because the mortgage insurers made payments that were not "solely" for reinsurance, as required by the letter.

PHH arguments about Section 8(c)(2)

PHH argues that the rule of leniency applies to override the text, structure, and goals of Section 8(c)(2) and RESPA as a whole—but Cordray disagrees.

Cordray disagreed that his interpretation of Section 8(c)(2) is conflicting with the statute, that his interpretation would undermine the protection Section 8(c)(1) provides, or that his interpretation would undo years of interpretations made by HUD. Cordray stated that his interpretation is consistent with the statute because it is not a violation of Section 8(a) to make a payment in connection with the referral of a particular loan to a particular lender. However, it is a violation to make a payment in exchange for a referral pursuant to an understanding to refer settlement service business.

Alternative liability under 8(c)(2)

Cordray stated that he would rule that PHH still violated RESPA even if he were to accept PHH's contention that Section 8(c)(2) creates a substantive exemption for conduct that violates 8(a).

Four book years were open on or after July 21, 2008, but PHH offered no Milliman reports for two of them. Thus, for those two book years, PHH could not be exempt. In addition, for the book years that closed on or after July 21, 2008, the ALJ decided that PHH did not make the required showings as to the remaining two books. Therefore, even under PHH's own interpretation of Section 8(c)(2), Cordray found that PHH still violated RESPA for not making the required showings.

Additional arguments from PHH relating to liability

PHH asserted additional arguments relating to liability, however, Cordray found them all to be invalid.


As for sanctions, similar to the ALJ, Cordray found that all Respondents acted as a common enterprise and were jointly and severally liable for the relief imposed from the proceeding. PHH Corp., PHH Mortgage, PHH Home Loans, and Atrium/Atrium Reinsurance shared employees. The entities shared directors and officers, and operated under common control; the three PHH companies also operated Atrium, making Respondents a common enterprise.

The ALJ ordered three injunctive provisions: 1) PHH must cease and desist from violating Section 8 of RESPA; 2) PHH was enjoined for 15 years from engaging in the business of captive insurance; and 3) PHH was "enjoined to disclose" to the Bureau all services provided to them by any mortgage insurer since 2004.

Cordray recognized that there was a high chance PHH would repeat these violations due to its success for more than 15 years. Because of this, he decided to enter an injunctive provision requiring Respondents to cease and desist from the prohibited conduct, while tailoring the provisions to PHH's particular misconduct.

Cordray found ALJ's second injunctive relief to be appropriate. Cordray added an order prohibiting PHH from referring borrowers to any provider of a settlement service, if that provider agreed to purchase a service from PHH, and if payment of that service was triggered by referrals.

Lastly, Cordray narrowed the ALJ's third injunctive provision to make it easier for the Bureau to detect any violations of Section 8. Cordray confirmed the ALJ's order to the operative dates—on or after July 21, 2008—and for 15 years from the date the order becomes effective.

For the disgorgement order, the ALJ concluded that PHH's disgorgement obligation could be offset by payments made to mortgage insurers—Cordray disagreed with this notion. PHH made the payments to mortgage insurers, not the borrowers that RESPA seeks to protect. Cordray found it inappropriate to credit PHH for the payments it made to the mortgage insurers that were the very same people involved in the RESPA violations.

Moreover, Cordray agreed with the ALJ that PHH should disgorge premiums it received for loans that closed on or after July 21, 2008.

Because the record on the issues is very complete, the following calculations are a reasonable estimate of what PHH received from each mortgage insurer: UGI = $72,848,494; Genworth = $34,236,016; Radian = $957,704; and CMG = $1,146,404. The total disgorgement, summing up the calculations from each mortgage insurer, was $109,188,618.

If all or a portion of the disgorgement is upheld on appeal, the amount shall be released to the Bureau within 30 days after the decision becomes final—any funds remaining in escrow shall be released to the Respondents.

Lastly, a civil monetary penalty was not imposed.

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