United States: District Court Rebuffs CFPB's RESPA "Continuing Violations" Theory

On June 6, 2017, a federal district court in Menichino v. CitiBank1 rejected an interpretation of the RESPA Section 8 statute of limitations espoused by the CFPB in captive reinsurance cases, instead concluding that RESPA's limitations period runs from the date of the occurrence of the claimed violation, which is the date of the loan closing. The Menichino decision is a welcome development because although the CFPB has asserted its "continuing violations" theory in the closely-watched PHH case, that issue is not among those taken up by the D.C. Circuit Court of Appeals as part of its en banc review in PHH.

An issue in need of resolution.

PHH and Menichino are part of a series of CFPB enforcement and private class action cases that have attempted to assert violations of RESPA's anti-kickback provision based on captive reinsurance arrangements in the mortgage industry. Mortgage insurance ("MI") is insurance that protects a lender from the risk that a borrower will default on a mortgage; it is often purchased in connection with mortgage borrowers who put less than 20 percent down on a home loan, and the premiums are usually paid monthly along with each mortgage payment. In a captive reinsurance arrangement, the MI company cedes some of its premium, along with part of the risk, to a reinsurance company that is affiliated with the mortgage lender. The concept is that in this way, the lender is protected by the MI and the MI company is protected by the reinsurance.

The CFPB, however, has claimed that the MI companies' payments of reinsurance premiums to the captive reinsurance company can amount to an unlawful "kickback" under RESPA Section 8(a). Further—despite the fact that courts have long held that the RESPA statute of limitations is triggered by the mortgage loan closing2—the CFPB has developed a new interpretation that the alleged RESPA violation occurs not at the closing, but instead every time a monthly payment for MI is made and the premium ceded.3 In the PHH case, the effect of that interpretation was to increase the disgorgement penalty by targeting all payments accepted after the three-year cutoff date,4 even if the payments were associated with loans that closed well before that date. The CFPB's stance on that issue, however, is not among those teed up for en banc review by the D.C. Circuit.5

In the meantime, plaintiffs in private class action cases have been attempting to piggyback on the CFPB's "continuing violations" theory. Using the CFPB's approach would dramatically extend the RESPA statute of limitations in captive reinsurance cases, as the vast majority of homeowners pay monthly premiums for years after the closing of their home purchase. This has obvious appeal for the plaintiffs' bar, which is otherwise confronted with a one-year statute of limitations triggered by the closing of their client's home loan. Historically, RESPA plaintiffs have tried to overcome the statute of limitations by pleading a claim of equitable tolling by fraudulent concealment, but that theory is difficult to plead and even harder to maintain on a class-wide basis. See, e.g., Cunningham v. M&T Bank Corp., 814 F.3d 156, 161-64 (3d Cir. 2016) (rejecting plaintiffs' attempt to equitably toll the RESPA statute of limitations in a captive reinsurance case under a fraudulent concealment theory because they could not demonstrate the exercise of diligence to discover their claim).

The Menichino decision.

In its June 6th decision, the Menichino court rejected a "continuing violations" theory to instead follow both Third Circuit precedent and "the weight of federal authority" concerning RESPA statutory limitations periods. Menichino, 2017 U.S. Dist. LEXIS 86380 at *8-23.

In Menichino, the plaintiffs had moved to amend their RESPA captive reinsurance and equitable tolling claims after the Third Circuit issued its Cunningham decision. Menichino was a nearly identical factual case brought by the same group of attorneys, who no doubt saw the writing on the wall. To avoid dismissal of their RESPA claim, the Menichino plaintiffs disavowed their equitable tolling claim and instead alleged that—consistent with the theory articulated by the Director of the CFPB in PHH—"each monthly payment constitute[d] a new, independent violation of RESPA" such that plaintiffs could maintain their actions with respect to "mortgage insurance payments made within one year of the date of the filing of their original complaint." Id. at *13-14. As the Menichino court put it, plaintiffs "sensed a sea change" and therefore tried to "adjust their sails" accordingly. Id. at *13. But the judge rejected this effort to amend, taking all of the wind out of plaintiffs' sails.

The Opinion relied heavily on the Third Circuit's reasoning in Cunningham. See id. at *14-17. In Cunningham, the Third Circuit reaffirmed that RESPA's statute of limitations "runs from the date of the occurrence of the violation...which begins at the closing of the loan." Cunningham, 14 F.3d at 160. The Menichino court emphasized that Cunningham did not consider the dates of plaintiffs' MI payments when analyzing the statute of limitations. Instead, the Third Circuit established the date of the violation as the closing, and then considered whether the statute of limitations was met or could be tolled. Menichino, 2017 U.S. Dist. LEXIS 86380 at *15. The judge in Menichino agreed with this analysis, stating that "if Defendants' captive reinsurance scheme violated RESPA as plaintiffs claim, the gravamen of that violation occurred when plaintiffs closed their loans." Id. at *16 (citing Snow). Moreover, Cunningham was published months after the CFPB director, Richard Cordray, issued his decision in the PHH case and ruled, inter alia, that every loan payment made as part of a captive reinsurance arrangement was a separate RESPA violation. See id. at *20.

The Menichino court acknowledged that another judge in the same Pennsylvania federal district court had reached the opposite conclusion with respect to a set of cases (White and Blake)6 brought by the same group of plaintiffs' attorneys. In White and Blake, Judge Stengel had sided with CFPB Director Cordray, concluding, without detailed discussion of the statutory language, that "it defies the plain language of [RESPA Section 8] to not consider each prohibited kickback or referral a separate violation capable of resetting the limitations period" because to find otherwise would mean that defendants "would be free to violate RESPA by accepting kickback after kickback for years on end" while plaintiffs only have one year to bring suit. White, 2017 WL 85378, at*6 (E.D. Pa. Jan. 10, 2017).7 Judge Stengel further argued that by not addressing this question, the D.C. Circuit panel "at the very least acquiesced in the CFPB's holding." Id. at *7.

However, the Menichino court did not agree. Instead, it was swayed by the precedential decision in Cunningham, the overall "weight of federal authority" backing its interpretation, and the knowledge that "no Court of Appeals has held that each monthly mortgage insurance payment constitutes a new and independent violation of RESPA or that RESPA's statutory limitations period is otherwise tied to the date of the most recent monthly mortgage insurance payments(s)." Menichino, 2017 U.S. Dist. LEXIS 86380 at *22, n.12 (citing twenty-nine cases from various jurisdictions in unanimous support of its interpretation).

Conclusion.

This issue is likely to arise in RESPA captive reinsurance cases, and possibly many other RESPA section 8 cases across the country, and the Menichino decision and the case law from other jurisdictions that it nicely compiles (id.) provides a well-reasoned basis for rejecting the "continuing violations" theory in RESPA cases.

Footnotes

[1] Menichino v. Citibank, N.A., No. CV 12-00058, 2017 U.S. Dist. LEXIS 86380 (W.D. Pa. June 6, 2017).

[2] See e.g., Snow v. First American Title, 332 F.2d 356 (5th Cir. 2003).

[3] In re PHH Corporation, 2014-CFPB-0002, June 4, 2015, available at http://files.consumerfinance.gov/f/201506_cfpb_decision-by-director-cordray-redacted-226.pdf ("PHH Opinion")

[4] While the statute of limitations for a private RESPA action is 1 year, the Bureau has 3 years to bring an enforcement action.

[5] An earlier decision by a three-judge panel of the court left "that question for the CFPB on remand and any future court proceedings." PHH Corp. v. Consumer Fin. Prot. Bureau, 839 F.3d 1, 55 n.30 (D.C. Cir. 2016), vacated by, rehearing, en banc, granted by, 2017 U.S. App. LEXIS 2733 (D.C. Cir. Feb. 16, 2017).

[6] Blake v. JPMorgan Chase Bank, N.A., No. CV 13-6433, 2017 WL 1508995 (E.D. Pa. Apr. 26, 2017); White v. PNC Fin. Servs. Grp., Inc., No. CV 11-7928, 2017 WL 85378 (E.D. Pa. Jan. 10, 2017)

[7] In White, Judge Stengel analyzed the issue as whether the "continuing violation" theory applies to RESPA claims. However, this analysis was misplaced because Director Cordray specifically disavowed a "continuing violations" theory would allow each new mortgage payment to bring every earlier payment within the statute of limitations. PHH Opinion at 27-28. Judge Stengel acknowledged that distinction but nonetheless chalked it up to semantics and concluded that a subsequent pattern of kickbacks could amount to a "continuing violation," thereby re-setting the statute of limitations upon each new violation. White, 2017 WL 85378, at*10, n.16 (E.D. Pa. Jan. 10, 2017).

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