Three Takeaways from PHH v. CFPB Ruling

October 13, 2016

A federal appeals court issued its long-awaited decision today in an appeal by PHH Corp. of its $109 million fine by the Consumer Financial Protection Bureau (CFPB) for alleged RESPA section 8 violations. The case involved the payment of reinsurance premiums by mortgage insurers on loans originated by PHH to a reinsurance entity affiliated with PHH.

The appeal stemmed from CFPB Director Richard Cordray’s finding that PHH violated RESPA each time it accepted mortgage reinsurance premiums on or after July 21, 2008. This theory led to a $109 million disgorgement remedy, nearly 18 times the remedy recommended by the Administrative Law Judge. PHH contended that the director’s decision removed years of precedent from both HUD and previous court cases without any notice or rulemaking process in violation of the CFPB’s authority. PHH further argued that the CFPB is an unconstitutional agency, since it is an independent agency that is only headed by one person.

ALTA members have been waiting for months to see what the court would say on the PHH case.

“ALTA members have been waiting for months to see what the DC Circuit Court would say on the PHH case,” said Michelle Korsmo, ALTA’s chief executive officer. “The court affirming the application of RESPA, as it had been followed by HUD previously, provides consistency that is important to ensure compliant business practices. There is a desire among regulated businesses to have clarity of what is expected of them. While this decision doesn't give specific clarity, it does say that checks and balances are required and gives businesses more confidence to make decisions. Frankly, that's good governance and should make the system better by bringing in accountability.”

Steve Gottheim, ALTA’s senior counsel, identified three issues that the U.S. Court of Appeals for the District of Columbia Circuit held in its opinion.

CFPB Structure

First, the court agreed with PHH that the structure of the CFPB is constitutionally problematic. The opinion discusses that independent agencies—agencies where the leadership can only be removed for cause by the president—must have some limit in their authority.

In its 110-page opinion, the D.C. Circuit Court compared the CFPB to other agencies like the FCC, SEC, and FDIC, all of which have a commission structure. The result was that the court found the CFPB’s structure constitutionally weak because it had a single director that was insulated from presidential oversight.

"That combination of power that is massive in scope, concentrated in a single person, and unaccountable to the President triggers the important constitutional question at issue in this case," Judge Brett Kavanaugh wrote for the majority. "The CFPB's concentration of enormous executive power in a single, unaccountable, unchecked director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decision-making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency."

Despite PHH’s argument that the only remedy would be to shut down the CFPB, the court neglected to take this course and opted to strike the clause in the Dodd-Frank Act that said the CFPB director could be removed "for cause," and that the “CFPB therefore will continue to operate … but will do so as an executive agency akin to other executive agencies headed by a single person, such as the Department of Justice or the Department of the Treasury,” the court ruled.

Gottheim added that “following traditional Supreme Court jurisprudence, it fashioned the narrowest remedy possible and simply severed the ‘for cause’ provision of the CFPB’s authorizing statute. If this ruling holds up, the CFPB director would now no longer be independent and the president would be able to supervise the director and remove them at will. This should not result in much change in the way the CFPB operates.”

Captive Reinsurance Arrangements

The court also held that RESPA allows captive reinsurance arrangements so long as the amount paid for the reinsurance does not exceed the market value. Since CFPB’s ruling in this case departed from prior HUD guidance on the topic, the court found that it presented some due-process issues that necessitate sending the case back to the CFPB for a new ruling.

In looking at the relationship between section 8(a) and (c) of RESPA, the court adopted the industry’s long-standing view of the law: Companies can pay parties in a position to refer business when it is market value for a service actually performed.

“The court does not have a problem with the tying agreement at issue here unless it can be shown that the payment was above market value,” Gottheim said. “The court found that because of the pervasiveness of the prior HUD opinion, the CFPB could not change its interpretation and apply it to conduct prior to the CFPB issuing that interpretation.”

Prior to this ruling, ALTA joined other real estate trade associations in an amicus brief to provide the court with a better understanding of how industry has interpreted section 8(c) of RESPA and how this section relates to section 8(a). The letter said Cordray’s ruling “would disrupt long-established business practices to the detriment of consumers.”

Cordray’s ruling in June 2015 basically said that even if an agreement meets the requirements of a RESPA 8(c) exemption, if the agreement is in exchange for the referral of business it could still be a RESPA violation. Additionally, the bureau would take a liberal interpretation of each occurrence of a “kickback” to avoid the statute of limitations and obtain a higher penalty.

The ruling provides some clarity on the legality of marketing service agreements and other arrangements as long as the payment for goods and services performed are made at fair market value.

Statute of Limitations

Finally, the court found that all laws allowing for criminal or civil penalties must have some statute of limitations.

“The court specifically held that while Dodd-Frank created an administrative hearing process those hearings are limited by the underlying federal consumer law,” Gottheim said. “Thus, RESPA’s three-year statute of limitations applies.”

Gottheim said the case now goes back to the CFPB to determine if during the three-year period from the start of the enforcement action, the mortgage insurers paid more than reasonable value for reinsurance.

It is important to note that even the dissent disagrees with the CFPB’s interpretation of RESPA and would apply a three-year statute of limitations.

The Financial CHOICE Act

Jeb Hensarling (R-Texas), chair of the U.S. House Financial Services Committee, said the court’s ruling was a “good day for democracy, economic freedom, due process and the Constitution.”

“The second highest court in the land has vindicated what House Republicans have said all along, that the CFPB’s structure is unconstitutional,” he said. “By design the CFPB is arguably the most powerful and least accountable Washington bureaucracy in American history, and it shows.  The Bureau has infringed on the economic freedoms of consumers, limited their financial choices, increased their costs, and failed to hold managers accountable for widespread discrimination and abuse of its own employees. This must change.”

Hensarling added that the bureau has an important mission and if properly designed it is capable to provide many benefits. However, the CFPB’s structure “allows it to evade the time-tested checks and balances that are necessary to hold it or any other government bureaucracy accountable.”

Hensarling said The Financial CHOICE Act, which was approved by the committee in September, would solve the constitutional defect of the CFPB identified by the court. The Financial CHOICE Act would replace the current single director with a bipartisan, five-member commission.


The CFPB said it “respectfully disagrees” with court’s ruling and appears to be weighing its next move.

“The bureau that Congress’ decision to make the director removable only for cause is consistent with Supreme Court precedent and the bureau is considering options for seeking further review of the court’s decision,” the agency said in a short statement.

This could mean the CFPB may appeal the case to the Supreme Court. Meanwhile, PHH said it was “extremely gratified.”

“We are hopeful that the Court’s opinion will provide greater certainty to the entire mortgage industry regarding the industry’s reliance on long-standing regulation as to how to conduct business consistent with RESPA,” PHH said in a statement.

“Regarding the Court’s decision to remand the case to the CFPB to determine whether any mortgage insurers paid more than reasonable market value to the PHH-affiliated reinsurer, we will continue to present the facts and evidence to demonstrate that we complied with RESPA and other laws applicable to our former mortgage reinsurance activities in all respects,” PHH concluded.

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