PHH Kickbacks Case to Test Scope of CFPB Enforcement Authority

By Chris Bruce

Nov. 10 — A closely watched case now before a federal appeals court in Washington, D.C., is shaping up as a pivotal case on the Consumer Financial Protection Bureau's ability to choose when and how to bring its enforcement powers to bear.

In the first-ever challenge to an CFPB administrative action, mortgage company PHH Corp. is appealing CFPB Director Richard Cordray's $109 million enforcement ruling that the company took kickbacks in violation of the Real Estate Settlement Procedures Act (RESPA) (108 BBD, 6/5/15).

At issue is not only CFPB's reading of RESPA, which industry groups say could result in widespread exposure to substantial civil or criminal penalties, but also the broader question of how the agency interpreted the statute of limitations as not applying to administrative proceedings. If the CFPB prevails, the agency could potentially challenge an array of practices under other laws or authority based on alleged violations going back several years, even beyond July 21, 2011, the effective date of its enforcement authority.

“This case is about RESPA, but that ruling could apply to really anything the Bureau pursues administratively, including unfair, abusive or deceptive acts or practices cases,” said Lucy Morris, a partner with Hudson Cook in Washington, D.C., and formerly the CFPB's deputy enforcement director for litigation who was in charge of the administrative case during her tenure at the CFPB. “If the court of appeals upholds it or doesn't reverse it, then 10 years from now, the Bureau could attempt to go back to its ‘live date' in 2011 or even earlier to pursue remedies and penalties for conduct long since over, so the potential exposure is pretty huge.”

CFPB Alleges Violations

According to the CFPB, PHH referred business to mortgage insurers with whom PHH had captive reinsurance agreements, including Atrium Insurance Corp., a PHH subsidiary later re-established as Atrium Reinsurance Corp. The captive reinsurers provided reinsurance “only for mortgage insurers that insured mortgages generated by PHH, and only for mortgages that PHH originated or obtained from its own correspondent lenders,” the CFPB said.

The CFPB first initiated action against PHH in 2014, saying reinsurance payments received by PHH from mortgage insurers either were not for services actually performed or that they “grossly exceeded” the value of Atrium's reinsurance services.

“Although PHH claimed to be giving its borrowers a choice, the supposed choice was entirely illusory — if the borrower selected a mortgage insurer that was not a party to a captive reinsurance agreement, PHH would not approve the loan,” Cordray said in his June decision.

PHH said Section 8(c)(2) of RESPA exempts certain payments and serves as a sufficient defense, and cited a 1997 letter by the Department of Housing and Urban Development (HUD), saying it also provides an exemption.

An administrative law judge (ALJ) recommended a mixed ruling, saying PHH might be able to claim Section 8(c)92) as a defense, finding as well that the HUD letter provided an exemption. Even so, among other points, the ALJ said the CFPB could seek remedies for loans that closed on or after July 21, 2008, and recommended $6.5 million in disgorgement.

Cordray Disagrees

Cordray disagreed in his June decision, saying Section 8(c)(2) is not an exemption but merely a clarification of the statutory language. He also interpreted the HUD letter differently, saying it is nonbinding and inconsistent with the text of Section 8(c)(2).

Cordray expanded upon a the ALJ ruling, holding PHH violated RESPA each time it accepted a kickback on or after July 21, 2008, and directing the company to disgorge $109 million, instead of the $6.5 million ordered by the ALJ.

PHH asked the D.C. Circuit to stay the CFPB's action, calling Cordray's ruling “a radical new interpretation” of RESPA.

The D.C. Circuit granted the stay in August, saying PHH met the “stringent requirements” for such requests (150 BBD, 8/5/15).

Breaking New Ground

As the first contested administrative adjudication, the case represents a “very important” test of CFPB authority and the first decision by the director in such a proceeding, Morris told Bloomberg BNA Nov. 3.

“It's also being hotly contested, so the Bureau is facing on appeal a decision that might either affirm or cut back its enforcement authority,” Morris said.

Of particular significance is Cordray's decision to hike the disgorgement amount from $6.5 million to $109 million, which could be interpreted as a message by the CFPB not to challenge agency enforcement actions, said Geoffrey P. Miller, a professor at the New York University School of Law.

“Critics may worry that if the penalty is allowed to stand, no one will have the courage to challenge CFPB penalties either within the agency or in court,” Miller said in a Nov. 3 e-mail to Bloomberg BNA. “They fear that the result could be a dangerous form of administrative discretion unchecked by the safeguard of judicial review. Arguably, the stay issued by the appeals court signals that the judges are concerned that their role in the enforcement process is in jeopardy,” he said.

The disgorgement issue is a question on its own. PHH says RESPA does not authorize disgorgement, but the CFPB says the Dodd-Frank Act provides authority to award disgorgement.

Deference Question Central

According to PHH, Cordray's ruling clashes with almost 20 years of RESPA interpretation by HUD, which formerly administered RESPA, the CFPB's own rules, and the clear language of the statute.

Cordray's interpretation of RESPA, the company said in a Sept. 28 brief, “cannot be applied retroactively to punish conduct undertaken by Petitioners based on explicit agency advice expressly approving that conduct.”

Any ambiguities should be resolved in favor of PHH, the brief added.

“Violation of RESPA carries criminal penalties, and the rule of lenity requires all ambiguities in criminal statutes to be construed against the government,” said the brief by Mitchel H. Kider, David M. Souders, Sandra B. Vipond and Michael S. Trabon of Weiner Brodsky Kider in Washington, D.C.

In a 61-page brief filed Nov. 5, the CFPB said the D.C. Circuit should defer to its reading of RESPA.

“This Court has never held that an agency is stripped of deference with respect to a statute it administers merely because provisions of the statute may be criminally enforced,” the brief said.

Beyond RESPA

The case's potential impact reaches beyond RESPA.

Among other points, the ALJ and Cordray both concluded that no statute of limitations applies when the CFPB enforces RESPA in an administrative proceeding.

The holding on that point is highly significant, because the Dodd-Frank Act allows the CFPB to enforce laws administratively or in court and obtain the same remedies.

Although RESPA sets a three-year statute of limitations, the CFPB says no limit applies to administrative actions.

In Dodd-Frank, Cordray said in his June decision, “Congress could have amended RESPA to apply its three-year limit to administrative proceedings as well as court actions, but it did not.”

The U.S. Chamber focused on that question as well in an Oct. 5 amicus brief, saying RESPA is just one of 19 statutes enforced by the CFPB.

Under the CFPB's analysis, the brief said, statutes of limitations in those laws also would not apply in the administrative context.

“The Bureau's enforcement actions might never be subject to any limitations period,” the Chamber said.

Due Process?

Complaints about due process also permeate the briefing.

The American Land Title Association, the American Escrow Association, the National Association of Realtors and others said the June ruling by Cordray calls into question an array of standing business practices.

Several echoed PHH's claims that Section 8(c)(2) of RESPA has long been recognized as an exception to activities that otherwise would count as RESPA violations.

The CFPB's reading of that provision as a clarification, not an exemption, leaves industry participants wondering whether they might be exposed to “substantial” civil or criminal penalties under RESPA, the National Association of Realtors said in its Oct. 5 brief.

The case also provides an additional platform for a Texas bank that says the CFPB's governing structure violates the U.S. Constitution.

State National Bank of Big Spring, Texas, whose challenge to the CFPB's constitutionality was recently revived by the D.C. Circuit (143 BBD, 7/27/15), filed a brief in the PHH case Oct. 5, urging the appeals court to reach the issue of CFPB's constitutionality.

PHH Chief Optimistic

Neither PHH nor the CFPB responded to requests for comment on the case.

PHH President and Chief Executive Glen A. Messina Nov. 5 said he expects to prevail in the D.C. Circuit.

Though the outcome is not certain, “we continue to believe that our appeal will be successful,” Messina said on a conference call with analysts.

Final briefs are due in mid-December. Argument is expected next spring and a ruling in the fall of 2016.

To contact the reporter on this story: Chris Bruce in Washington at

To contact the editor responsible for this story: Seth Stern at