Implications of PHH v. CFPB

The case began in
January 2014, when the CFPB reported that an investigation into PHH found that the lender and four subsidiaries were paid kickbacks through reinsurance arrangements.

According to the regulator, the hundreds of millions of dollars that the Mount Laurel, New Jersey-based mortgage banking firm received through the arrangement
was in violation of RESPA.

But the CFPB’s findings seemed to contradict a 1997 letter from the then-Federal Housing Commissioner Nicholas Retsinas stating that captive reinsurance arrangements are permissible under RESPA as 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.

The CFPB
filed an administrative action against PHH seeking a civil fine, restitution for victims and a permanent injunction to prevent future violations.

But a November 2014 recommendation by an administrative law judge that that PHH disgorge more than $6 million wasn’t enough for the CFPB.

So
the CFPB announced in June 2015 that CFPB Director Richard Cordray had, in part, reversed the decision and issued an order requiring PHH to pay $109 million.

Cordray’s action was followed by an appeal filed by PHH.

Representing PHH in the administrative hearing and in the appeal filed with the U.S. Court of Appeals for the District of Columbia is
Mitchel H. Kider, the chairman and managing partner of Weiner Brodsky Kider PC.

Kider talked about the case Monday on the show, Lykken on Lending.

He noted that while many administrative appeals normally are sent to the federal district court, this case went to the appeals court instead because the CFPB took its action under its cease-and-desist authority granted under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which requires appeals to go straight to the Court of Appeals.

The Court of
Appeals consists of a three-judge panel that does its own research and comes to a decision. The PHH challenge to the CFPB’s authority is the first of its kind.

“It’s an important case because the CFPB brought forth arguments and different readings, I would say, very unique and novel interpretations of section 8 of RESPA, which is very different than 40 years worth of rules, guidance and policy statements that pertain to RESPA itself,” Kider said.

The litigator said PHH is challenging the constitutionality of the
regulator’s structure.

For one thing, the structure gives a single individual so much power and authority even though he is not answerable to the president or Congress and can only be removed for cause.

“The argument that’s being made over here is not only is that shift not appropriate and hasn’t gone through proper notice-and-comment rule making, but no one was given fair notice of that particular shift in policy, and it was done by an agency that, quite frankly, is somewhat suspect,” Kider continued.

He said that if PHH wins its appeal, then Congress would have to work with the president to determine how the CFPB ought to be structured.

In addition, the court’s decision could have an impact on other RESPA-related issues such as marketing service agreements.

He explained that the appeal has been fully briefed by both sides, argument was heard last week, and the case is ready for a decision from the court.