Oral arguments are about to begin for the first-ever lawsuit challenging the constitutionality of the Consumer Financial Protection Bureau (CFPB)’s authority. The trial in the case of PHH Corp. v. CFPB begins Tuesday morning in the U.S. Appeals Court for the District of Columbia. A ruling in the case is expected before the end of the year.
New Jersey-based lender PHH Corp. is trying to overturn a $109 million penalty issued by the CFPB in June 2015 over alleged violations of the Real Estate Settlement Procedures Act (RESPA). This is a landmark case because it is the first time in the almost five-year history of the CFPB that a company has judicially challenged a penalty handed down by the Bureau.
The CFPB first announced the administrative proceeding against PHH in January 2014 seeking a civil fine, a permanent injunction to prevent future violations, and victim restitution. In November 2014, Administrative Law Judge Cameron Eliot stated in a Recommended Decision that PHH took kickback payments in the form of reinsurance premiums paid to a PHH subsidiary by mortgage insurers, a violation of RESPA, and ordered PHH to pay a $6.4 million penalty.
PHH appealed Eliot’s ruling, and in June 2015, CFPB Director Richard Cordray denied the appeal and raised the penalty to $109 million, saying the original ruling was flawed because it did not take into account how the mortgage premiums were paid. Whereas Eliot's decision stated that PHH's RESPA violations were connected to loans closing on or after July 21, 2008, Cordray went beyond that ruling by saying that PHH was in violation of RESPA for every kickback payment the company accepted after that date. The $109 million penalty handed down by Cordray in June is the amount of reinsurance premiums PHH received on or after July 21, 2008, according to the CFPB. PHH is alleged to have accepted the kickback payments as far back as 1995.
“Never before has so much authority been consolidated in the hands of one individual shielded from the president’s control and Congress’s power of the purse.”
Lawyers for PHH Corp.
Almost immediately, PHH's lawyers filed a petition with the D.C. Circuit Court of Appeals to “modify or set aside civil investigative demand,” claiming an abuse of power on the part of the CFPB. In the petition, PHH also questioned the constitutionality of an agency such as the CFPB which is funded by the Federal Reserve but not subject to the Congressional appropriations process and run by a single director rather than a board.
“Never before has so much authority been consolidated in the hands of one individual shielded from the president’s control and Congress’s power of the purse,” the petition said. This, it claims, puts the CFPB director’s power and tenure at odds with the U.S. Supreme Court’s Free Enterprise Fund v. Public Company Accounting Oversight Board decision from 2010.
CFPB defended itself and the $109 million disgorgement in a filing with the D.C. Circuit Court, claiming the penalty was a “small fraction” of the kickbacks and that the $109 million was merely money that the company should have never received to begin with, and therefore in essence not a penalty.
PHH gained a semi-victory in court in August when a trio of judges in the D.C. Circuit Court stayed the August 5 deadline by which PHH was supposed to pay the $109 million penalty. None of those three judges will be in the courtroom Tuesday morning to hear oral arguments in the case, however.
The CFPB said it does not comment on pending litigation. In June, at the time Cordray announced the $109 million penalty, PHH issued a statement saying, “We strongly disagree with the decision of the Director. We believe this decision is inconsistent with the facts and is not in accord with well-settled legal principles and interpretations. We continue to believe we complied with RESPA and other laws applicable to our mortgage reinsurance activities. The company did not provide reinsurance on loans originated after 2009.”