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CFPB vs. PHH Dismissed: RESPA Enforcement Implications

gavel and scaleOn June 7, 2018, the Bureau of Consumer Financial Protection (formerly the Consumer Financial Protection Bureau) dismissed the case against PHH Corp., indicating that “PHH did not violate RESPA if it charged no more than reasonable market value for the reinsurance it required the mortgage insurers to purchase, even if the reinsurance was a quid pro quo for referrals.” This decision follows years of litigation and appeals through two different administrations and raises the question of what service providers can understand the current rules of the road to be with regards to RESPA, and what the dismissal means for prior court rulings.

This case stems from a 2014 administrative proceeding before the Bureau, in which the bureau alleged that PHH, a mortgage originator, created a kickback scheme that violated RESPA. The questioned business arrangement related to the alleged practice by PHH of referring business to mortgage insurers in exchange for insurers entering into reinsurance contracts with PHH’s wholly-owned reinsurance subsidiary.

The initial proceedings were held in 2014 before an Administrative Law Judge (ALJ). PHH argued that the reinsurance premiums it received were lawful under RESPA Section 8(c)(2), which provides that RESPA should not be interpreted to forbid compensation for “services actually performed,” and that this position had been long accepted by HUD, which had responsibility for the interpretation of RESPA prior to the creation of the Bureau. The ALJ rejected this defense, ruling that the premiums PHH received were in excess of the fair market value of the services provided, and as such were not “services actually performed” under 8(c)(2), imposing a $6.4 million penalty on PHH.

PHH appealed this ruling to the Director of the Bureau, Richard Cordray. The director rejected PHH’s arguments and imposed a significantly more limited interpretation of Section 8(c)(2), ruling that any payment tied in any way to the referral of business could not be “bona fide” and therefore severely limited the application of the safe harbor afforded by that section. The director held that all of PHH’s reinsurance payments were tied to referrals and violated RESPA. He also rejected the ALJ’s ruling on the applicable statute of limitations, holding that PHH violated RESPA every time it collected a premium since July 2008, resulting in a disgorgement order of $109 million in past payments.

PHH petitioned for appellate review, and on Oct. 11, 2016, a three-judge panel of the United States Circuit Court of Appeals for the District of Columbia Circuit declared the Bureau’s single-director structure was unconstitutional and vacated the $109 disgorgement order. In doing so, the panel found that the Bureau’s structure allowed the director to wield too much power, unchecked by any other part of government and in violation of the separation of powers. The panel further rejected the Director’s ruling on substantive RESPA grounds, finding that (a) Bureau’s interpretation of RESPA violated PHH’s due process rights by reversing long-standing guidance from HUD regarding captive reinsurance arrangements, (b) the Bureau’s interpretation of Section 8(c)(2) was overly narrow, and (c) the Director’s interpretation of the statute of limitations was incorrect and should be confined to the three-year period that had traditionally been applied to RESPA.

The Bureau sought en banc review of this order, and on Feb. 16, 2017, the Court of Appeals granted that request and vacated the panel decision. On Jan. 31, 2018, a majority of the Court ruled in favor of the Bureau on the constitutional issues but reinstated the panel’s prior ruling against the Bureau on the application of RESPA. The matter was then remanded to the Bureau’s administrative process to determine whether the relevant mortgage insurers paid more than reasonable market value to the captive reinsurer, applying a three-year statute of limitations, rather than the limitless time period that former Director Cordray indicated applied.

Neither PHH nor the Bureau appealed that decision, so the matter was remanded to the Bureau’s administrative process, where, on June 7, 2018, Acting Director Mick Mulvaney dismissed the case.

While the dismissal of the case may reflect changing enforcement priorities at the Bureau and a return to a more traditional interpretation of RESPA section 8(c)(2), the dismissal does nothing to moot the rulings of the DC Circuit Court. As a result, the rulings made by the Court as to the interpretation of the statute and the applicable statute of limitations remain binding on matters before that Court and its subordinate courts, even if a future administration appoints a Director with an interpretation closer to that of former Director Cordray.  Accordingly, any new interpretation by a future administration would likely have to take the form of new rulemaking or official guidance before any enforcement action would be accepted by the courts.

About Author: Andrew S. Wein

Andrew S. Wein
Greenberg Traurig Shareholder Andrew S. Wein is a regulatory, litigation, and corporate attorney who represents financial services clients. His national practice focuses primarily on mortgage companies and other consumer financial institutions, assisting them with both litigation and regulatory compliance. Wein handles litigation and regulatory issues arising out of federal and state consumer protection statutes, including the Real Estate Settlement Procedures Act, Truth in Lending Act, Fair Debt Collection Practices Act, Fair Credit Reporting Act, Telephone Consumer Protection Act, Home Mortgage Disclosure Act, Secure and Fair Enforcement for Mortgage Licensing Act, and the Home Affordable Modification Program.

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