As the Consumer Financial Protection Bureau’s (CFPB) battle with mortgage lender PHH Corp. enters its third year, the bureau is striking back against a recent federal court’s finding that its single-director structure is “unconstitutional” and challenging the court’s interpretation of the Real Estate Settlement Procedures Act (RESPA).
On Nov. 18, the CFPB filed a strongly worded petition for a rehearing en banc with the U.S. Court of Appeals for the District of Columbia, asking the court to reconsider its declaration last month that “the single-director structure of the CFPB represents a gross departure from settled historical practice.”
The CFPB called the court’s Oct. 11 ruling — considered to be a huge win for embattled PHH — “a dramatic and unprecedented ruling that purports to override Congress’ explicit determination to create ‘an independent bureau’ to exercise regulatory and law enforcement authority in a particular segment of the economy.
“It thus sets up what may be the most important separation of powers case in a generation,” the bureau stated in its petition.
The CFPB’s petition also claimed the court “misinterpreted RESPA” in assessing whether PHH’s mortgage reinsurance agreements complied with the federal statute’s antikickback provisions.
Ironically, the CFPB’s argument mirrors widespread criticism of its own interpretation of RESPA, with regard to PHH’s mortgage reinsurance practices as well as in several cases involving title insurance and mortgage lender firms’ marketing service agreements with real estate brokers and other settlement service providers — but RESPA has taken a back seat in this case.
Richard Cordray
The focus is now on the CFPB’s concentration of power in one man, Director Richard Cordray.
The long road to this point
Cordray first took action against PHH in 2014 when he filed a notice of charges alleging that the New Jersey-based mortgage lender set up captive reinsurance agreements in the 1990s and took reinsurance fees as kickbacks in violation of RESPA.
Captive reinsurance is a way for lenders to distribute a portion of the risk (and the premium) for insuring low-down-payment homebuyers. Buyers who put down less than 20 percent on their home purchase typically must pay mortgage insurance. This protects the mortgage lender against losses if the buyer defaults on the loan.
Until the mid-1990s, lenders would purchase mortgage insurance from third-party insurers and charge the premium back to the borrower. In the mid-1990s, lenders set up captive reinsurance subsidiaries instead of using third-party insurers.
Throughout two years of contentious litigation, PHH asserted that its captive reinsurance agreements were compliant with RESPA and informal guidance issued by the Department of Housing and Urban Development (HUD), the CFPB’s predecessor.
The lender also challenged the CFPB’s single-director structure and the authority granted to Cordray to initiate the administrative adjudication proceeding, hear PHH’s multiple appeals and ultimately overrule an administrative law judge’s ruling and penalty by issuing an even stiffer one.
The case eventually made its way to the U.S. Court of Appeals for the District of Columbia, which heard oral arguments from both sides in April.
PHH’s counsel called the CFPB an “unconstitutional, superexecutive agency” that “ran roughshod over RESPA,” while lawyers for the CFPB seemed to struggle in their attempt to convince the court that the bureau’s one-man leadership was preferable to the commission-based structure of other federal regulatory agencies.
The CFPB’s attorneys also argued that PHH received fees from mortgage insurers that were not solely for reinsurance, but were quid pro quo referrals, which the bureau said is “exactly what RESPA seeks to prohibit.”
On Oct. 11, the court responded with a 110-page ruling concluding that the CFPB is “unconstitutionally structured,” as its “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 multimember independent agency.”
The court also sided with PHH’s RESPA arguments, ruling that captive reinsurance is, in fact, permissible under RESPA, as long as reinsurance charges do not exceed fair market value.
The court remanded the case for further adjudication, during which PHH will attempt to show it did not charge unreasonable rates in its agreements with reinsurers.
CFPB strikes back
The CFPB’s petition was not unexpected, as shortly after the Oct. 11 ruling came out, it said it would consider “options for seeking further review of the court’s decision.”
The CFPB’s petition challenges both of the court’s conclusions, arguing first that Congress has the power to create “an independent bureau” to exercise regulatory and law enforcement authority in a particular segment of the economy, and the CFPB was set up in a manner consistent with well-established case law.
In addition, the CFPB expressed concerns that the court’s statements about its single-director structure “may not only affect the bureau, but also other agencies headed by a single director removable only for cause,” such as the Social Security Administration, the Federal Housing Finance Agency and the Office of Special Counsel.
“If the ruling stands, it will become easy for lenders and others to make referrals of real estate settlement service business to disguise kickbacks” – CFPB’s petition
The CFPB also argued that the panel’s decision “misinterpreted RESPA” and overstepped its role in reviewing an administrative decision, ignored key portions of the statutory text and “interpreted the term ‘bona fide’ in a manner inconsistent with Supreme Court precedent.
“If the ruling stands, it will become easy for lenders and others to make referrals of real estate settlement service business to disguise kickbacks and evade RESPA’s prohibition,” the CFPB stated in its petition.
The next chapter as saga enters year 3
As the sun sets on 2016, the battle between the CFPB and PHH will enter its third year as the bureau waits to see if the court grants its rehearing petition.
The D.C. Court of Appeals’ decision was handed down by a panel of three judges. The bureau is asking the court to hear the case again, this time with the involvement of all of the court’s judges.
Appellate courts sometimes grant rehearing en banc petitions in cases involving matters of exceptional public importance, or if the panel’s decision appears to conflict with a prior court decision.
However, appellate courts don’t always grant requests for en banc rehearings, as petitioners must overcome legal high standards for the court’s acceptance.
If the court does grant the rehearing and affirm the previous ruling, Republican lawmakers, who have unsuccessfully introduced bills addressing the CFPB’s structure in both chambers of Congress, may finally have the ammunition they need to challenge the bureau’s authority.
Many are anxious to see if President-elect Donald Trump will make good on his campaign pledge to provide regulatory relief to the financial services industry — particularly to the mortgage industry, which has been inundated with new regulations during the Obama administration, said David H. Stevens, president and CEO of the Mortgage Bankers Association (MBA).
“If the full circuit court makes that ruling, it could open up an opportunity for the president to shorten the term of the director,” said Stevens, who served as HUD’s assistant secretary for housing and federal housing commissioner during the early years of the Obama administration.
Cordray’s five-year term ends in 2018, “which, when you really think about it, is not too far away, and by then the Trump administration should be well settled into the halfway point of their four-year term,” Stevens pointed out.
Even if the court denies the CFPB’s petition, the bureau can still appeal to the Supreme Court, said Ken Trepeta, executive director of the Real Estate Services Providers Council Inc. (RESPRO).
“The net effect is that any changes at the CFPB will likely have to wait until the end of the appeals process or the end of Cordray’s term, whichever comes first, unless legislation changing the structure of the CFPB is enacted first,” Trepeta said.
PHH did not respond to a request for comment by press time.
