Does the director of the Consumer Financial Protection Bureau (CFPB) have too much power — or the correct amount?
And how and when should the bureau inform the real estate industry about any regulation changes?
Is it before an agent or brokerage runs afoul of the regulation (by issuing a notice that the rules will change and soliciting comments about the plan to change it), or afterward through an enforcement action?
Those are questions at the core of a case between the bureau and mortgage lender PHH, which is fighting back against the CFPB’s charges that its captive reinsurance agreements involved kickbacks. How those charges were handled arguably landed the bureau in hot water and brought its future structure into question.
After a hearing in which a panel of judges ruled that the CFPB’s structure was unconstitutional and that the president has the right to remove the bureau’s director at any time, the CFPB requested a re-hearing by the entire court.
That re-hearing was recently granted and will take place on May 24.
What will the hearing tackle, and what will it mean for the CFPB’s enforcement of real estate referral and marketing regulations?
Why the fight in the first place?
In 2014, the CFPB accused PHH of setting up “captive reinsurance agreements in the 1990s and [taking] reinsurance fees as kickbacks in violation of RESPA” (the Real Estate Settlement Procedures Act), reported Inman’s Amy Tankersley last year.
Borrowers with down payments below 20 percent must pay mortgage insurance because their loans are higher-risk. In the mid-1990s, mortgage lenders like PHH distributed the risk from these loans by setting up captive reinsurance subsidiaries to assume a portion of the mortgage insurance premiums (as well as the risk for insuring those low-down-payment mortgages).
The CFPB had a problem with this because consumers were not consulted about captive reinsurance alternatives. The typical next step would be for the bureau to file a federal lawsuit; however, instead, the CFPB filed an administrative adjudication claim before a judge.
Richard Cordray
This meant that any appeal of the administrative judge’s decision would be heard and adjudicated by Richard Cordray, the director of the CFPB — the same entity that was prosecuting PHH in the first place.
“If you try your case before some administrative law judge, and your appeal is to the director — who’s also the prosecutor in the case — the prosecutor isn’t going to say, ‘I was wrong and you’re not guilty,'” noted Ken Trepeta, the executive director of the Real Estate Services Providers Council (RESPRO) and a licensed attorney.
“PHH also noted that the bureau chose this route to get around RESPA’s three-year statute of limitations on federal court claims, as administrative proceedings do not have the same filing restrictions,” Tankersley wrote.
The result was — not surprisingly — a $109 million enforcement penalty against PHH. But the mortgage lender fought back, and a federal appeals court panel agreed last October that there are problems with how the CFPB is structured and how it wielded its power in this case.
“The single-director structure of the CFPB represents a gross departure from settled historical practice,” wrote the panel of judges making the decision for the appeals court, adding that “never before has an independent agency exercising substantial executive authority been headed by just one person.”
So the panel fixed the situation: It ruled that the President could remove the director of the CFPB at will instead of “for just cause,” which had previously been the rule.
The CFPB, also not surprisingly, did not like this ruling. It requested a rehearing en banc — a revisitation of the subject with the full court instead of a panel of judges.
Who agrees — and disagrees — with the CFPB?
So far, the Department of Justice has changed its mind on the issue, first supporting the CFPB’s request for a rehearing, then reversing that party line and arguing that the panel of judges was correct in striking the “for just cause” provision.
The National Association of Realtors (NAR) and other real estate industry groups have also spoken out on the issue, filing an amici curiae, or “friend of the court,” brief in March.
The brief argued that the CFPB’s $109 million order was in conflict with RESPA and longstanding policy guidelines, and also that the order “exceeded the bureau’s statutory authority and violated fundamental tenets of administrative law and fair notice.”
“The underlying Bureau order misread RESPA, overturned decades of settled interpretations without any notice, and disrupted a large sector of the economy,” the brief states. “The panel’s decision correctly restored the status quo, and Amici urge the en banc court to let that decision stand.”
Of course, it was the panel’s decision on RESPA that “restored the status quo” — not its decision about whether or not the director of the CFPB can be fired at will, which arguably seriously disrupted the status quo.
And so there are two related (but somewhat separate) issues that the panel of judges ruled on and that the CFPB might ask the court to revisit in the May re-hearing:
- Whether the CFPB correctly interpreted and enforced RESPA in its actions against PHH
- Whether the director of the CFPB has too much power and should be subject to “removal at will”
The amici brief filed by NAR and the other entities listed addresses the first issue at length — it says that the panel of judges correctly ruled that the CFPB overstepped its interpretation and enforcement boundaries. It does not offer a strong opinion, however, about the second issue.
“The cases are good cases; they are good enforcement actions,” opined Trepeta. But the problem is the dicta in the consent orders — there’s too much of it, and it’s too confusing.
“The bureau says too much in its consent orders, and when it does go to put out guidance, it puts out stuff that is imprecise or not particularly close to the interpretations that the industry has dealt with for the last 30 years or more,” Trepeta explained. “A lot of this stuff is deviating from commonly accepted practices.”
For example, Trepeta points out that the CFPB has taken the stance more than once that getting quality service is a “thing of value” — and real estate agents are not allowed to exchange “things of value” for referrals from mortgage lenders or title companies, per RESPA.
“So if I recommend you because you do a good job, and you answer my client’s phone calls, and then I get paid because it’s closing my end of the deal quicker — that could be a ‘thing of value’ that’s a RESPA violation,” noted Trepeta. “If the deal closes, isn’t that a ‘thing of value,’ too?”
The consent orders that the CFPB was filing were “classic violations” said Trepeta, but then the CFPB “would start to talk about other things in the consent orders that were really scary … they’d scare people into thinking, ‘Well, maybe I shouldn’t refer to anyone,’ or ‘I need to refer to three people even though two of them are no good.’ Two-thirds of your clients are going to be mad at you! That’s the kind of situation they’re creating that NAR and other real estate companies are concerned about.”
What next?
With the Department of Justice — and the many organizations represented in the amici brief — supporting the panel’s decision, it’s most likely that the rehearing by the full court of judges in May aims to clarify the court’s position on the constitutionality (or not) of the CFPB.
In its brief filed on March 31 (embedded at top), the constitutionality argument seems paramount to the CFPB, which breaks up the “arguments” section as follows:
- The bureau’s structure is constitutional
- The court should explicitly address whether the bureau’s structure is constitutional
- If the court decides that the CFPB shouldn’t have used an administrative court to adjudicate its charges against PHH, then “it should either seek supplemental briefing in this matter or vacate and remand to the bureau”
There will likely be a wait for a decision from the court after the May re-hearing — Trepeta predicts that the Washington, D.C., circuit court hearing the case will give an answer in the fall.
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