Dodd-Frank Bureau beaten in Court by PHH Mortgage Company
By Jennifer Felten
Created by the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, the Consumer Financial Protection Bureau (“CFPB”) is an agency of the United States government responsible for consumer protection in the financial sector. As a relatively young agency, little case law exists regarding the powers and abilities of the agency. The agency believes that, pursuant to Dodd-Frank, they have extensive authority to regulate and enforce in all aspects of the financial sector. Few have challenged the agency’s position fearing the repercussions of doing so.
One lender, PHH Mortgage, has bucked this trend, taking the CFPB to court over a ruling by the CFPB on the company’s business practices as it relates to mortgage insurance. In particular, the CFPB had found that PHH violated RESPA by disguising the payments it received from mortgage insurers in the form of reinsurance premiums. PHH defended the case on the grounds that the reinsurance premiums were “reasonably related” to the services actually provided, as evidenced by millions of dollars of reinsurance claims that ultimately were paid out. The case was originally heard by an administrative court which fined PHH $6,000,000. PHH appealed that original ruling which resulted in the director of the CFPB increasing the fine to $109,000,000. Reasonably displeased, PHH appealed the CFPB’s ruling to the U.S. Court of Appeals for the District of Columbia Circuit.
On October 11, 2016, the Court ruled on the PHH appeal. The results were a clear victory for PHH and others regulated by the CFPB. Indeed, the Court made several significant rulings that will impact both CFPB and all other entities regulated thereby. First, the Court agreed with an argument made by PHH that the structure of the CFPB was unconstitutional. As a result, the Court struck language in the Dodd-Frank Act that said the CFPB director could be removed “for cause,” such that the “CFPB therefore will continue to operate … but will do so as an executive agency akin to other executive agencies headed by a single person.” Federal executive agencies are governed by the President of the United States so this will likely have significant impacts on the agency over the next few years.
Second, the court also held that RESPA allows captive reinsurance arrangements so long as the amount paid for the reinsurance does not exceed the market value. In looking at the relationship between section 8(a) and (c) of RESPA, the Court adopted the industry’s long-standing view of the law that financial services companies can pay parties in a position to refer business when it is market value for a service actually performed. This is a major win for PHH as their fine will most certainly be reduced if not eliminated.
Another core ruling of the Court was that all laws allowing for criminal or civil penalties must have some statute of limitations. The CFPB had taken the position that there was no time limit on their enforcement ability such that they could retroactively punish behavior without limit. The court specifically held that while Dodd-Frank created an administrative hearing process those hearings are limited by the underlying federal consumer law. In this case the law being enforced was RESPA which has a three-year statute of limitations, so the Court threw out the penalties imposed for PHH’s activities more than three years before their original administrative hearing. Obviously, PHH will see a significant financial benefit. So too this helps the industry as a whole plan and implement procedures based upon current law, which will hopefully reduce costs for the industry and by extension consumers.
Jennifer Felten, Esq., Relaw Ms. Felten specializes in representing both individuals and legal entities, providing representation and guidance on a variety of real estate related matters. Relaw APC 699 Hampshire Road, Suite 105 Westlake Village, CA 91361 US Phone: (805) 265-1031 or email her at: firstname.lastname@example.org
For inquiries or questions about having Ms. Felten speak at your event please email email@example.com.