DC Circuit Court Ruling on CFPB Case

The long awaited appeal by PHH of its $109 million fine by the CFPB for RESPA section 8 claims has been issued.

Dear Members,

I was going to tell you all about the ALTA national conference, but something much more important (and interesting) came up and is breaking news.

The District of Columbia Circuit Court issued its ruling in the CFPB case. Here is the write up I received from Steve Gottheim, Senior Counsel at ALTA:

The DC Circuit issued its opinion in the long awaited appeal by PHH of its $109 million fine by the CFPB for RESPA section 8 claims. The case involved the payment of reinsurance premiums by mortgage insurers on loans originated by PHH to a reinsurance entity affiliated with PHH.

The opinion addresses three topics.

First, the circuit court agreed with PHH that the structure of the CFPB is constitutionally problematic. The opinion discusses that independent agencies (agencies where the leadership can only be removed for cause by the President), must have some limit on their authority, or checks and balances. In this case, the court compared the CFPB to other agencies like the FCC, SEC, and FDIC, all of which have a commission structure. The result was that the circuit court found the CFPB's structure constitutionally infirm because it had a single director that was insulated from presidential oversight.

Despite PHH's argument that the only remedy would be to shut down the CFPB, the court neglected to take this course. Instead, following traditional Supreme Court jurisprudence, it fashioned the narrowest remedy possible and simply severed the "for cause" provision of the CFPB's authorizing statute. If this ruling holds up, the CFPB director would now no longer be independent and the President would be able to supervise the director and remove them at will. This should not result in much change in the way the CFPB operates.

The most telling line on the impact of this decision is on page 57 that states, "although the single-Director structure does not necessarily give more control to the President over an independent agency, one might say from the other direction that the structure at least does not diminish the President's power beyond the diminishment already caused by Humphreys Executor" [the Supreme Court case allowing independent agencies].

Second, the court held that RESPA allows captive reinsurance arrangements so long as the amount paid for the reinsurance does not exceed the market value. Since CFPB's ruling in this case departed from prior HUD guidance on the topic, the court found that it presented some due process issues that necessitate sending the case back down to the CFPB for a new ruling.

In looking at the relationship between section 8(a) and (c) of RESPA, the court adopts the industry's long standing understanding of the law. Companies can pay parties in a position to refer business when it is market value for a service actually performed. The court does not have a problem with the tying agreement at issue here (PHH will refer MI business to the insurer if it buys reinsurance from PHH's affiliate) unless it can be shown that the payment was above market value. The court found that because of the pervasiveness of the prior HUD opinion, the CFPB could not change its interpretation and apply it to conduct prior to the CFPB issuing that interpretation.

Third, the court found that all laws allowing for criminal or civil penalties must have some statute of limitations. The court specifically held that while Dodd-Frank created an administrative hearing process, those hearings are limited by the underlying federal consumer law. Thus, RESPA's three year statute of limitations applies.

The case now goes back to the CFPB to determine if during the three year period from the start of the enforcement action the mortgage insurers paid more than reasonable value for reinsurance.

It is important to note that even the dissent disagrees with the CFPB's interpretation of RESPA and would apply a three year statute of limitations. END OF SUMMARY.

So... stay tuned to what happens next but it appears that it is pretty much "business as usual" at the CFPB.

Thanks for your support of The Fund.

Best Regards,

Melissa Jay Murphy
Senior Vice President and
General Counsel