CFPB v. PHH, explained

The legal battle between the Consumer Financial Protection Bureau (CFPB) and New Jersey-based mortgage lender PHH Corp., is one of the most watched cases in the mortgage and real estate industries, and for good reason: It involves a huge enforcement penalty — $109 million — and it marks the first time a company has fought back against the bureau for taking such an action.

The case is complex and has been brewing for two years, but boiled down to the simplest of terms, the case involves the place where mortgage reinsurance, a business practice that traces its roots in the mortgage industry to the 1990s, and the Real Estate Settlement Procedures Act (RESPA) collide.

But as the case has progressed over time, it has evolved into something much more fascinating: A critique of how the CFPB goes about enforcing RESPA against companies in the mortgage, real estate and settlement services industries.

Here is a timeline of the events in the case, and some explanations of key issues that arose along the way.

---

What is PHH?

PHH Corp. is a financial services corporation headquartered in Mount Laurel, N.J. The company provides mortgage services to some of the world’s largest financial service firms and is the biggest U.S. outsourcer of home loans.

PHH Home Loans operates under a variety of brands across the country, including Axiom Financial, Coldwell Banker Home Loans, First Capital, Mortgage California, PHH Home Loans, Princeton Capital, Rocky Mountain Mortgage and Sunbelt Lending Services.

PHH’s mortgage subsidiary, PHH Mortgage, has a joint venture with Realogy Holdings Corp., called PHH Home Loans LLC. This joint venture provides mortgage origination services to more than 700 real estate offices within NRT LLC, Realogy’s company-owned real estate brokerage business and the largest residential real estate brokerage company in the nation.

In 2015, PHH closed approximately $41 billion in mortgage financing and maintained an average servicing portfolio of approximately 1.1 million loans.

PHH’s current management currently includes Glen A. Messina, president and CEO, and Robert B. Crowl, executive vice president and chief financial officer.

1946

PHH is founded by Duane Peterson, Harley Howell and Richard Heather.

1953

PHH is incorporated as a Maryland corporation that provides mortgage, employee relocation and fleet management services.

---

In the beginning: Captive reinsurance is born

1994

PHH creates the first captive reinsurance entity in the mortgage industry, a wholly-owned subsidiary called Atrium. This company was the nation’s only captive reinsurer until 1995, when Amerin Guaranty, which later became part of Radian Guaranty, forged a similar agreement with Countrywide Financial Corp.

What is captive reinsurance?

Borrowers who make less than a 20-percent down payment are usually required to pay for mortgage insurance, which protects the mortgage lender against losses if the borrower ultimately defaults on the mortgage loan.

Up until the mid-1990s, lenders purchased mortgage insurance from third-party insurers and charged the premium back to the borrower. Then lenders began setting up captive reinsurance subsidiaries to assume a portion of the premium — and some of the risk — on loans they originated.

How did regulators respond to the creation of captive reinsurance companies?

When they were first created, they raised RESPA and banking regulation questions.

Section 8(a) of RESPA prohibits anyone from giving or accepting a fee, kickback or anything of value in exchange for referrals of settlement service business involving a federally related mortgage loan.

In addition, RESPA Section 8(b) prohibits fee splitting and receiving unearned fees for services not actually performed.

However, RESPA Section 8(c) also contains some “safe harbors” for certain activities that are considered permissible, including:

• Fees for services actually performed by attorneys, title company agents or lender agents
• Salaries, compensation or other payment for goods or facilities actually furnished or for services actually performed
• Payments pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and brokers
• Affiliated business arrangements “so long as (A) a disclosure is made of the existence of such an arrangement … [and] a written estimate of the charge or range of charges” is provided; (B) use of the affiliated entity is not required (except for “the services of an attorney, credit reporting agency, or real estate appraiser chosen by the lender”); and (C) “the only thing of value that is received from the arrangement, other than the payments permitted under this subsection, is a return on the ownership interest or franchise relationship”

In addition, banking laws do not permit lenders to underwrite insurance directly in-house.

Obviously, regulators had to make some decisions and let the affected industries know where they stood on this new practice in the context of existing federal laws.

1996

United Guaranty Residential Insurance Co., a member company of American International Group (AIG), one of the nation’s largest underwriters of commercial and industrial coverages, writes a letter to the Office of the Comptroller of the Currency (OCC), which charters, regulates and supervises national banks.

The letter asks the OCC to confirm that a national bank may establish an operating subsidiary to reinsure a portion of the mortgage insurance on loans originated or purchased by the parent bank or one of its affiliates, and to declare this permissible under the National Bank Act.

In what will come to be known as Interpretive Letter #743, the OCC agrees with United Guaranty’s request and declares mortgage reinsurance legal under the National Bank Act because the process if “functionally interchangeable” with the process of lending, “and is essentially a new way of conducting an aspect of the very old business of banking.”

1997

The Department of Housing and Urban Development (HUD), which was charged with overseeing RESPA at the time, responds to a similar letter from Amerin Guaranty, Countrywide Home Loans and their affiliated reinsurer, Charter Reinsurance, asking the department to clarify the applicability of RESPA Section 8 to captive reinsurance programs.

HUD’s letter states that RESPA Section 8 (c)(2) sets forth various exemptions from the statute’s prohibitions against paying for referrals and splitting fees. HUD goes on to say that “so long as payments for reinsurance under captive reinsurance arrangements are solely ‘payment for goods or facilities actually furnished or for services actually performed,’ these arrangements are permissible under RESPA Section 8 (c)(2).”

HUD also establishes a two-step analysis for determining whether a captive reinsurance arrangement is RESPA-compliant:

1. Payments to the reinsurer must be for reinsurance services “actually furnished or for services performed”; and
2. Payments to the reinsurer are bona-fide compensation that does not exceed the value of such services.

HUD also warns that captive reinsurance arrangements would be subject to “particular scrutiny” when:

• The lender restricts its mortgage insurance business “in whole or to a large extent” to one particular mortgage insurer that has a “reinsurance agreement with the lender’s captive reinsurer”

and

• The agreement to reinsure depends on the lender sending all of or a predetermined volume of its mortgage insurance business to the insurer in question

or

• The terms of the agreement to reinsure fluctuate depending on the volume of the primary insurance business referred by the lender to the insurer.

“These conditions would indicate that at least a portion of the compensation paid to the reinsurer is for the referral of mortgage insurance business,” stated HUD.

“The department notes the trend in the mortgage market toward increased diversification of risk. The department welcomes such trends to the extent that such arrangements increase the availability of mortgage credit. Where RESPA would not preclude such arrangements, the department would generally support them.”

HUD’s letter comes to be considered formal guidance that the industry relies on when setting up captive reinsurance arrangements — including PHH.

1999

The American Land Title Association (ALTA), a trade association for title insurers, agencies and abstracters, notes that lenders, builders and others in a position to refer settlement service business are approaching title insurers with proposals for establishing captive reinsurers for the purpose of reinsuring the title insurer’s residential title risks on referred transactions.

ALTA decides to write a letter to HUD, asking for guidance on how its 1997 letter relates to captive reinsurance in the title insurance industry.

ALTA’s letter asks two questions:

1. Assuming that these residential reinsurance proposals involve the actual transfer of risk, is it relevant to whether HUD would give “particular scrutiny” to such arrangements if title insurers did not actively seek to reinsure such risks other than through captive reinsurers?
2. Since Section 8 analysis involves determining whether payments made were “reasonable” in light of the services rendered, what methodology would HUD suggest for determining whether amounts paid to a captive reinsurer are reasonable?

But much to ALTA’s frustration, HUD does not respond or give any guidance on these questions for several more years.

Reinsurance raises eyebrows

Late 1990s – early 2000s

Despite blessings from the HUD and OCC, some states begin to take a close look at mortgage insurance practices, including captive reinsurance. Class-action lawsuits are filed, and some state regulators initiate investigations of mortgage insurers, some of which end up in settlements.

 2004

With the practice of captive reinsurance continuing to grow, HUD finally answers ALTA’s letter. The response is unsatisfying, as it essentially restates the two-part analysis test described in the 1997 letter.

2005

Having operated as a wholly owned subsidiary of Cendant Corp., since 1997, PHH is spun off when Cendant breaks up and begins operating as an independent, publicly traded company under the stock symbol NYSE: PHH.

Mid- to late 2000s

Despite its previously issued guidance permitting the practice of mortgage reinsurance under certain prescribed circumstances, the fact that mortgage reinsurance practices begin to fall out of fashion due to stricter requirements for government-sponsored enterprises (GSEs) brought about by the 2007 mortgage industry collapse and financial crisis, that some of its investigations exceeded RESPA Section 8’s three-year statute of limitations for regulator enforcement actions and that no other agency had taken action on these practices, HUD continues its investigations.

And despite the letter it issued to ALTA in 2004, HUD begins investigating title companies engaged in captive reinsurance arrangements — in some cases, issuing consent orders and entering into multimillion-dollar settlements.

This creates turmoil in the title insurance industry, which is frustrated that the department said captive reinsurance was permissible, but then took action that seemed to fly in the face of its previously issued guidance.

2009

PHH ends most of its reinsurance agreements when they cease to be profitable enough to continue.

---

New agency, new interpretation

 2011

Congress passes the Dodd-Frank Wall Street Reform and Consumer Protection Act and authorizes the creation of a new federal agency, the CFPB, to oversee the consumer financial services industries.

HUD’s RESPA authority transfers over to the CFPB — and so do the department’s unfinished investigations, including one involving PHH’s mortgage reinsurance practices.

2013

What other mortgage reinsurance arrangements did the CFPB take action on?

The CFPB picks up where HUD left off and enters into several consent orders with companies that are engaged in mortgage reinsurance.

Unlike its predecessor, however, the CFPB doesn’t focus on title insurers, and instead shifts its attention to lenders that may have been the payees in these agreements. After all, RESPA states that “no person shall give and no person shall accept” kickbacks, fees and other items in connection with the referral of business.

The CFPB’s crackdown on mortgage reinsurance practices include:

• A $100,000 penalty ordered against Republic Mortgage Insurance Corp.
• A $4.5-million penalty ordered against Genworth Mortgage Insurance Corp.
• A $2.65-million penalty ordered against Mortgage Guaranty Insurance Corp.
• A $3.75-million penalty ordered against Radian Guaranty Inc.
• A $4.5-million penalty ordered against United Guaranty Corp.

In announcing these actions, the CFPB states its position on the practice of mortgage reinsurance: “In exchange for kickbacks, these mortgage insurers received lucrative business referrals from lenders. These types of kickbacks were a common practice in the years leading up to the financial crisis.”

The companies named in its actions “provided kickbacks to mortgage lenders by purchasing captive reinsurance that was essentially worthless, but was designed to make a profit for the lenders,” the bureau says.

---

CFPB first takes action against PHH and reinsurance partners

Jan. 29, 2014

In a notice of charges, the CFPB says that its investigation of PHH shows that when the company originated mortgages, it referred consumers to its mortgage insurer partners — including some of the other mortgage insurers that agreed to pay penalties to the CFPB.

The bureau further alleged that PHH took reinsurance fees as kickbacks in violation of RESPA and that consumers ended up paying more in mortgage insurance premiums.

Specifically, the CFPB alleges that from 1994, when PHH created Atrium, until at least 2009, PHH set up a system whereby it received as much as 40 percent of the premiums that consumers paid to mortgage insurers, “collecting hundreds of millions of dollars in kickbacks.”

The CFPB further alleges that PHH charged consumers additional percentage points on their loans if they did not buy mortgage insurance from one of its partners, and that PHH pressured mortgage insurers to “purchase” its reinsurance with the understanding or agreement that the insurers would then receive borrower referrals from PHH.

Named in the notice of charges are PHH Corp., PHH Mortgage Corp., PHH Home Loans LLC, Atrium Insurance Corp., and Atrium Reinsurance Corp. The CFPB’s notice seeks a civil fine, a permanent injunction to prevent future violations and victim restitution.

In an unusual move, CFPB files an administrative adjudication claim before an administrative law judge, instead of filing suit in federal district court.

What is administrative adjudication?

Similar to a complaint filed in federal court, a notice of charges initiates proceedings in an administrative forum and is not a finding or ruling that the defendants have actually violated the law. Charges and actions initiated by the CFPB are based on alleged violations of federal statutes and the regulations that carry out the statutes’ mandates.

Cases are tried by an administrative law judge (ALJ) from the CFPB’s Office of Administrative Adjudication (OAA), an independent adjudicatory office within the bureau.

The director of the CFPB — the same person who initiates an administrative proceeding — hears any appeals that may arise from the proceeding. The director (Richard Cordray) also has the power to overrule an ALJ’s ruling.

This has raised a lot of questions about the scope of the CFPB director’s authority and whether there are adequate checks and balances of its power.

Why did the CFPB pursue an administrative proceeding against PHH instead of filing suit in federal district court?

The Consumer Financial Protection Act (CFPA), the portion of the Dodd-Frank Act that established the CFPB, gives the CFPB a choice: It may enforce laws administratively or in court.

As noted by a CFPB enforcement brief, the section of the CFPA that authorizes the bureau to enforce laws through administrative proceedings does not contain a statute of limitations.

The CFPB would not have been able to pursue court action against PHH because the practices alleged by the bureau occurred well before the three-year statute of limitations for RESPA Section 8 federal court claims.

Jan. 31, 2014

PHH and the other companies move to dismiss the CFPB’s charges, categorically denying all of the bureau’s accusations.

PHH’s response to the bureau’s charges also argues that the claims are barred by the three-year statute of limitations under RESPA and the Dodd-Frank Act.

PHH also argues that its reinsurance practices were approved by HUD, and subsequently by proxy, the CFPB. The company offers a slew of case law and other documents in support of its arguments, including HUD’s 1997 letter.

In the alternative, PHH requests summary disposition “because it is undisputed that Atrium paid more than $156 million in claims, which proves that the reinsurance contracts were, in fact, not a ‘sham.'”

PHH and its co-defendant companies are represented by Washington, D.C.-based law firm Weiner Brodsky Kider PC. Lead attorney Mitchel K. Kider is a nationally recognized RESPA attorney who frequently conducts educational seminars on how to structure RESPA-compliant business relationships and discusses RESPA case law and related news at industry conferences.

Feb. 3, 2014

Administrative Law Judge Cameron Elliot is assigned to the proceeding. Elliot is a judge from the Securities and Exchange Commission (SEC) and appears pursuant to an interagency agreement with the CFPB.

Elliot was formerly an administrative law judge for the Social Security Administration and handled patent and copyright cases for the Department of Justice. His private-sector work focused on intellectual property litigation.

Feb. 20, 2014

The CFPB responds to PHH’s motion to dismiss. In the CFPB’s view, HUD’s 1997 letter did not bless the practice of captive reinsurance because “the letter did not grant any permission for lenders to steer referrals of business to mortgage insurers in exchange for their participation in captive reinsurance arrangements.

“In fact, the letter warned that ‘if the lender or its captive reinsurance affiliate is merely given a thing of value by the primary insurer in return for this referral, in monies or the opportunity to participate in a money-making program, then Section 8 would be violated; the payment would be regarded as payment for the referral of business or the split of fees for settlement services.’”

The CFPB also asserts that the three-year statute of limitations provision relied upon by PHH “has no application in this administrative adjudicatory proceeding,” but even if it did, “PHH engaged in a long-running kickback scheme dating back to 1995 and continuing until at least 2013. Because the nature of these violations goes far beyond the origination of individual loans, this conduct constituted a continuing violation of the law.”

Feb. 28, 2014

The defendants file a strongly worded response to the CFPB, stating: “The bureau cannot have it both ways. The bureau admits that if it brought this action in federal court, it would be bound by RESPA’s three-year statute of limitations.

“Yet, the bureau claims that by filing administratively, it is entitled to the very same remedies and it can penalize conduct going back 20 years.

“The bureau also admits that its predecessor, HUD, did not have any ability to bring administrative claims under RESPA. Yet, the bureau claims that its ability to bring such an action, with the full panoply of penalties that did not exist prior to July 2011, is simply ‘procedural.’

“The bureau further admits that UGI is entitled to pay premiums pursuant to existing reinsurance agreements — including the one with Atrium Re. Yet, the bureau claims that the receipt of those premiums violates RESPA.

“While the bureau will say anything to avoid dismissal of this action, the fact remains that none of its arguments can overcome the established legal principles in favor of dismissal and/or summary adjudication.”

March 5, 2014

Judge Elliot holds oral arguments on the motions. He comments that “this case is really big” and that “I really just don’t see any way that I can resolve this case within 300 days.”

March 13, 2014

Judge Elliot issues an order denying the companies’ motion to dismiss or for summary judgment, agreeing with the CFPB’s arguments.

March-November 2014

Both sides file for the protection, release and redaction of certain documents in the case that are of a sensitive nature, dispute the appearance of some witnesses and debate who should pay for fees when certain witnesses give depositions that were taken without the issuance of a subpoena.

Nov. 24, 2014

Judge Elliot announces that he will release his recommended decision the next day, and he reminds both sides that he will release both a public version of the decision with redaction of sensitive, confidential information, as well as a nonpublic version containing no redactions.

Nov. 25, 2014

Judge Elliot releases his recommended decision, the public version of which runs 105 pages.

The decision finds that the companies accepted reinsurance premiums in violation of RESPA Sections 8(a) and 8(b) on loans closed after July 2008 (the earliest date the CFPB is permitted to take RESPA enforcement action), and failed to prove that their reinsurance agreements met the requirements of the HUD letter or RESPA Section 8(c)(2) safe harbor.

The judge recommends imposition of an injunction and disgorgement of about $6.4 million to all of the companies, jointly and severally.

What is disgorgement?

Disgorgement is an equitable remedy that requires a violator to give up wrongfully obtained profits causally related to the proven wrongdoing.

Dec. 4, 2014

The defendant companies file their appeal of Elliot’s recommended decision, taking exception to “all findings of liability and all relief recommended by the hearing officer, on the grounds that the findings of fact, conclusions of law and proposed relief are arbitrary, capricious, an abuse of discretion, not in accordance with law and/or unsupported by reliable, probative and substantial evidence.”

Dec. 10, 2014

In a stunning move, despite having received a recommended decision in its favor, the CFPB says it intends to file its own appeal of certain portions of the recommended decision, “including, but not limited to, the scope of the actionable violations and the relief granted.”

The bureau’s filing hints that Cordray thinks the companies should have been held liable for loans closed prior to 2008 and pay more than what Elliot recommends.

---

New year means new process as appeals are filed

Jan. 9, 2015

Both sides file their opening appeal briefs.

The defendant companies’ appeal alleges and argues the following:

• The CFPB’s first adjudicative hearing was “fundamentally unfair.”
• CFPB enforcement counsel tried to get the companies to agree to a hundred-million-dollar settlement; when the companies refused, the CFPV “literally dumped more than 1 million pages of documents — purportedly their entire investigative file on respondents less than a week before the parties were required to designate exhibits.” When the companies tried to compel the CFPB to identify relevant materials, Judge Elliot rejected their motion.
• The action never should have been filed because the companies did not violate RESPA; it crafted its reinsurance agreements per the framework suggested by the HUD letter.
• Judge Elliot showed “overt hostility” toward the company “in virtually every order he issued, as well as in the recommended decision.”
• There is a specific statute of limitations in RESPA governing government “actions,” and it should have applied to this administrative action.
• The purpose of an injunction is to prevent future violations, but PHH had already ended its reinsurance practices by the time this action was taken.
• RESPA does not provide for the remedy of disgorgement.

For its part, the CFPB’s appeal states that Elliot’s “findings and conclusions are fundamentally correct, supported by abundant evidence and should not be disturbed,” and explains that it is filing the appeal “to ensure that they are carried through to their logical conclusion: That all relief available and appropriate under the governing authorities is imposed to remedy PHH’s wrongdoing,” and to clarify certain points, including:

• The CFPB should affirm the finding of liability in the recommended decision; award all monetary relief authorized by RESPA and the Consumer Financial Protection Act; declare that as a matter of law PHH may not assert a RESPA Section 8(c)(2) defense and that irrespective of the form of the arrangements, they cannot qualify as an “actual service” because they increased risk to the mortgage insurers; and deny any offsets to disgorgement for payments to the mortgage insurers who “conspired with PHH to violate RESPA.”
• Regarding the statute of limitations issue, the CFPB should apply the “continuing violation doctrine” to RESPA Section 8, and determine that statute of limitations begins to run when the violation is complete, or in this case, when any kickback payment is made.
• PHH should be required to disgorge $493 million of ceded premiums it accepted through its continuous violation of RESPA from 1995 through 2013.
• PHH should pay civil money penalties “for each day” that the reinsurance arrangements were in place after July 2011 (when the CFPB opened its doors) — at least $256.5 million, an estimate the CFPB says is “conservative” in light of the recommended decision’s suggestion that all of PHH’s violations were knowing.

Feb. 6, 2015

Cordray schedules oral arguments for March 9, 2015, giving each side 30 minutes to present their arguments.

The two sides continue to file evidence in support of their appeals and respond to each other’s filings.

March 9, 2015

Cordray presides over oral arguments for both sides’ appeals.

June 4, 2015

Cordray issues his final decision, stating that he is affirming Elliot’s conclusion that PHH violated RESPA, “though on somewhat different grounds.”

Affirming that “no statute of limitations applies here” to this administrative proceeding, Cordray stated, “even if these provisions were in any way ambiguous, which they are not, I would interpret them to impose a limit only on court actions.”

Regarding the HUD letter, Cordray states that it “is not in such a form as to be binding on any adjudicator.”

“The letter responded to a lender seeking HUD’s guidance on the application of Section 8 to captive reinsurance agreements. Unlike some other forms of written guidance issued by HUD, the letter was never published in the Federal Register.

“Thus, pursuant to the applicable provisions of Regulation X in effect at the time of the events at issue in this proceeding (and pursuant to HUD’s own regulations in effect at the time of the letter), the letter provides no protection to PHH in this proceeding,” Cordray concluded.

Disagreeing with Elliot’s conclusion that PHH violated Section 8 only at the very moment a particular loan closed, not each time the mortgage insurer forwarded a premium payment to a reinsurer, Cordray concludes that “PHH committed a separate violation of RESP A every time it accepted a reinsurance payment from a mortgage insurer.”

“That means PHH is liable for each payment it accepted on or after July 21 , 2008, even if the loan with which that payment was associated had closed prior to that date,” Cordray states.

Cordray also orders all of the companies, as well as their subsidiaries and divisions, officers and employees (present and future) to cease and desist from violating RESPA Section 8.

The director also orders them to, for a period of 15 years, cease and desist from entering into any captive reinsurance agreement; refrain from referring any borrower to a settlement service provider if the provider has agreed to pay purchase or pay for any service from the companies; and maintain records of all things of value they receive from any settlement service provider.

Cordray further orders PHH to pay more than $109 million in disgorgement of the premiums it paid to the reinsurers. Cordray provides this calculation of that figure:

UGI: $72,848,494
Genworth: $34,236,016
Radian: $ 957,704
CMG: $ 1,146,404
TOTAL: $109,188,618

June 17, 2015

Calling Cordray’s final decision “striking,” the defendant companies note that Cordray has interpreted RESPA “in a way contrary to the preexisting interpretations maintained by HUD — the agency previously charged with the interpretation and enforcement of RESPA — and by numerous courts and the mortgage industry.”

“At a minimum, respondents should be afforded the opportunity to seek judicial review of the director’s decision to reject this guidance before being subjected to disgorgement and other adverse actions,” they state.

In addition, the companies will suffer “irreparable harm” if a stay is not granted on Cordray’s order, they argue.

Therefore, they request a stay of Cordray’s final order pending the outcome of a judicial review they plan to file in the U.S. Court of Appeals for the District of Columbia Circuit.

---

PHH strikes back

June 19, 2015

The defendant companies petition the U.S. Court of Appeals for the District of Columbia Circuit to review Cordray’s final decision and order “on the grounds that it is arbitrary, capricious and an abuse of discretion within the meaning of the Administrative Procedures Act; violates federal law, including but not limited to the U.S. Constitution, RESPA and the Consumer Financial Protection Act of 2010, as well as regulations promulgated under those statutes; and is otherwise contrary to law.”

In throwing down this gauntlet, the companies are the first to strike back against a CFPB enforcement proceeding.

June 24, 2015

Cordray denies the companies’ motion for a stay, but throws them a bone: He agrees to stay the effective date of his order for another 30 days — until Aug. 5, 2015 — to permit PHH the opportunity to seek a stay from the D.C. Circuit Court.

June 26, 2015

The defendant companies file a motion for a stay of Cordray’s decision, pending the court’s review of it.

Aug. 3, 2015

The defendant companies get their wish. The court grants their requested stay of Cordray’s order, finding they “have satisfied the stringent requirements for a stay pending appeal.”

September-October 2015

The defendant companies get an outpouring of support from dozens of companies and trade organizations that file amicus curiae, or “friend of the court,” briefs, including:

• The U.S. Mortgage Insurers (USMI)
• The Real Estate Services Providers Council Inc. (RESPRO)
• The American Escrow Association (AEA)
• The American Land Title Association (ALTA)
• The National Association of Realtors (NAR)
• The American Financial Services Association
• The Consumer Bankers Association
• The Housing Policy Council of the Financial Services Roundtable
• The Independent Community Bankers of America
• The Leading Homebuilders of America
• The Mortgage Bankers Association
• The National Association of Home Builders
• The American Escrow Association
• And others

The brief filed together by ALTA, AEA, RESPRO and USMI lamented Cordray’s lack of clarity on RESPA and legal obligations and risks, noting that his order’s “ill-considered interpretation of RESPA Section 8(c) and the statute of limitations would disrupt the ability of Realtors, title insurers/agents, mortgage lenders/brokers, mortgage insurers and other providers to manage risk, compete, develop best practices and ultimately to efficiently deliver quality real estate settlement services to consumers.”

NAR’s brief states: “RESPA permits good-faith reliance on any ‘rule, regulation or interpretation’ issued by HUD or the CFPB interpreting Section 8, and NAR’s members have so relied. In light of RESPA’s penalties, the director’s decision in this case represents an unfair and unprecedented departure from substantial, uniform precedent and agency guidance. On behalf of its members, NAR respectfully requests that the decision be reversed and vacated.”

Even the U.S. Chamber of Commerce gets in on the action, filing a brief arguing that businesses and consumers need regulatory certainty, but that Cordray’s order violates due process and basic principles of statutory interpretation.

Nov. 5, 2015

The CFPB files its reply brief, asserting that its structure is Constitutional, that no statute of limitations applies to the proceeding, that Cordray’s interpretation of RESPA was appropriate and that the injunctive relief ordered against the companies was proper.

The CFPB asks the court to uphold Cordray’s final decision and order.

Nov. 23, 2015

The defendant companies’ reply brief argues the following:

• Cordray’s liability determination is unlawful because it contradicts nearly two decades of consistent agency guidance and settled federal agency interpretation
• Cordray’s “new interpretations of RESPA” are contrary to law
• The CFPB itself violates the Constitutional Separation of Powers
• Cordray’s sanctions are unlawful and exceed the bureau’s statutory authority
• Cordray’s decision and order should be vacated.

Jan. 15, 2016

The court schedules an oral argument hearing for April 12, giving one attorney from each side 15 minutes to present their case.

April 4, 2016

About a week before the oral argument is scheduled to take place, the court asks all parties to be prepared to discuss two questions:

1. What independent agencies now or historically have been headed by a single person? For this purpose, consider an independent agency as an agency whose head is not removable at will, but is removable only for cause
2. If an independent agency headed by a single person violates Article II as interpreted in Free Enterprise Fund v. PCAOB (2010), what would the appropriate remedy be? Would the appropriate remedy be to sever the tenure and for-cause provisions of the Dodd-Frank Act? Or is there a more appropriate remedy? And how would the remedy affect the legality of the director’s action in this case?

Attorneys and compliance experts speculated that the court’s order could spell doom for the CFPB, as it focused on the Constitutionality of the CFPB. It also did not escape anyone’s notice that the three judges on the court’s panel were all appointed by Republican presidents; creation of the CFPB was primarily a Democratic effort, and since it began operations in 2011, Republican members of Congress have questioned its actions and decisions on many occasions.

April 12, 2016

Attorneys for both sides appear before the U.S. Court of Appeals for the D.C. Circuit on April 12 for an hour-long oral argument hearing. A three-judge panel was to hear the oral arguments, but only two panel members, Judge Brett M. Kavanaugh and Judge A. Raymond Randolph, are present.

Judge Karen L. Henderson is not present, but will consider oral arguments based on an audio recording of the hearing, which is publicly available here.

Constitutionality of CFPB called into question

Theodore B. Olson, partner in the Washington, D.C., law firm of Gibson Dunn and attorney for PHH, speaks calmly but firmly for about 20 minutes with few interruptions from the panel, calling the CFPB an “unconstitutional, superexecutive agency.”

“There are so many problems with the creation of this agency,” Olson says. “It doesn’t have to go to Congress for its funding. It takes its money out of the Federal Reserve, without an appropriation of Congress.

“It has the power to write its own rules and regulations. It doesn’t have to go through the Office of Management and Budget with respect to proposed regulations as every other agency does.

“The President and the Congress have no control over this agency. The only check on this agency is right here. If it isn’t for the judiciary, this agency can do anything it wants.”

“So what is the remedy?” Kavanaugh asks.

“The remedy is that this agency is unconstitutional. This decision has to be vacated,” Olson responds. “I hesitate to go any further than that, because if I were in your shoes, I would be very, very tempted to write an opinion — and it would be entirely justified — that Congress cannot create an agency like this that ignores all of the rules with respect to separation of powers.

“As many scholars, the Supreme Court and courts of this jurisdiction have pointed out, the separation of powers is what protects out liberty as individuals in this country. The very definition of tyranny is to concentrate all powers — legislative, judicial and executive — in a single agency.”

By comparison, Larry Demille-Wagman, senior litigation counsel for the CFPB, seems flustered and is frequently interrupted and questioned by the panel for about 40 minutes.

Demille-Wagman begins by noting that PHH’s primary argument is that the CFPB is unconstitutional because its director can only be removed for cause.

“The bureau’s for-cause removal provision is no different than the for-cause removal provision for the Federal Trade Commission,” the attorney begins, but Kavanaugh interrupts him.

“But they’re a commission,” the judge points out. “That’s the difference. Historically, federal agencies have been multimember on the theory that they are nonpartisan or bipartisan.” The CFPB, the judge said, “is a novel structure with very few precedents that I’ve found — almost none that are historical, and very few in recent years.”

“There are a few, your honor,” says Demille-Wagman. “The Social Security Administration went back 20 years. The office — ”

“Right, but by the way, when that was created, President Clinton issued a signing statement saying there are severe Constitutional problems with that agency,” the judge interjects.

“Yes, but he didn’t explain what those problems were, and President Obama didn’t indicate that there were any Constitutional problems with respect to the bureau,” Demille-Wagman responds.

“The reason for the commission structure was that this was an exception or a difference from the usual control the president has over the executive branch,” Kavanaugh explains. “If we’re going to have that kind of structure, we want it to be a group that is going to be nonpartisan or bipartisan.

“You can’t have that with a single person. You’re concentrating in a single person a huge amount of power, and the president has no authority over that.”

Cordray’s RESPA interpretation also questioned

Both sides also make their case with respect to the RESPA charges against PHH. Olson explains that in structuring its agreements mortgage insurers, PHH used the framework provided by a formal guidance on mortgage reinsurance that HUD issued in 1997.

For nearly 20 years, that is the interpretation that all settlement service providers have relied upon, and it has been widely endorsed by the courts as well, Olson points out.

“The director ran roughshod over a clear provisions of federal law, rewriting Section 8 of RESPA to prohibit conduct expressly authorized by that law; disregarded and retroactively overruled decades of administrative and judicial application of that law and widespread industry reliance on it; dismissed and distorted a plainly applicable statute of limitations contrary to authoritative judicial decisions; and imposed draconian, remedial punishment that Congress did not give or authorize to that bureau under these circumstances,” Olson says.

Demille-Wagman disagrees, saying, “The problem for PHH here is that the payments it was receiving from the mortgage insurers were not solely for reinsurance. They were quid pro quo for referrals … and that is exactly what RESPA seeks to prohibit.”

The attorney went on to suggest that PHH examine HUD’s interpretive letter more closely to “parse the words and pick up elements of style,” but Kavanaugh interrupts that argument.

“You are asking them to do something the entire industry had the opposite reading of it, confirmed repeatedly by HUD,” the judge says.

“Everyone understood what the deal was, and if you want to change it going forward, we can talk about the statutory issue, whether you have the authority to do that. But to pull the plug and change it going backwards is very problematic, at least under the Supreme Court’s precedents.”

---

Where do we go from here?

The court is expected to rule on the case sometime this fall. Most compliance experts agree it is highly likely that the disappointed party will seek review by the full D.C. Circuit, and perhaps eventually by the Supreme Court.

In either case, serious questions have now been raised to a federal appellate court — and sooner or later, Congress will face pressure to resolve concerns about the financial industry watchdog it created and the uncertain regulatory environment created by Cordray’s interpretations of RESPA.

Who’s who in the companies’ court appeal

The cast of characters involved in the D.C. Circuit Court case are interesting individuals whose backgrounds may influence the eventual outcome of the appeal.

The main counsel of record for the defendant companies, Theodore B. Olson, partner in the Washington, D.C., law firm of Gibson Dunn, formerly served as President Ronald Reagan’s legal counsel during the Iran-Contra affair’s investigation phase, as well as assistant attorney general when Reagan ordered the Environmental Protection Agency’s administrator to withhold documents on the ground they contained “enforcement sensitive information.”

The House Judiciary Committee later produced a report suggesting Olson had given false and misleading testimony before a House subcommittee during the investigation. The Judiciary Committee forwarded a copy of the report to the attorney general requesting the appointment of an independent counsel investigation.

Olson argued that the independent counsel took executive powers away from the president and created a hybrid “fourth branch” of government that was ultimately answerable to no one. He also argued that the broad powers of the independent counsel could be easily abused or corrupted by partisanship. The Supreme Court ultimately decided against him in that case.

Olson went on to argue 62 cases before the Supreme Court, winning about 75 percent of them, according to his law firm bio. In one case, he argued against federal sentencing guidelines, and in another he defended the reporter who had first leaked the Anita Hill sexual harassment story. In another, he successfully represented President George W. Bush in Bush v. Gore. Bush later appointed him solicitor general.

If none of that rings a bell, but Olson’s name still sounds familiar, it could be because he is involved in Apple Inc.’s fight against helping the FBI to unlock the cell phone of the San Bernadino terrorists. He is also representing New England Patriots quarterback Tom Brady in the NFL’s “deflategate” scandal.

Leading the legal team for the CFPB in these proceedings is Larry Demille-Wagman, senior litigation counsel for the bureau. Demille-Wagman has worked in federal government for several decades, having worked at the Federal Trade Commission (FTC), where he helped implement the Do Not Call Registry, and the Commodity Futures Trading Commission.

According to Bloomberg, Demille-Wagman has been involved in cases involving a wide range of litigation, including commodities contracts and their equivalents, Big Pharma, advertising of weight-loss products, a software company’s legal responsibility for scammers’ creation of fraudulent checks and the FTC’s ability to videotape investigative depositions.

Demille-Wagman is also representing the CFPB in the 7th Circuit Court, where ITT Educational Services is appealing a district court’s ruling involving a CFPB enforcement action alleging the company exploited its students by pushing them into loans it knew were likely to default.

The three-judge panel that will decide this case includes:

• Brett M. Kavanaugh: This judge was confirmed court in 2006, overcoming three years of partisan divide over his appointment by President George W. Bush in 2003. Kavanaugh played a lead role in drafting the Kenneth Starr report, which urged the impeachment of President Bill Clinton, led the investigation into the suicide of Clinton aide Vincent Foster and worked for Bush’s 2000 election campaign during the Florida recount. His name has been mentioned as a future Republican nominee to the Supreme Court.
• A. Raymond Randolph: Randolph was appointed to the court in 1990 by President George H.W. Bush and assumed senior status in 2008. A former advanced Constitutional law professor, Randolph served as assistant to the solicitor general for three years, went into private practice briefly and returned as the Deputy U.S. Solicitor General from 1975 to 1977. Notable cases include several challenges to the Bush Administration’s policies regarding detention of suspected terrorists at Guantanamo Bay.
• Karen L. Henderson: This judge was also appointed in 1990 by President George H.W. Bush to fill the seat vacated by Starr when he became solicitor general. Henderson’s notable cases include ending the U.S. Postal Service’s alleged favoritism towards Netflix; finding that the D.C. Circuit cannot rule on a filibuster lawsuit due to jurisdictional issues; ruling that the Religious Freedom Restoration Act, a statute that applies by its terms to all “persons” did not apply to detainees at Guantánamo; and a decision that “the Constitution, case law and applicable statutes all establish that the district is not a state within the meaning of the Second Amendment.

Oct. 11, 2016

The U.S. Court of Appeals for the District of Columbia declares the CFPB’s structure unconstitutional and negates the bureau’s controversial interpretation of RESPA.

Apologizing for the length of its 110-page opinion, the court agrees with PHH that “the single-director structure of the CFPB represents a gross departure from settled historical practice” on the authority given to other government agencies. The court adds: “The director enjoys more unilateral authority than any other officer in any of the three branches of the U.S. government, other than the president.”

“Never before has an independent agency exercising substantial executive authority been headed by just one person,” the court states. “The CFPB’s 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. We therefore hold that the CFPB is unconstitutionally structured.”

Although PHH had lobbied for the court to shut down the entire CFPB or even invalidate the entire Dodd-Frank Act until Congress passes new legislation addressing this “constitutional flaw,” the court follows Supreme Court precedent and prescribes a narrower remedy: Severing the statute’s for-cause provision, which allows for the removal of a director for just cause, because this “will not affect the ongoing operations of the CFPB.”

“With the for-cause provision severed, the president now will have the power to remove the director at will, and to supervise and direct the director,” the court states. “The president is a check on and accountable for the actions of those executive agencies, and the president now will be a check on and accountable for the actions of the CFPB as well.”

The court also sides 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 remands the case for further adjudication, where PHH will likely have to show it did not charge unreasonable rates.

The court also finds that the CFPB violated PHH’s right to due process by applying its interpretation of RESPA retroactively and incorrectly, and that the CFPB is subject to RESPA’s three-year statute of limitations.

PHH says in a statement that it is “extremely gratified” by the court’s decision, and it welcomes the chance to “present the facts and evidence to demonstrate that we complied with RESPA and other laws applicable to our former mortgage reinsurance activities in all respects.” The decision, the lender says, “will provide greater certainty to the entire mortgage industry regarding the industry’s reliance on long-standing regulation as to how to conduct business consistent with RESPA.”

The CFPB issues this brief statement: “The bureau is considering options for seeking further review of the court’s decision. In the meantime, as the court expressly recognized, the bureau will continue its important work. Today’s decision will not dampen our efforts or affect our focus on the mission of the agency.”

Email Amy Swinderman