In a decision asserting broad authority for the CFPB and which is certain to set the tone for future CFPB appellate rulings, Bureau director Richard Cordray recently issued the Bureau’s first decision from an appeal of a Bureau administrative enforcement action. The decision, issued June 4, generally affirmed a 2014 Administrative Law Judge (ALJ) decision finding that PHH Corporation (PHH) violated the Real Estate Settlement Procedures Act (RESPA) by accepting kickbacks from mortgage insurers. The decision also reversed the ALJ on a few key issues, including increasing the number of payments for which PHH was held liable under RESPA, resulting in an increase in the monetary remedy to PHH.
The CFPB’s enforcement action against PHH alleged that PHH violated RESPA by accepting illegal kickback payments in return for referring customers to mortgage insurance companies for certain settlement services. PHH had created Atrium, a wholly-owned mortgage reinsurer. The CFPB alleged, and the ALJ concluded, that PHH varied the number of mortgages it placed for insurance with mortgage insurers based on the insurers’ agreement to use Atrium as a reinsurer, thereby funneling mortgage insurance premium dollars back to Atrium. The ALJ held that conduct violated Section 8 of RESPA, 12 U.S.C. § 2607, which prohibits any person from giving or accepting any kickbacks or unearned fees in connection with any real estate settlement service.
In a detailed 38-page decision and final order, Cordray upheld PHH’s liability under RESPA but reversed the ALJ on the number of RESPA violations at issue, significantly expanding PHH’s liability. First, Cordray ruled that no statute of limitations applies when the CFPB challenges a RESPA violation in an administrative proceeding. Instead, the limitations period applies only to CFPB enforcement actions brought in court. The Director concluded, however, that the Bureau cannot revive time-barred claims – i.e., claims that HUD itself could not bring before the CFPB took over enforcement of RESPA. Because the CFPB took over for HUD on July 21, 2011, it can challenge alleged RESPA violations that occurred on or after July 21, 2008.
Applying this reasoning, Cordray concluded that PHH committed a separate violation of RESPA each time it accepted a reinsurance payment on or after July 21, 2008 even if the mortgage at issue closed before July 21, 2008. By contrast, the ALJ had concluded that PHH was liable only for payments that were connected with loans that closed on or after July 21, 2008. The result of Cordray’s decision was to increase in the amount of disgorgement PHH was ordered to pay from $6 million to $109 million. In reaching his conclusion, Cordray distinguished a Fifth Circuit opinion, which held that a RESPA cause of action accrues at the closing, on the basis that PHH did not receive the full value of the kickback at the time of closing because a portion of the kickback was received with each mortgage payment. The Director opined that the emphasis placed on closing by the federal courts does not appear within the text of the statute and “the culpable conduct under the statute is the giving and accepting of kickbacks, which does not necessarily occur only at closing but might occur at other stages of the process.” The Director elected not to impose an additional civil penalty when considering that no civil money penalty could have been imposed under RESPA’s framework for the majority of PHH’s conduct and because the disgorgement “is a just and sufficient remedy to fulfill the Bureau’s goals.”
The decision also affirmed extensive injunctive relief, (1) ordering PHH to cease and desist violating section 8 of RESPA; (2) enjoining PHH for 15 years from engaging in the business of captive reinsurance; and (3) ordering PHH to maintain records of all things of value that PHH receives or has received from any real estate settlement service provider to which PHH has referred borrowers since July 21, 2008 and for the next 15 years.
Cordray’s sweeping decision reflects the broad powers that the CFPB is asserting for itself in addressing alleged violations of RESPA. The absence of any statute of limitations applicable to RESPA violations after July 2008, which potentially opens the door to CFPB administrative actions against mortgage industry companies for years to come, is perhaps the decision’s most striking holding, and is tempered only by Cordray’s rejection of the continuing violation doctrine, which the CFPB’s enforcement division had argued authorized the Bureau to pursue RESPA claims even for pre-2008 conduct. Nonetheless, the Bureau’s view of when a RESPA violation occurs – when money is received rather than at loan closing – expands dramatically the number of alleged violations for which the CFPB claims enforcement authority. Also important is the standard of review embraced in the decision, which holds that in any appeals to the Director, the law and facts are reviewed de novo – in other words, no deference is given to the factual determinations of the ALJ.
PHH may file a petition for review of the Director’s final order in a United States Court of Appeals within 30 days of the service of the final order. Time will tell whether the courts will sanction the expansive approach taken by the CFPB here or rein in the authority the Bureau asserts for itself.