Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB or Bureau), has issued his decision in In re PHH Corporation, the Bureau’s first appeal of a contested administrative adjudication. The outcome was unfortunate for PHH; Director Cordray not only rejected PHH’s challenge to the Administrative Law Judge’s (ALJ) finding that PHH had violated the Real Estate Settlement Procedures Act (RESPA), but he adjusted the damages upward from the $6 million awarded by the ALJ to $109 million, an increase of approximately1,700%.

The CFPB had alleged that PHH, a residential mortgage lender, engaged in an illegal kickback scheme with several mortgage insurance companies. According to the Bureau, PHH did business exclusively with mortgage insurance companies that had agreed to purchase reinsurance from a wholly owned PHH subsidiary, at supposedly exorbitant rates. These reinsurance premiums, the Bureau argued, constituted kickbacks in exchange for referrals, which are prohibited by RESPA.

This case was initially tried before an Administrative Law Judge from the Securities and Exchange Commission (SEC).1 Although the ALJ agreed with many of the Bureau’s allegations, he found that loans that closed prior to July 21, 2008—the majority of the loans at issue—were outside the statute of limitations and thus nonactionable. The ALJ reasoned that HUD’s power to enforce RESPA was limited to bringing civil actions in federal court, where a three-year statute of limitations applied, and that the transfer of RESPA enforcement authority to the Bureau on July 21, 2011, did not have the effect of reviving time-barred claims. Accordingly, he awarded the CFPB just $6 million of the $430 million it had sought.

Director Cordray agreed that PHH was liable and that the CFPB lacked the ability to retroactively revive claims that HUD would have been time-barred from bringing when the Bureau was created. He found, however, that each reinsurance premium payment within the limitations period constituted a separate kickback in violation of RESPA, regardless of whether the underlying loan had closed outside of the limitations period.

The damages also were greater because the Director rejected the ALJ’s approach to deducting expenses. The ALJ had held that, although the reinsurance premiums collected by PHH were unlawful kickbacks, PHH should be allowed to deduct the amount of the reinsurance claims that it paid out. The Director disagreed, holding that “it is not appropriate to credit PHH for payments it made to those who were involved in the very RESPA violations that are at the heart of this case.”

On the substantive question of liability, it is notable that Director Cordray went out of his way to interpret RESPA in an aggressive manner. The ALJ had interpreted RESPA to provide an affirmative defense to liability if PHH could prove that it had actually provided reinsurance in exchange for the payments. In so finding, the ALJ largely deferred to the Department of Housing and Urban Development’s prior interpretation of the statute. (The Department had been tasked with enforcing RESPA before the establishment of the CFPB.) The ALJ ultimately concluded, however, that the affirmative defense was unavailable to PHH: the reinsurance had been structured so that there was no real risk transfer, and the service purportedly provided was illusory. Although unnecessary to affirm PHH’s liability, Director Cordray took up the issue and pointedly rejected the Department’s prior interpretation, concluding that there is no affirmative defense to a RESPA violation.

Perhaps most notably, the Director agreed with the ALJ’s conclusion that, although a three-year statute of limitations applies where the CFPB sues to enforce RESPA in federal court, no statute of limitation applies to Bureau administrative enforcement proceedings. Both the ALJ and Director Cordray relied on the US Supreme Court’s decision inBP America Production Co. v. Burton, which held that Congress’ use of the term “action” in a statutory limitations provision limited the provision’s scope to “judicial, not administrative proceedings.”2

Given that the Bureau has virtually unfettered discretion to elect between an administrative proceeding or a federal court action, and that it generally may seek the same forms of relief in either forum, the significance of this holding cannot be overstated: even if a RESPA claim would be time-barred in federal court, the Bureau nonetheless can assert it, and seek the same injunctive and monetary remedies, through an administrative adjudication. It is likely that the CFPB will make this argument with respect to other federal statutes that similarly impose limitations periods only on “actions,” such as the Truth in Lending Act, the Fair Credit Reporting Act, and the Consumer Financial Protection Act (which sets forth the Bureau’s prohibition on “unfair, deceptive, or abusive acts or practices”).

Finally, the Director exercised his discretion “as justice may require” and declined the Bureau’s request for additional civil penalties (potentially up to $1 million per violation) on top of the $109 million in disgorgement that he had already awarded. PHH has petitioned the DC Circuit for review.
Key takeaways from this decision include:

  • First, Director Cordray obviously wrote this decision with appellate review in mind. He engaged in extensive and careful parsing of statutory language, and he also explicitly invoked his authority to issue binding interpretations of ambiguous language. Although the Courts of Appeals are required to review this decision deferentially, expect that whichever court hears this case will scrutinize the decision carefully—both because of the huge financial stakes, and because the court will want to set good precedent in the first enforcement appeal. In particular, the courts may be more sympathetic to PHH’s arguments regarding the procedural unfairness of the ALJ proceeding.
  • Second, the Director is squaring off against criticism that the CFPB’s use of administrative proceedings raises due process and other constitutional concerns. A CFPB administrative adjudication is a “rocket docket,” with a highly compressed discovery schedule and few of the protections afforded by the federal discovery rules. Criticism of the SEC’s push to bring more cases before its internal ALJs—who, as noted above, also preside over CFPB administrative adjudications—has been mounting, particularly given media analyses demonstrating that the SEC enjoys a significant home-court advantage when it sends cases to its internal tribunal.
  • The Director is interested in using adjudication to set policy, even with regard to issues that are not germane to his decisions. Policymaking by adjudication bypasses notice and comment rulemaking, preventing public participation and reducing transparency. It also increases legal uncertainty, as regulated entities no longer understand the rules of the road, but instead can find themselves liable for conduct that was not clearly prohibited before their own case.
  • Finally, the idea that a decision to appeal may have negative consequences for a litigant’s financial health is a message that threatens to further insulate the CFPB’s enforcement activities from outside scrutiny. If the Director continues to view appeals from adverse ALJ determinations as invitations to impose dramatic increases on existing penalties, litigants may decline to exhaust their administrative remedies, thus foreclosing judicial review of CFPB administrative adjudications in the federal courts.