PHH Corp. v. Consumer Fin. Protection Bureau, No. 15-1177, 2016 U.S. App. LEXIS 18332 (D.C. Cir. Oct. 11, 2016)
While not the usual stuff that we report on, the DC Circuit’s rejection of the Consumer Financial Protection Bureau’s (CFPB) determination concerning captive insurance arrangements is important given the numerous cases we have digested on the issue of captive reinsurance arrangements in the mortgage industry. In its decision, the court essentially eviscerated the CRPB’s decision-making structure.
The captive reinsurance arrangement issue is straightforward. A lender recommends a mortgage insurance company to its borrower. That mortgage insurance company is recommended because it purchases reinsurance from the lender’s captive reinsurance company. The borrower’s mortgage is protected by the insurance and the mortgage insurer is protected by the reinsurance.
Under the Real Estate Settlement Procedures Act (RESPA), this arrangement is legal, according to the court, as long as the mortgage insurance company pays no more than a reasonable market value premium to the lender’s captive reinsurer for the services actually provided. If not, then the arrangement is essentially an illegal rebate that is not permitted under RESPA. The Department of Housing and Urban Development (HUD) promulgated regulations and issued regulatory guidance providing for proper captive reinsurance arrangements.
The CFPB took a dim view of captive reinsurance arrangements, ignored the statute and the HUD pronouncements, and retroactively applied its newly-developed opinion against captive reinsurance arrangements to a lender and issued a significant fine. The lender challenged the determination in court and the circuit court agreed with the lender.
The court plainly held that Sections 8(a) and 8(c) of RESPA allow captive reinsurance arrangements so long as the mortgage insurance companies pay no more than reasonable market value to the reinsurers for services actually provided. In other words, if the reinsurance deal is not arms-length and the reinsurance premiums are not reasonable, then the captive reinsurance arrangement violates RESPA as an illegal rebate.
If, however, the lender’s captive reinsurer charges market rate and reasonable reinsurance premiums for providing reinsurance protection to the third-party mortgage insurer, then the arrangement is legal under RESPA and under previous HUD regulatory interpretations.
This is an important case because of the challenge to the CFPB’s authority and constitutionality and we may have a Supreme Court ruling on this issue in the future.