While the court opinion on the constitutionality of the CFPB’s structure was long awaited, its decision related to RESPA affords the mortgage industry much-needed clarity.

The January 31 en banc ruling of the D.C. Court of Appeals gave a huge win to the mortgage industry by reinstating the October 2016 three-judge panel’s findings that the Real Estate Settlement Procedures Act (RESPA) does not prohibit captive reinsurance arrangements. In a 250-page opinion that drew three concurrences and three dissents, the court addressed many controversial topics, including finding that the Consumer Financial Protection Bureau’s (CFPB) structure of a single director who may only be removed for cause is constitutional. In particular, however, the court’s rulings regarding RESPA provided needed clarity regarding a longstanding practice before it was challenged by the CFPB in early 2014.

Before the enactment of the Consumer Financial Protection Act in 2010, the Department of Housing and Urban Development (HUD) was responsible for administering and enforcing RESPA. Under HUD’s jurisdiction, Section 8(c) of RESPA’s anti-tying and kickback prohibitions were understood as permitting captive reinsurance arrangement in exchange for “bona fide payments,” thereby prohibiting captive reinsurance arrangements with mortgage insurers if the mortgage insurer paid the reinsurer more than the “reasonable market rate.” The CFPB assumed enforcement responsibility of RESPA in June 2011, and in January 2014, initiated an administrative enforcement proceeding against PHH Corp., a national mortgage lender.

The CFPB alleged PHH violated Section 8 of RESPA (12 U.S.C. § 2607(c)) when PHH paid a reasonable market rate to its captive reinsurance agency, Atrium Reinsurance Corp., and viewed these payments as “kickbacks.” PHH responded to these allegations with a number of affirmative defenses, including claims that the CFPB structure is unconstitutional. In November 2014, the administrative law judge ruled in the CFPB’s favor, enjoined PHH from entering into future captive reinsurance arrangements, and assessed a $6 million fine. PHH appealed this finding, and the case was adjudicated by then-CFPB Director Richard Cordray, who affirmed the administrative law judge’s findings, and increased the fine to $109 million.

PHH appealed to the D.C. Court of Appeals, and a three-judge panel heard the case. In October 2016, the court ruled in PHH’s favor, and issued a scathing critique of the CFPB. With respect to RESPA, the court found that the CFPB’s interpretation of Section 8(c) was incorrect. Specifically, the court held that the CFPB’s retroactive enforcement of its interpretation violated PHH’s due process rights, and held that the three- year RESPA statute of limitations applied to the CFPB’s administrative proceedings, and as a result, the entire suit was time-barred. Thus, the injunction and fine against PHH were lifted. The opinion also found that the CFPB’s structure was unconstitutional because the president could only remove the director for cause, which violated the president’s authority to replace agency heads at his discretion.

The CFPB appealed these findings, and the en banc D.C. Circuit Court heard the appeal. The full court ultimately ruled in favor of the CFPB, and found that its structure is constitutionally acceptable. However, in doing so, the court found that “[t]he panel opinion, insofar as it related to the interpretation of RESPA and its application to PHH and Atrium in this case, is accordingly reinstated as the decision of the three-judge panel on those questions.” This means that PHH “lost” its appeal, but overturned the enforcement action that led to the entire case.

While the court opinion on the constitutionality of the CFPB’s structure was long awaited, its reinstatement of the three-judge panel decision related to RESPA affords the mortgage industry needed clarity, allowing it to continue to pay captive reinsurers a reasonable market rate without violating Section 8 of RESPA. It also should bring some assurance of the industry’s ability to rely on administrative guidance without the fear that such guidance may be ignored at any time, exposing a company large fines and penalties.

Pepper Points

  • The en banc court ultimately ruled in the CFPB’s favor as it relates to the constitutionality of the agency’s structure. Therefore, only PHH may petition for certiorari. PHH is unlikely to do, given that PHH prevailed on all of its other claims (including having the $109 million fine removed.)

  • The court also held that the CFPB was bound by RESPA’s three-year statute of limitations rather than the general five-year limitations period under 28 U.S.C. § 2462.

  • Companies can and should continue to rely on administrative guidance and opinions with great confidence that they will not be held retroactively liable for “violating” new interpretations.

  • Mortgage companies may continue to pay reasonable market rates to captive reinsurance agencies without violating RESPA.