On August 5, 2015, PHH Corp. (“PHH”) won a stay of the $109M penalty handed down by Consumer Financial Protection Bureau (“CFPB”) director Rich Cordray. Cordray’s aggressive legal reasoning and the harsh penalties he imposed, in what was the first ever appellate decision in a CFPB enforcement action, have already sent shockwaves around the financial services industry.
The case began as a CFPB enforcement action alleging that PHH had violated the Real Estate Settlement Procedures Act (“RESPA”) by allegedly tying mortgage insurance referrals from PHH to agreements mortgage insurers made for captive reinsurance contracts with a PHH affiliate. PHH argued, amongst other things, that it had relied on previous administrative guidance from the Department of Housing and Urban Development and the provisions of Section 8(c) of RESPA which excludes payments of “services actually performed” from the definition of a kickback. Nonetheless, the Administrative Law Judge (“ALJ”) found against PHH and assessed a $6.4 million dollar penalty against PHH. PHH appealed the decision, which, under the provisions of the 2013 Dodd-Frank Wall Street Reform and Consumer Protection Act, are reviewed by none other than the director of the CFPB himself, Rich Cordray.
In June of 2015, Cordray issued his opinion. Cordray reversed the ALJ’s findings that the applicable statute of limitations for RESPA violations applied to the CFPB and hit PHH with a $109M in penalties (which corresponded to the total amount of reinsurance premiums PHH had received) and awarded injunctive relief which requires PHH to stay out of the captive re-insurance business for 15 years. The aggressiveness of Cordray’s conclusions, harsh penalty, and the short shrift he gave to arguments which had been accepted by the ALJ surprised many observers.
PHH has appealed the award to the U.S. Court of Appeals for the District of Columbia Circuit (“DC Circuit”) arguing that the award was “arbitrary, capricious, and an abuse of discretion within the meaning of the Administrative Procedure Act.” The first issue in the case was whether or not to stay enforcement of the 109M penalty and injunctive relief set forth in Cordray’s opinion. PHH had argued that complying with Cordray’s order would violate PHH’s due process rights and harm business irreparably. The CFPB opposed the imposition of a stay, arguing that PHH would not be irreparably harmed. In its short order, the DC Circuit indicated that it had reviewed the parties’ briefs and that a stay on enforcement was appropriate.
The case is PHH Corp. et al. v. Consumer Financial Protection Bureau, case number 15-1177, and it is currently pending in the U.S. Court of Appeals for the District of Columbia Circuit.