Court ruling will have lasting impact on CFPB

The Scotsman Guide - Victor Whitmen - 18 October 2016

The U.S. Court of Appeals for the District of Columbia last week tossed a $109 million fine against the mortgage lender PHH Corp. and also declared the leadership structure of the Consumer Financial Protection Bureau (CFPB) unconstitutional. While those decisions garnered the most media coverage, the court also made several key rulings that rebuked the bureau over its interpretation of the anti-kickback provisions of the Real Estate Settlement Procedures Act (RESPA).

PHH initially ran into trouble with the CFPB because of its practice of referring consumers to insurance companies that had side agreements with PHH to purchase so-called "reinsurance" from PHH-owned companies, which took on a portion of the loan-default risk for a fee.

The CFPB maintained that these arrangements were illegal under RESPA, even though they were tolerated for many years by the U.S. Department of Housing and Urban Development (HUD), which oversaw RESPA before the CFPB took on that role. HUD had relied on an exemption that would have allowed for these side agreements between lenders and captive companies.  

The federal appeals court ruled that by reinterpreting RESPA and penalizing PHH for alleged violations retroactively, the CFPB had violated PHH’s right to due process. The court also ruled that the bureau was subject to a three-year statute of limitations in prosecuting violations. The CFPB had maintained that it was not subject to the statute of limitations in cases where it is taking administrative action.  

Richard Andreano Jr., a partner with the Washington, D.C.-firm Ballard Spahr, spoke with Scotsman Guide News about the potential ramifications of the case.  

Could you review the key findings in the PHH case?

The one decision that received the most attention was the court indicating that the structure of the bureau was not constitutional, but its remedy was relatively limited. It simply changed the provision of the statute that the director can be removed by the president only for cause to an at-will provision, so basically making the director serve at the pleasure of the president. That has gotten most of the press, but the industry frankly thought a number of the other decisions were more important, RESPA being a central part of the case. 

Will the D.C. Circuit decision mean that the CFPB has to back off in prosecuting perceived RESPA violations? 

That is going to be interesting to see what they do. A decision of a Circuit Court of Appeals is technically binding only in the jurisdiction that it governs, which [in this case] is here in the District of Columbia. But the D.C. Circuit is viewed as very influential and an expert court of appeals when it comes to matters of administrative law and agencies. It has weight, and its decisions also, in many respects, are consistent with other courts of appeal. In terms of RESPA, given some of the very strenuous language of the opinion, one would think that the bureau would get that message that the court was very disturbed with the bureau’s position, and that they need to be a little less aggressive in some of their actions and interpretations of statute. The problem with this bureau is that it tends to march to the beat of its own drum and doesn’t particularly care if that diverges from prior interpretations. We will really have to see whether the bureau takes this decision to heart and perhaps changes the way it proceeds in enforcement actions, or will it ignore the decision outside of the D.C. Circuit and remain as aggressive as it has been in interpreting statutes in seeking to enforce those provisions.

So, this decision won't necessarily gives the industry a blank check to do marketing service agreements?

It is interesting that when people were discussing the PHH case, they said, "Oh, it is about marketing service agreements." It is actually not. It is about captive mortgage reinsurance, but marketing service agreements were based on [a RESPA exemption] that allowed fair-value payments for goods and services. The bureau’s position, if upheld, would have meant that if somebody refersbusiness to you, you can’t have any other contractual relationship with [that company] in which you pay them anything, even if what you pay them is fair, because it would be illegal. That would be the bureau’s interpretation, and the court clearly knocked that out.
But the bureau has still raised other concerns with marketing service agreements, in that services have to be rendered and then fair value has to be paid. Even with this decision, the bureau can still attack the structure of the marketing service agreement, saying, "Well, I am not saying they can’t exist, but you did not structure it right." That still remains as a challenge.
One thing the bureau sought to do is create amarketplace where consumers could freely shop for loans and other consumer financial services. The bureau appears to believe that marketing service agreements result in steering of consumers that impede their freedom to shop. Because of that, I think they are going to remain concerned about marketing service agreements.

Could this case open the door for more lawsuits against the CFPB?

It takes a company that is larger because these are not inexpensive endeavors to take on this type of litigation. It may encourage more companies, if they believe the bureau is being overly aggressive and not interpreting the law correctly. The trouble is that with a lot of small entities, they simply don’t have the resources to engage in this type of challenge, and that is what bothers the industry. The belief is that the bureau knows it has a lot of power. It knows it is very expensive for someone to challenge what it does. So, in many cases, it is able to get smaller companies to settle because they don’t have a choice. They don’t have the ability to fight the bureau. That’s where the industry believes that the structure of the bureau is a problem, and that the president and Congress really need to revisit that.

Some people have raised the point that the three judges who ruled in the PHH case were Republican presidential appointees and their positions might not be shared by the full D.C. Circuit. Do think this case will be appealed?

On the constitutional decision, I would expect that the bureau will either ask for a hearing before the full circuit or ask for Supreme Court review. I think that is likely. The other issues are a little bit more debatable. Even though it was a three-judge panel of Republican judges, on the RESPA issues, I find those rulings to be consistent with other courts. If the bureau challenges [the court’s finding that RESPA allows payments for the fair value of goods or services even to a party that is referring business], I don’t see them winning. That interpretation is very consistent with prior HUD interpretations and very consistent with prior court interpretations. On the due-process arguments --- can the Bureau change its position [on what constitutes a RESPA violation] and then retroactively apply it --- I don’t see them winning that in any court. And there is a risk going to the Supreme Court. I think the justices would be very concerned with the conduct of the bureau in this case.