After the housing bubble burst and led to the Great Recession, the pressure was on Congress to ensure that this crisis could never happen again — and to create a system under which the financial services industry could be held accountable. So when Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 and authorized the creation of the Consumer Financial Protection Bureau (CFPB), its primary objective was to put a “a cop on the beat to patrol the consumer financial services markets” in the wake of the financial crisis of 2007.

  • Congress's primary objective was to put a “a cop on the beat to patrol the consumer financial services markets” in the wake of the financial crisis of 2007.
  • PHH sought and obtained a stay on an $109-million order issued by the CFPB -- and prepared to challenge the scope of the behemoth government agency’s authority in court.
  • The court is expected to rule on the case sometime this fall. Most compliance experts agree it is highly likely that the disappointed party will seek review by the full D.C. Circuit, and perhaps eventually by the Supreme Court.
  • Sooner or later, Congress will face pressure to resolve concerns about the financial industry watchdog it created and the uncertain regulatory environment created by interpretations of RESPA.

After the housing bubble burst and led to the Great Recession, the pressure was on Congress to ensure that this crisis could never happen again — and to create a system under which the financial services industry could be held accountable.

So when Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 and authorized the creation of the Consumer Financial Protection Bureau (CFPB), its primary objective was to put a “a cop on the beat to patrol the consumer financial services markets” in the wake of the financial crisis of 2007.

When Congress transferred regulatory authority over the Real Estate Settlement Procedures Act (RESPA) from the Department of Housing and Urban Development (HUD) to the CFPB, its intentions were equally clear: To make the mortgage marketplace safer and more accessible to more Americans.

With five years of mortgage industry oversight now under its belt, the CFPB has implemented the most significant change to the mortgage transaction made since the 1970s and collected billions of dollars in consumer redress, fines, penalties and settlements against mortgage, real estate, title insurance and settlement service providers it deemed to be in violation of RESPA.

So has Congress achieved its mission, or did American lawmakers unwittingly create a monster?

Regulating by enforcement?

The CFPB’s RESPA-related activities have made for big headlines, featuring splashy, high-figure penalties and settlements with some of the industry’s most recognizable brands — but the bureau has also been under fire by the industry, compliance experts, attorneys and even other government officials for playing fast and loose with the 42-year-old federal statute.

Many have also accused the bureau of regulating by enforcement instead of following in HUD’s footsteps and issuing formal guidance and interpretive notices to let the industry know where it stands on certain practices and issues.

Those accusations have now moved beyond tepid criticism to official legal record, as PHH Corp., one of the nation’s largest mortgage lenders, has become the first company to take the bureau to court for allegedly overstepping its authority in a 2014 RESPA proceeding.

And judging by what took place last week during oral arguments before the U.S. Court of Appeals for the D.C. Circuit, the company may actually succeed in getting the government to take a closer look at how well the CFPB is functioning and fulfilling its mission.

Taking one for the team

PHH stands accused of steering consumers to mortgage insurers in exchange for kickbacks, and overcharging consumers who did not purchase private mortgage insurance from its affiliates. These practices, which took place over a 15-year period, violated the anti-kickback provisions in Section 8 of RESPA, the CFPB alleged.

Allegations surfaced in administrative proceeding

These allegations didn’t surface in a settlement or penalty announcement, as the CFPB’s other RESPA cases have, but in an administrative proceeding the bureau initiated in January 2014. This kind of proceeding is similar to a complaint filed in federal court — which is another enforcement action the CFPB is authorized to take — but it is not a finding or ruling that a defendant has actually violated the law.

The proceeding is heard by an administrative law judge (ALJ) in the CFPB’s Office of Administrative Adjudication, an independent adjudicatory office within the bureau.

PHH appealed the proceeding, denying the CFPB’s allegations and asserting that its mortgage insurance agreements met all RESPA requirements. But in November 2014, Administrative Law Judge Cameron Elliot issued a decision recommending that the CFPB impose an injunction and disgorgement of almost $6.5 million.

Richard Cordray, the CFPB director

Richard Cordray

Both PHH and the CFPB appealed different aspects of that decision to CFPB Director Richard Cordray, who — in a move that stunned many — pushed aside portions of the ALJ’s decision and an appeal filed by the bureau’s own enforcement counsel, and countered with a new order: This time, asking PHH to pay more than $109 million in disgorgement.

The ALJ had concluded that it had the authority to require PHH to disgorge premiums that it received for loans closed on or after July 21, 2008, but Cordray said this decision “does not capture the full extent of its RESPA violations.”

He then ordered PHH to disgorge all premiums that it accepted on or after July 21, 2008, not just the ones associated with loans closed on or after that date.

“PHH violated RESPA every time it accepted a reinsurance premium from a mortgage insurer pursuant to a captive reinsurance agreement because those reinsurance premiums were kickbacks,” Cordray stated in his order. “I now conclude that PHH committed a separate violation of RESPA every time it accepted a reinsurance payment from a mortgage insurer.”

Cordray made a similar declaration in September 2014, when he fined Michigan title company Lighthouse Title $200,000 for entering into marketing services agreements (MSAs) with real estate brokers and others with the understanding that these companies would refer mortgage closings and title insurance business to Lighthouse. Cordray’s position that an MSA can be considered a “thing of value,” triggering a RESPA violation, was highly controversial, as RESPA Section 8(c)(2) contains “safe harbor” provision for service contracts involving parties that refer business to one another as long as they provide bona fide services at fair market value.

Lighthouse Title paid the fine and moved on. But PHH, with greater resources and geographic reach, decided to fight back.

Calling Cordray’s new decision a “radical new interpretation of RESPA” that clashed with about 20 years of formal RESPA interpretation and guidance issued by HUD, PHH sought and obtained a stay on the $109-million order — and prepared to challenge the scope of the behemoth government agency’s authority in court.

‘The very definition of tyranny’

Attorneys for both sides appeared before the U.S. Court of Appeals for the D.C. Circuit on April 12 for an hour-long oral argument hearing. A three-judge panel was to hear the oral arguments, but only two panel members, Judge Brett M. Kavanaugh and Judge A. Raymond Randolph, attended. Judge Karen L. Henderson was not present and will consider oral arguments based on an audio recording of the hearing, which is publicly available here.

Theodore B. Olson, partner in the Washington, D.C., law firm of Gibson Dunn and attorney for PHH, spoke calmly but firmly for about 20 minutes with few interruptions from the panel, calling the CFPB an “unconstitutional, superexecutive agency.”

“There are so many problems with the creation of this agency,” Olson said. “It doesn’t have to go to Congress for its funding. It takes its money out of the Federal Reserve, without an appropriation of Congress. It has the power to write its own rules and regulations. It doesn’t have to go through the Office of Management and Budget with respect to proposed regulations as every other agency does. The president and the Congress have no control over this agency. The only check on this agency is right here. If it isn’t for the judiciary, this agency can do anything it wants.”

“So what is the remedy?” Kavanaugh asked.

“The remedy is that this agency is unconstitutional. This decision has to be vacated,” Olson responded.

“I hesitate to go any further than that, because if I were in your shoes, I would be very, very tempted to write an opinion — and it would be entirely justified — that Congress cannot create an agency like this that ignores all of the rules with respect to separation of powers.

“As many scholars, the Supreme Court and courts of this jurisdiction have pointed out, the separation of powers is what protects out liberty as individuals in this country. The very definition of tyranny is to concentrate all powers — legislative, judicial and executive — in a single agency.”

By comparison, Larry Demille-Wagman, senior litigation counsel for the CFPB, seemed flustered and was frequently interrupted and questioned by the panel for about 40 minutes.

Demille-Wagman began by noting that PHH’s primary argument is that the CFPB is unconstitutional because its director can only be removed for cause.

“The bureau’s for-cause removal provision is no different than the for-cause removal provision for the Federal Trade Commission,” the attorney began, but Kavanaugh interrupted him.

“But they’re a commission,” the judge pointed out. “That’s the difference. Historically, federal agencies have been multimember on the theory that they are nonpartisan or bipartisan.” The CFPB, the judge said, “is a novel structure with very few precedents that I’ve found — almost none that are historical, and very few in recent years.”

“There are a few, your honor,” said Demille-Wagman. “The Social Security Administration went back 20 years. The office — “

“Right, but by the way, when that was created, President Clinton issued a signing statement saying there are severe Constitutional problems with that agency,” the judge interjected.

“Yes, but he didn’t explain what those problems were, and President Obama didn’t indicate that there were any Constitutional problems with respect to the bureau,” Demille-Wagman responded.

“The reason for the commission structure was that this was an exception or a difference from the usual control the president has over the executive branch,” Kavanaugh explained. “If we’re going to have that kind of structure, we want it to be a group that is going to be nonpartisan or bipartisan. You can’t have that with a single person. You’re concentrating in a single person a huge amount of power, and the president has no authority over that.”

Parsing the words

Both sides also made their case with respect to the RESPA charges against PHH. Olson explained that in structuring its agreements mortgage insurers, PHH used the framework provided by a formal guidance on mortgage reinsurance that HUD issued in 1997. For nearly 20 years, that is the interpretation that all settlement service providers have relied upon, and it has been widely endorsed by the courts as well, Olson pointed out.

“The director ran roughshod over a clear provisions of federal law, rewriting Section 8 of RESPA to prohibit conduct expressly authorized by that law; disregarded and retroactively overruled decades of administrative and judicial application of that law and widespread industry reliance on it; dismissed and distorted a plainly applicable statute of limitations contrary to authoritative judicial decisions; and imposed draconian, remedial punishment that Congress did not give or authorize to that bureau under these circumstances,” Olson said.

Demille-Wagman disagreed, saying, “The problem for PHH here is that the payments it was receiving from the mortgage insurers were not solely for reinsurance. They were quid pro quo for referrals … and that is exactly what RESPA seeks to prohibit.” The attorney went on to suggest that PHH examine HUD’s interpretive letter more closely to “parse the words and pick up elements of style,” but Kavanaugh interrupted that argument.

“You are asking them to do something the entire industry had the opposite reading of it, confirmed repeatedly by HUD,” the judge said. “Everyone understood what the deal was, and if you want to change it going forward, we can talk about the statutory issue, whether you have the authority to do that. But to pull the plug and change it going backwards is very problematic, at least under the Supreme Court’s precedents.”

Where do we go from here?

The court is expected to rule on the case sometime this fall. Most compliance experts agree it is highly likely that the disappointed party will seek review by the full D.C. Circuit, and perhaps eventually by the Supreme Court.

In either case, serious questions have now been raised to a federal appellate court — and sooner or later, Congress will face pressure to resolve concerns about the financial industry watchdog it created and the uncertain regulatory environment created by Cordray’s interpretations of RESPA.

“It is exceedingly important that the court address the substantive factual issues of RESPA that were violated here. This is an entire industry that’s listening to what’s happening here today.” – Theodore B. Olson, attorney for PHH

“It is exceedingly important that the court address the substantive factual issues of RESPA that were violated here,” Olson said during his oral argument. “This is an entire industry that’s listening to what’s happening here today.”

Email Amy Swinderman

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