May 2016 - Rise and Fall

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TH E M R EP O RT | 25 FEATURE T he real estate industry waits on bated breath for the final decision in the ongoing case PHH Corporation v. CFPB. Anyone under the Consumer Financial Protection Bureau's (CFPB's) enforcement umbrella—from lenders to title agents, servicers to property preservation specialists— could be seriously affected by this upcoming decision from the United States Court of Appeals for the D.C. Circuit. The decision will have ramifications on the CFPB's ability to interpret statutes and bring enforce- ment actions. The case may even decide whether the current structure of the CFPB is constitutional. CFPB Launches Allegations T he PHH Corporation is an American financial services corporation that provides mortgage services to some of the world's largest financial services firms. PHH wholly owns Atrium Insur - ance Corporation and Atrium Reinsurance Corporation, which enter into mortgage reinsurance contracts with mortgage insurers contracted by PHH. The CFPB considered this relationship a viola - tion of the Real Estate Settlement Procedures Act (RESPA). The CFPB first filed a Notice of Charges against PHH on January 19, 2014, alleging violations of RESPA "relating to their use of captive mortgage reinsurance arrangements." PHH immediately fought back and contested the charges. Rather than bring a suit in federal district court—as it typi - cally had done up to that point in other contested enforcement ac- tions—the CFPB chose to bring an administrative claim before an ad- ministrative law judge. Specifically, the case was brought before Judge Cameron Elliot of the Securities and Exchange Commission. The administrative law judge assigned to adjudicate the CFPB's case is to be selected directly by the CFPB. An administrative trial was conducted. Afterward, the administrative law judge issued a decision on November 25, 2014, holding that the relationship between PHH and Atrium was in fact an illegal kickback scheme under RESPA Section 8(a). The judge ordered limited injunctive relief as well as a $6.4 million dis - gorgement penalty against PHH. Two things are particularly of note in this ruling, both concern- ing the nature of the new regime. First, the judge relied on HUD's (not the CFPB's) regulations and interpretive guidance to conclude that some captive reinsurance is permissible under RESPA. Second, although the judge sided with the CFPB, he nonetheless limited the CFPB's enforcement ability under RESPA's three-year statute of limitations, essentially cutting off liability prior to June 8, 2008. CFPB Director Reviews His Own Bureau's Decision B oth PHH and the CFPB appealed the judge's ruling. Under current federal law, that appeal goes straight to the direc- tor of the CFPB. What's more, even absent an appeal by the parties, the director has the final say in any contested administra- tive proceedings. The director may intervene in a case without any prompting or request. CFPB Director Richard Cordray issued his final decision on June 4, 2015, siding almost universally with the CFPB. However, Cordray increased the $6.4 million penalty to a stagger - ing $109 million. In his decision, Cordray departed from Elliot's ruling, asserting that the CFPB is not bound by historical interpre- tations of RESPA nor is it bound by RESPA's statute of limita- tions in administrative proceed- ings. Cordray also contended that the Dodd Frank Act (the Congressional law that created the CFPB) allows disgorgement to reach gross revenues not delimited by costs or losses. PHH was left with two op - tions: First, ask the CFPB director to reconsider the CFPB director's own decision upholding a CFPB- selected judge's ruling in favor of the CFPB. Or, second, seek independent judicial review in the United States Circuit Courts. PHH chose the latter. PHH Calls CFPB's Decision "Arbitrary and Capricious" O n June 19, 2015, PHH filed a petition for review in the United States Court of Appeal for the District of Columbia Cir- cuit, claiming Cordray's decision was "arbitrary, capricious, and an abuse of discretion." PHH as- serted several grounds for relief, including the CFPB's improper interpretation of RESPA Section 8, the failure to comply with RESPA's statute of limitations, as well as the excessive disgorge- ment of $109 million. PHH even challenged the constitutionality of the CFPB. Oral arguments began on April 12, 2016, before the Court's panel of three judges. It appears the Court will give no deference to Cordray's decision. Generally, appellate courts afford substan - tial deference to statutory and regulatory interpretations of lower courts and agencies. However, ap- pellate courts will outright reject prior findings if it finds they are "arbitrary and capricious." PHH has argued exactly that. Regardless, the Court may depart from Cordray's conclu - sions under another legal doctrine: the Rule of Lenity. Essentially, lenity prescribes that ambigui- ties in criminal statutes must be interpreted in favor of defendants. RESPA itself contains both civil and criminal penalties and, as such, is subject to lenity. If the Court were to find ambiguity with RESPA (as enforced by the CFPB), then it may resolve the issue in favor of PHH. Cordray Rejects Safe Harbor R ESPA regulation has al- ways been a bit uncertain, especially regarding mortgage insurance and reinsurance. After all, there's a reason HUD had to provide regular guidance to the industry. However, Cordray's interpretation of two RESPA provisions marks a radical de - parture from years of industry regulation and custom. Simply put, RESPA Section 8(a) prohibits kickbacks. The statute reads: "[n]o person shall give and no person shall accept any fee, kickback, or thing of value pursu - ant to any agreement or under- standing, oral or otherwise, that business incident to or a part of a real estate settlement service involv- ing a federally related mortgage loan shall be referred to any person." However, certain payments and relationships have been legal under the safe-harbor provisions of RESPA Section 8(c)(2). Section 8(c)(2) serves as an exception to Section 8(a) liability and reads: "[n]othing in this section shall be construed as prohibiting the pay - ment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed."

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