By now, you may have heard of the recent court decision regarding the Consumer Financial Protection Bureau (CFPB) and PHH Corporation, a mortgage lender. In a surprising turn of events, the District of Columbia Circuit Court ruled in favor of PHH against the CFPB. Here are three things you need to know upfront:
- RESPA (Real Estate Settlement Procedures Act) prohibits fee sharing, charging fees that weren’t actually earned and business referrals in exchange for payments of money (or other items of value). The Department of Housing and Urban Development (HUD) enforced RESPA until 2011 – then the CFPB took over. The CFPB, in response to the mortgage crisis of 2008, has taken a much more aggressive, pro-consumer approach to enforcing RESPA.
- Since 1995, PHH referred borrowers to a mortgage insurer that purchased mortgage reinsurance from a PHH affiliate. HUD was OK with the practice, as long as the reinsurance was bought and sold at (and did not exceed) a reasonable fair market value.
- In 2015, the CFPB changed HUD’s interpretation of PHH’s reinsurance practice, claiming that PHH’s reinsurance arrangement violates RESPA Section 8, even when the mortgage insurer pays no more than reasonable market value for the reinsurance.
What forced the parties into court? The CFPB retroactively applied its new interpretation of the law, holding PHH responsible for conduct that occurred before the new interpretation was issued in 2015. The CFPB, through Director Cordray’s unilateral decision, ordered PHH to pay $109 million to the Bureau in disgorgement based on conduct that occurred as far back as 2008. PHH appealed CFPB’s Director Cordray’s decision. Te Court made three impactful findings:
- Retroactively applying new a decision to past conduct violates due process, noting people should have fair warning of what conduct is prohibited by government agencies.
- The Section 8 issue was returned to the CFPB for reconsideration and to determine if the mortgage insurers paid more than reasonable fair market value and thereby made disguised payments for referrals in violation of RESPA Section 8 in the PHH reinsurance arrangement.
- CFPB is unconstitutionally structured, because it is an independent agency headed by a single director.
What does this decision mean for title, real estate and mortgage services professionals?
- RESPA’s three-year statute of limitations applies to CFPB enforcement actions.
- The CFPB cannot reverse HUD precedent, applying its new interpretations retroactively without giving regulated industries fair warning of the change in interpretation.
- Related-party reinsurance arrangements do not violate RESPA, unless the consumer pays more than fair market value.
These are all good outcomes, which provide a stable and predictable environment in which we can practice our trade. Be careful in reading too much into this decision. While a clear win for PHH, the Court did not actually hold the CFPB, as an agency, unconstitutional – just its current structure.
Further, the Court was not willing to strike down the Dodd-Frank Act or strike down and sever the CFPB from the act. In fact, the Court recognized the Bureau’s need to continue to “operate and perform its many critical responsibilities.” The CFPB is still with us and continues to have broad remedies to enforce federal consumer protection laws, including RESPA, and we need to act accordingly.
Because this decision was issued by the U.S. Court of Appeals for the D.C. Circuit, the CFPB may appeal it to the Supreme Court. We’ve likely not heard the last on the constitutional issue, and we also await the CFPB’s resolution of Section 8 issues. Stay tuned – this promises to be an exciting case to follow as we near the end of 2016 and approach 2017!