Court is in session: What does the CFPB/PHH case mean for lenders?

What to make of RESPA

The Consumer Financial Protection Bureau and PHH entered their next court room battle, and possibly their last, to finally answer at least two major issues plaguing the industry.  

The first issue centers on the constitutionality of the CFPB and its director, Richard Cordray.

And the second issue, which carries an enormous amount of weight for the mortgage finance industry, focuses on the Real Estate Settlement Procedures Act (RESPA) enforcement.

Ryan McKenna, general Counsel at radius financial, gave his initial thoughts on the case since the U.S. Court of Appeals for the D.C. Circuit held oral arguments on May 24.

McKenna previously shared his thoughts on what the PHH/CFPB case means for lenders earlier this year in a HousingWire webinar that can be downloaded for free here.

Regardless of the constitutional issue, McKenna explained that he looks forward to the D.C. Court’s ruling because he thinks it will constitute a net benefit to the industry.

“In particular, I think the Court will rule in favor of PHH on the RESPA issue, affirming that Section 8(c)(2) is the ‘exception’ to RESPA’s general prohibition against fees and kickbacks that it reads to be.”

He added that he is very optimistic that even if the D.C. Court upholds the constitutionality of the bureau’s structure, the plain meaning of RESPA will be upheld and changes to written agency precedent will require notice and comment rulemaking.

A blog from Ballard Spahr by Theodore Flo on the case said that so far RESPA and statute of limitations issues did not occupy much time at the oral argument.

From the blog:

Counsel for PHH urged the D.C. Circuit to reinstate the panel’s RESPA and statute of limitations rulings, all of which were in favor of PHH, and to rule on one issue not addressed by the panel.  While the panel decided, contrary to the CFPB’s views, that the CFPB is subject to statutes of limitations in administrative proceedings, the panel left for the CFPB on remand to decide if, as argued by the CFPB, each reinsurance premium payment triggered a new three-year statute of limitations, or whether, as argued by PHH, the three-year statute of limitations is measured from the time of loan closing.  The judges did not raise any questions in response to counsel’s arguments on the RESPA and statutes of limitation issues.

Beyond RESPA, the topic of the bureau’s constitutionality is also being played out in government legislation. The House of Representatives is set to consider the Republican-led Financial CHOICE Act, H.R. 10, on Wednesday, which is the leading option to replace the Dodd-Frank Wall Street Reform and Consumer Protection Act. If the CHOICE act does pass, the bureau would face some of the most drastic changes.

McKenna stated that either Congress or the D.C. Court could make the director removable at the will of the president, meaning that the director’s tenure and priorities would likely fluctuate with the priorities of the prevailing political party.

“However, I think Congress is more likely to accomplish this, and that if Congress fails, the D.C. Court may very well uphold the ‘for cause’ restriction to the director’s removal as constitutional,” said McKenna. “In this case I would cynically expect to see more of the same ‘rule by fear (of enforcement action)’ currently characteristic of one of the most powerful and well-financed agencies in the country. So I hope Congress can pass most of the Financial Choice Act 2.0.”

Under the current law, the president may remove the director for “inefficiency, neglect of duty, or malfeasance in office.”

Bottom line, McKenna said he is pumped that the PHH case will likely stand for the proposition that the law applies equally to those enforcing it as to those being regulated, and that it will give business executives more confidence knowing they can resort to the judicial process if the bureau goes out of bounds.

“I think as an industry we need to focus more on following the law, and focus less on the Bureau’s regulatory jawboning,” he said. 

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