Politics & MoneyMortgage

Court of Appeals rules against CFPB, vacates PHH’s $100M fine for alleged RESPA violations

It wasn’t a sweeping victory for the CFPB after all

While the main story coming out of Wednesday’s stunning decision from the Court of Appeals for the District of Columbia Circuit was the court upholding the constitutionality of the Consumer Financial Protection Bureau, the CFPB didn’t escape unscathed.

The challenge to the bureau’s constitutionality stemmed from a lawsuit from PHH Corp., which challenged former CFPB Director Richard Cordray’s $103 million increase to a $6 million fine initially levied against PHH for allegedly illegally referring consumers to mortgage insurers in exchange for kickbacks.

PHH later challenged Cordray’s authority to levy the additional fine and the constitutionality of the CFPB.

In October 2016, the Court of Appeals declared the CFPB’s leadership structure unconstitutional and vacated PHH’s $103 million fine.

When the Court of Appeals decided to rehear the case en banc, meaning entire court would hear the case, it tossed out its previous decision, thereby reinstating the fine for the time being.

But, the full Court of Appeals elected to only decide on the constitutionality of the CFPB, upholding the court’s earlier decision that Cordray far exceeded his authority as director when he handed down the seven-figure fine against PHH.

And in doing so, the court vacated the $100+ million fine against PHH.

The fine centered around Cordray saying that PHH violated the Real Estate Settlement Procedures Act every time it accepted a kickback payment on or before July 21, 2008, going beyond the original penalty, which limited PHH’s violations to kickbacks that were connected with loans that closed on or after July 21, 2008.

But the court stipulated Wednesday that Cordray’s interpretation of the RESPA rules was incorrect.

From the court ruling:

The panel was unanimous, however, in overturning the Director’s interpretation of RESPA.

It held that Section 8 permits captive reinsurance arrangements so long as mortgage insurers pay no more than reasonable market value for reinsurance. And, even if the Director’s contrary interpretation (that RESPA prohibits tying arrangements) were permissible, the panel held, it was an unlawfully retroactive reversal of the federal government’s prior position. Finally, according to the panel, a three-year statute of limitations applies to both administrative proceedings and civil actions enforcing RESPA.

The panel opinion, insofar as it related to the interpretation of RESPA and its application to PHH and Atrium in this case, is accordingly reinstated as the decision of the three-judge panel on those questions.

Unsurprisingly, PHH was pleased with the court’s ruling on the RESPA challenge.

“The decision by the full D.C. Circuit Court of Appeals to uphold the panel’s ruling to overturn former Director Cordray’s decision under RESPA with respect to our former mortgage reinsurance activities, which includes vacating the $109 million penalty, is an important and gratifying outcome for PHH and the industry,” PHH said in a statement.

“We continue to believe that we complied with RESPA and other laws applicable to our former mortgage reinsurance activities in all respects,” PHH added. “Regarding the remand, we will continue to present, if necessary, the facts and evidence to support our position that mortgage insurers did not pay more than reasonable market value to PHH affiliated reinsurers.”

Interestingly, PHH’s statement makes no mention of pursuing the CFPB constitutionality challenge to the Supreme Court.

The National Association of Realtors also welcomed the court’s decision on the RESPA issue. NAR previously filed a “friend of the court” brief in the PHH case, supporting PHH’s assertion that Cordray went too far.

“The National Association of Realtors is pleased with the court’s reinstatement of its previous decision affirming that payments to settlement service providers are permitted by RESPA, so long as those payments are for goods and services actually furnished or performed and are made at fair market value,” said NAR President Elizabeth Mendenhall said in a statement. “We’re hopeful this much-needed clarity will address any and all uncertainty moving forward for real estate professionals who have entered into marketing service agreements with settlement and other service providers.”

To read the court’s full decision, click here.

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