In early June, Consumer Financial Protection Bureau Director Richard Cordray issued a decision in the first appeal of an agency administrative enforcement proceeding, and a deeper look shows how the bureau will proceed with such actions.
In the administrative ruling, Cordray overruled several key actions by the administrative law judge, directing that PHH Corp. [PHH] a mortgage lender, had to it to pay $109 million to the bureau, which was allegedly more than 16 times the amount the administrative law judge recommended.
Cordray issued a decision upholding in part, and reversing in part, Administrative Law Judge Cameron Elliot’s November 2014 Recommended Decision, which held that PHH violated the Real Estate Settlement Procedures Act when it accepted kickbacks for loans that closed on or after July 21, 2008. Those kickbacks took the form of mortgage reinsurance premiums that the mortgage insurers paid to a subsidiary of PHH.
A spokesperson for PHH Mortgage strongly disagreed with the decision, but it has to take its case to the U.S. Court of Appeals.
“We strongly disagree with the decision of the Director. We believe this decision is inconsistent with the facts and is not in accord with well-settled legal principles and interpretations. We continue to believe we complied with RESPA and other laws applicable to our mortgage reinsurance activities," PHH said in a formal statement. "While there can be no assurances as to the final outcome of any such appeal, we believe our appeal will be successful and, as a result, are not adjusting our previously issued earnings guidance for this matter.”
Cordray’s ruling in the administrative action could have a long-term impact on real estate, on mortgage lending and enforcement actions by the CFPB in the future.
Some of what can be read in the ruling are not surprising – that the CFPB director believes that he is under no obligation to follow the administrative judge’s ruling, and that the director’s ruling is the final say. Furthermore, the CFPB will approach these cases using the “preponderance of the evidence” standard.
Cordray’s decision shows lenders how the CFPB interprets several Real Estate Settlement Procedures Act issues, including that it believes administrative actions have no statute of limitations, whether the “continuing violation” doctrine applies, and what actions by a lender RESPA protects.
Cordray’s decision held that PHH violated RESPA every time it accepted an alleged kickback payment on or after July 21, 2008. The administrative judge’ ruling, had limited PHH’s violations to alleged kickbacks that were connected with loans that closed on or after July 21, 2008.
Moreover, according to Law360 (subscription required), the decision also “establishes precedent for how the CFPB might handle future administrative proceedings, including what standard of review applies, how to calculate disgorgement and the propriety of civil money penalties.”
Notably in this case and in an unusual move, CFPB filed an administrative claim before an administrative law judge, instead of filing suit in federal district court.
In his decision, Cordray agreed with the administrative law judge that “although RESPA provides a three-year limitations period for enforcement actions brought in federal court, no statute of limitations applies to administrative enforcement actions brought by the CFPB.”
But more importantly, there is the issue of Cordray’s decision that turned a $6.5 million fine into a $109 million fine.
The value of the disgorgement that Cordray ordered PHH to pay came from the director’s determination that the RESPA violations at issue accrued when the mortgage insurers paid PHH for the reinsurance, and not at the time the underlying mortgage loans closed.
“Director Cordray grounded this decision on the principal that disgorgement is based on ill-gotten gains, as opposed to ill-gotten profit, and that the wrongdoer is not entitled to offset expenses incurred in the course of its illegal conduct,” according to an analysis from attorney Ori Lev at K&L Gates. “Unless it is reversed on appeal, this broad view of disgorgement is likely to have ramifications in other CFPB enforcement actions, as the CFPB enforcement staff is likely to seek such disgorgement in other cases where it cannot obtain consumer restitution.
“The notion that it is improper to deduct expenses incurred by a party in the course of the conduct that the CFPB believes to be illegal is thus likely to make its way into CFPB settlement demands as well as its demands in contested litigation,” he writes.
Cordray’s ruling also showed that he does not believe that the “continuing violation” doctrine does not apply in cases like this – which would have left PHH open to far greater liability. PHH has the option to pay into escrow while it is appealing,
What might happen in the U.S. Court of Appeals in the PHH case remains to be seen, but the bottom line from the administrative action seems to be the CFPB doesn’t view its administrative actions as bound by traditional legal precedents and rules.
“Director Cordray has sent a clear message that he intends to exercise the full scope of his authority as the final decision maker in contested administrative litigation brought by the CFPB,” Lev concludes. “While parties still must develop a factual record and present legal arguments to the administrative law judge in such cases, it is clear that the director will not necessarily afford deference to either the factual determinations or legal conclusions made by the administrative law judge. And while the director took two notable positions in favor of PHH — holding that the continuing violation doctrine does not apply and declining to impose civil money penalties — his decision as a whole is consistent with the CFPB’s approach to interpret the laws it is charged with enforcing in a manner most favorable to consumers.”