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Kickback court case puts CFPB under the microscope

The Consumer Financial Protection Bureau (CFPB) has exacted millions of fines from mortgage companies and conducted numerous investigations, but now the Bureau is under scrutiny.

The U.S. Court of Appeals, D.C. Circuit, has been asked to decide whether the watchdog agency has been trampling on federal laws and longstanding legal precedents in prosecuting companies over alleged kickbacks in the mortgage industry.

The court could also rule on whether the largely autonomous agency is constitutional under a leadership structure that gives enormous power to a single director.

PHH Corp., a public company that owns a mortgage company and several subsidiaries, has challenged a CFPB ruling that the company violated an anti-kickback provision in the Real Estate Settlement Procedures Act (RESPA). In June 2015, CFPB Director Richard Cordray fined the company $109.2 million for alleged violations dating on or after July 21, 2008. In doing so, Cordray overruled an administrative judge’s recommendation to fix the penalty at $6.4 million. After an extensive trial, the administrative judge did determine there were RESPA violations, but Cordray disagreed with the judge on the scope of the violations. 

The closely watched case potentially has widespread implications, said Jennifer Lee, a partner with Dorsey & Whitney and a former CFPB enforcement attorney. She said the PHH’s contention that the CFPB is unconstitutional could have particularly far reaching implications.

“This is the Super Bowl for the CFPB because it represents the situation where a company is challenging the constitutionality of the agency itself, which is an issue that has been in the minds of commentators for several years,” Lee told Scotsman Guide News. “Now the concept is really being put to the test in a federal appellate court.”

The basic facts aren’t in dispute. Over several years  PHH referred its borrowers to particular insurance companies as is standard practice when a borrower can’t make a substantial downpayment and needs to purchase private mortgage insurance. The mortgage insurers had agreements with PHH to purchase so-called "reinsurance" from companies owned by PHH, which took on a portion of the loan-default risk for a fee.

PHH collected hundreds of millions of dollars through these side agreements, according to the CFPB’s complaint. Under the U.S. Department of Housing and Urban Development (HUD), which once prosecuted RESPA violations, these agreements were generally tolerated if the company that received a referral provided a bona fide service.

The CFPB, which was created in 2011, has taken a harder line on referrals. In most cases, the CFPB has reached settlements with companies over RESPA violations. PHH has challenged timeliness of CFPB’s actions under a statute of limitations. It is also questioning whether the bureau’s interpretation of RESPA has ignored former precedents and, in essence, created new law.

Attorneys presented oral arguments on Tuesday before two of the three judges assigned to hear the case. A decision isn’t expected for several weeks. 


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