Director Of US Consumer Financial Protection Bureau Increases Penalty In First Appeal Of Contested Administrative Adjudication

Keywords: PPH Corporation, ALJ, RESPA

Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB or Bureau), has issued his decision in In re PHH Corporation, the Bureau's first appeal of a contested administrative adjudication. The outcome was unfortunate for PHH; Director Cordray not only rejected PHH's challenge to the Administrative Law Judge's (ALJ) finding that PHH had violated the Real Estate Settlement Procedures Act (RESPA), but he adjusted the damages upward from the $6 million awarded by the ALJ to $109 million, an increase of approximately 1,700%.

The CFPB had alleged that PHH, a residential mortgage lender, engaged in an illegal kickback scheme with several mortgage insurance companies. According to the Bureau, PHH did business exclusively with mortgage insurance companies that had agreed to purchase reinsurance from a wholly owned PHH subsidiary, at supposedly exorbitant rates. These reinsurance premiums, the Bureau argued, constituted kickbacks in exchange for referrals, which are prohibited by RESPA.

This case was initially tried before an Administrative Law Judge from the Securities and Exchange Commission (SEC).1 Although the ALJ agreed with many of the Bureau's allegations, he found that loans that closed prior to July 21, 2008—the majority of the loans at issue—were outside the statute of limitations and thus nonactionable. The ALJ reasoned that HUD's power to enforce RESPA was limited to bringing civil actions in federal court, where a three-year statute of limitations applied, and that the transfer of RESPA enforcement authority to the Bureau on July 21, 2011, did not have the effect of reviving time-barred claims. Accordingly, he awarded the CFPB just $6 million of the $430 million it had sought.

Director Cordray agreed that PHH was liable and that the CFPB lacked the ability to retroactively revive claims that HUD would have been time-barred from bringing when the Bureau was created. He found, however, that each reinsurance premium payment within the limitations period constituted a separate kickback in violation of RESPA, regardless of whether the underlying loan had closed outside of the limitations period.

The damages also were greater because the Director rejected the ALJ's approach to deducting expenses. The ALJ had held that, although the reinsurance premiums collected by PHH were unlawful kickbacks, PHH should be allowed to deduct the amount of the reinsurance claims that it paid out. The...