PHH challenges CFPB enforcement action

A court date of April 12 has been set for the next stage in a legal challenge to the Consumer Financial Protection Bureau’s enforcement power.

 A court date of April 12 has been set for the next stage in a legal challenge to the Consumer Financial Protection Bureau’s enforcement power. PHH Mortgage has appealed a low court decision that upheld a large CFPB penalty against the mortgage company last year. At stake is the extent of the bureau’s discretion in levying fines.

The dispute emanates from CFPB Director Richard Cordray’s decision to overrule an in-house judge’s decision that slapped PHH with a $6 million fine for taking illicit “kickbacks” from mortgage insurers. The lender’s protest over the judge’s decision backfired on the company when Cordray demanded PHH to pay 18 times more, or $109 million, for ill-gotten gains and for continually violating the law with monthly payments from its reinsurance contract. PHH initially argued the judge’s decision, saying it was an “overly aggressive interpretation of an old law.”

Cordray saw fit to take an even tougher stance. The CFPB argued that the actions of PHH led to a rise of consumer costs, as it referred new borrowers to mortgage insurance companies and then exerted pressure on those companies to buy a PHH affiliate’s reinsurance, which, in turn, directed up to 40 percent of those insurance premiums, or hundreds of millions of dollars, into PHH’s coffers.

In the current case, both parties seem to agree that Cordray’s decision to overrule the judge and increase the fine deviated interpretation of the Department of Housing and Urban Development’s (HUD) Real Estate Settlement Procedure Act (RESPA). Cordray wrote that HUD’s interpretation of RESPA had been “inconsistent with my textual and structural interpretation … I reject it.”

That rejection has triggered the PHH response. The company refers to CFPB’s single director structure, which lays extensive power in the hands of the director in order to make swift, extensive changes. “This brazen disregard for judicial authority, agency precedent and fair notice is a symptom of the larger constitutional problems,” PHH argued in a court filing. “The CFPB places legislative, executive and judicial power all ‘in the same hands’ of a single person — what James Madison called ‘the very definition of tyranny.’”

The CFPB justifies its actions by citing its continued compliance with the 2010 Dodd-Frank law and its effectiveness at resolving more than 770,000 complaints since its inception, as well as handing over $11 billion in compensation for damages to 25 million consumers.

“The PHH lawsuit is the first serious test of the CFPB’s enforcement authority,” said Isaac Boltansky, a financial analyst, in an interview with the Wall Street Journal. “If the court rules against the bureau, the calls for a change to its leadership structure will intensify.”

Fredrikson & Byron Law