PHH Challenges Constitutionality Of CFPB Structure

Experts Concerned Cordray Has Too Much Power

Mortgage lending heavyweight PHH has taken on the Consumer Fraud Protection Bureau (CFPB) in a legal battle that is bound to leave one or both of them bruised and battered.

New Jersey-based PHH is challenging more than just the $109 million fine that CFPB director Richard Cordray hammered the lender with in 2015; it’s challenging the very constitutionality of the agency’s structure. Currently before the District of Columbia Circuit Court of Appeals, industry insiders think the case will go all the way to the Supreme Court.

The CFPB in 2014 found PHH guilty of RESPA violations for referring consumers to its subsidiaries for mortgage insurance, something the agency called “a mortgage kickback scheme” dating back to at least 1995. The CFPB fined PHH $6.4 million.

PHH appealed the fine to Cordray, who concluded in June 2015 that PHH was guilty of accepting kickbacks every time a subsidiary received a premium. Calculating the damages far beyond RESPA’s conventional three-year statute of limitation, Cordray blew up the fine to $109 million, more than 17 times the original amount.

Now the lender is taking on the powerful and controversial federal agency, the first time a CFPB administrative action has been challenged in court. In addition to the fine, PHH is challenging the CFPB’s interpretation of RESPA, which differs from HUD’s traditional interpretation and contradicts 20 years of industry practice of referring consumers to subsidiary companies.

The ultimate resolution of that issue will have an enormous impact on the industry, said attorney Kosta Ligris, founder of Ligris & Assoc.

“Not only have they taken a different position, they’ve also taken a different interpretation on how far back they can go and what they can assess for penalties,” Ligris said. “What did PHH really gain? What was their profit? What was the real net benefit to PHH? Is it fair to have a director hear appeals? The biggest issue is how the court will interpret these questions.”

Important Issues Need Resolution

Also in question is the scope of the director’s authority. The agency is funded by the Federal Reserve and doesn’t answer to Congress. Even the president can only remove the director “for cause.” Some of the agency’s funding comes from the fines it collects, calling into question its impartiality.

“This is an unprecedented, unconstitutional agency that has more power than Congress and the president put together,” said Theodore P. Olson, one of the attorneys representing PHH.

Ligris commends the CFPB for its interest in protecting consumers, but he thinks the agency’s hearings and regulatory actions should provide as much transparency as it expects the industries it regulates to give consumers.

“This country is based on checks and balances, and if you have single person unilaterally make decisions, that’s concerning to people,” Ligris said.

Susan B. LaRose, president of the Real Estate Bar Association for Massachusetts, said it was clear to her from listening to the judges’ feedback that they understand the industry needs these important issues resolved.

“This is the suit that everyone involved in the industry was hoping someone would file,” La Rose said. “I’ll be shocked if it doesn’t go to the Supreme Court because either way, one of the parties will feel aggrieved once it’s decided. They’re both adamant and neither side can afford to lose.”

LaRose said the CFPB defends big fines like this one and others it has handed out by saying they help consumers by holding companies accountable.

“I don’t think that mortgage enforcement actions like this help consumers; [rather,] they make the lenders uncertain as to what they can and can’t do,” she said. If the secondary market is uneasy about the process, “that’s not good for stability, which is not good for consumers.”

Fines for common practices that go beyond the three-year statute of limitations amounts to retroactive rule-making, she said, and it’s making the market nervous.

“Without a statute of limitations, there is a lack of due process and fair notice,” LaRose said. “In civil litigation there are statute of limitations on everything. You can’t go back forever, because it’s just not fair.” The CFPB is making an example out of PHH “so that nobody else will do this again.”

That uncertainty around potential liability has driven some smaller lenders out of the mortgage market, reducing consumer choices.

“The only way to resolve this is by judicial action, and I think we’re going to start seeing that with TRID violations as well,” LaRose said. “That will impact the industry even more intensely than the PHH action. How will lenders react? I don’t know. It’s a fear in the industry.”

A decision from the Circuit Court of Appeals is expected by summer. Whatever the outcome, LaRose expects the case will go to the full appeals court, and possibly to the U.S. Supreme Court.

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