What PHH vs CFPB Means For Us

By rchrisman@robchrisman.com

"This is a case about executive power and individual liberty. The U.S. Government's executive power to enforce federal law against private citizens...is essential to societal order and progress, but simultaneously a grave threat to individual liberty. The Framers understood that threat to individual liberty...no independent agency exercising substantial executive authority has ever been headed by a single person. Until now." Yes, everyone is talking about the CFPB/PHH ruling - which, like Brexit, will drag on for years. Lots more below.

Before we plunge into the grist & clamor surrounding the CFPB/PHH ruling, perhaps lost in the news was the fact that the CFPB fined Navy Federal Credit Union. "The credit union, whose 6.3 million members include many veterans and military service members, unfairly restricted account access for members with delinquent loans and made false threats about debt collection...Navy Federal threatened to garnish the wages of members with slumped loans or take action against them, the CFPB said - actions it seldom took or did not have authority to take. The credit union also gave members with delinquent loans misleading information on the consequences to their credit, inflating the credit union's influence on their credit ratings."

 It took more than six months from the time of oral arguments for the D.C. Circuit Court of Appeals to hand down its decision in PHH Corp. v. Consumer Financial Protection Bureau, but the court's ruling is important for CEOs, regulators, all the way through to anyone who is employed in residential lending. In its 110-page ruling the court deemed the bureau to be unconstitutionally structured, and moved to remedy the situation rather than halt its operations. In addition, the court sided with PHH Corp. on other aspects of its appeal. While the decision does not shut down the CFPB it does give the president more power to remove the bureau's director and to direct and supervise in the director's place.

 The Court threw out a $109 million penalty against PHH Corp in 2014, saying the structure of the Consumer Financial Protection Bureau gives its sole director too much power. The CFPB is expected to request the entire appeals court conduct an "en banc" review of the case, with the losing side will likely appeal to the Supreme Court. In other words, it'll be years...

 PHH had objected to the CFPB's allegations it violated the Real Estate Settlement Procedures Act by referring customers to mortgage insurers who in turn bought reinsurance from one of its units. The judges ruled the lender was within the law and also that the CFPB was wrong to say its administrative action did not need to respect a three-year statute of limitations on the alleged violations.

 U.S. Circuit Judge Brett Kavanaugh wrote the current CFPB structure "poses a far greater risk of arbitrary decision making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency."

 Republican Jeb Hensarling, who chairs the House Financial Services Committee, called CFPB "the most powerful and least accountable Washington bureaucracy in American history."

Elizabeth Warren, expected to play a dominant role in a Clinton Administration, said, "the ruling makes a small, technical tweak to Dodd-Frank and does not question the legality of any other past, present, or future actions of the CFPB." She called Republican reorganization efforts "attempts fostered by big banks to cripple an agency."

 The decision is likely to lead more companies to challenge the CFPB's enforcement actions in the future, said Ballard Spahr attorney Alan Kaplinsky. PHH said in a statement that it hoped "the court's opinion will provide greater certainty to the entire mortgage industry." Over in the CFPB's camp, there was silence in the Newsroom but Moira Vahey, a CFPB spokeswoman, said the agency is considering its options for further review of the ruling while remaining focused on its mission. "The Bureau respectfully disagrees with the Court's decision. The Bureau believes that Congress's decision to make the director removable only for cause is consistent with Supreme Court precedent."

 So we have a court's opinion vacating a $109 million penalty imposed on PHH Corporation under the anti-kickback provisions of the Real Estate Settlement Procedures Act (RESPA), concluding that the CFPB misinterpreted the statute and violated due process by reversing the interpretation of the prior regulator and applying its own interpretation retroactively. The panel rejected the CFPB's contention that no statute of limitations applied to its administrative actions and concluded that RESPA's three-year statute of limitations applied to any actions brought under RESPA. And a majority of the panel held that the CFPB's status as an independent agency headed by a single Director violates the separation of powers under Article II of the U.S. Constitution. Rather than shutting down the CFPB, however, and voiding all of its regulations and prior actions, the majority chose to remedy the defect by making the CFPB's Director subject to removal at will by the President. In effect, this makes the CFPB an executive agency (like the Department of the Treasury).

 The panel remanded the case to the CFPB to determine whether the relevant mortgage insurers paid in excess of the fair market value of the services provided within the three-year statute of limitations in violation of RESPA. The CFPB is expected to petition for en banc reconsideration by the full D.C. Circuit or to seek direct review by the United States Supreme Court. Therefore, final resolution of this matter may be delayed by a year or more.

 BuckleySandler LLP's Andrew L. Sandler, Chairman & Executive Partner, suggested, "The PHH decision is very meaningful. First, the Bureau will be constrained in seeking restitution for periods prior to statutes of limitation, where a statute of limitation applies. Second, the Bureau will be constrained in seeking restitution for past periods where it interprets a rule, regulation or interpretation of another agency insofar as the subject company's actions were consistent with the prior rule, regulation, or agency interpretation. On the constitutionality question, the court sought to impose an elegant solution by ruling it unconstitutional and applying a fix that would not implicate prior Bureau actions. Notwithstanding, I expect lawyers for companies, subject to CFPB actions, to seek opportunities to undermine agency actions based on the court's ruling that it is unconstitutional as established."

 Dave Stevens, President and CEO of the MBA, scribed, "The opinion is thoughtful and extensive and addresses all of the key issues raised by the case and in MBA's amicus brief. The opinion holds that the CFPB incorrectly interpreted the Real Estate Settlement Procedures Act (RESPA), violated due process by its retroactive interpretation, and that a three-year statute of limitations applies to enforcement actions brought by the CFPB under RESPA. The decision goes to the heart of a core argument that MBA has been making for several years now - that lenders need certain, consistent and clear interpretations of the rules in order to best serve their borrowers and contribute to a smoothly functioning housing finance market."

 Isaac Boltansky with Compass Point Research & Trading, LLC, noted that "This decision is undoubtedly a win for PHH, but its victory is far from flawless given market expectations and lingering uncertainty given that the matter is now remanded back to the CFPB for further review. Our sense is that PHH will ultimately benefit from the Court's contouring of the case, especially in relation to the statute of limitations, but it is difficult to gauge the precise impact at this stage given lingering methodological and timeline uncertainties.

 "The CFPB therefore will continue to operate and to perform its many duties, but will do so as an executive agency akin to other executive agencies headed by a single person, such as the Department of Justice and the Department of the Treasury...This court decision will not affect the ongoing operations of the CFPB, but we expect the bureau to retrench in the near-term which would be viewed positively for auto lenders, the entire mortgage complex, student loan servicers, and payday lenders. Furthermore, an enforcement slowdown, or an increased willingness to challenge the bureau, should be viewed as an incremental positive for companies with outstanding NORA letters including World Acceptance, Navient, Ocwen, and TCF Financial. The bureau will surely continue advancing its broader enforcement agenda, but we expect more precision and possibly more pushback in the wake of this decision.

 "...we believe that efforts to curtail the bureau's power - either through targeted measures or a shift to its governance structure - are unlikely to gain traction in the medium-term. We expect the CFPB governance issue to reemerge when Director Cordray steps down, which will happen no later than July 2018, but the bureau appears to be safe from legislative threat for now."

 Attorney Brian Levy with Katten & Temple observed, "The court also reinforced the RESPA requirement to not pay more than reasonable value in purchasing goods and services from referral sources (they sent the case back to the CFPB to make sure that PHH did not pay more than reasonable value). Not paying more than reasonable value isn't new advice, so industry players would be wise to review operations to confirm that in all paid relationships with referral sources (such as MSAs, office leases, joint or web-marketing, sponsorships and the like) that you are only paying reasonable value and getting what you pay for."

 But there are critics who point out that the divided court's opinion was written by Judge Brett M. Kavanaugh, an appointee of former President George W. Bush and conservative stalwart whose jurisprudence has repeatedly provoked the ire of liberal groups. After the ruling, the progressive issue advocacy organization Allied Progress released the following statement from its executive director, Karl Frisch. "The plaintiffs in this case have been cheered on from the legal sidelines by the very same Wall Street special interests that instigated and profited from the financial crisis of 2007 and 2008, while millions of Americans were losing their homes and their retirement savings. The CFPB was created to hold these powerful financial institutions accountable - to make sure we never experience such a crisis ever again. In five short years, the CFPB has returned $11.7 billion to more than 27 million Americans harmed by the actions of credit card companies, big banks, debt collectors, payday and other predatory lenders."

 Turning to something less controversial, like interest rates...Tuesday's bond market didn't do too much although during the day the 10-year note hit another recent intra-day high, 1.78%, the highest level since the day of the UK Brexit Referendum, but closed the day at 1.76%. The 5-year T-note worsened .125, but agency MBS prices hardly budged - nice!

 Today we've already had the MBA reporting on last week's applications (not locks): -6%, back to June levels. Later today, besides a couple Fed speakers, we'll see the minutes from the Federal Reserve Open Market Committee meeting from last month. That may cause a little volatility. We'll also have the August JOLTS will be released at 10AM ET, a $24 billion 3-year note and a $20 billion 10-year T-note auction. Billions and billions! We find the 10-year hovering around 1.78% and agency MBS prices slightly worse compared to Tuesday evening.