The PHH Corporation, an American financial services company entered what
seems to be a long legal battle with the Consumer Financial Protection
Bureau (CFPB). After nearly four years of existence, the CFPB faces one
of its most serious challenges. The case involves questions mainly regarding
the CFPB’s authority and its prior enforcement of the Real Estate
Settlement Procedures Act.
The case originated from a decision made by CFPB Director Richard Cordray
against an appeal from PHH. In June 2015, Director Cordray unilaterally
made a decision to increase a $6.4 million penalty, administered by an
administrative law judge against PHH, to $109 million. The original penalty
was levied against PHH after the CFPB uncovered a kickback scheme concerning
mortgage reinsurance contracts between PHH Corporation and a PHH subsidiary.
The original case resulted in a decision by an Administrative Law Judge
to levy a $6.4 million fine against the corporation for premiums they
received in conjunction with the scheme.
After the decision, both the CFPB and PHH appealed the case, with the Director’s
June 4, 2015, decision to increase the fine being the result. PHH subsequently
filed a lawsuit with the U.S. Court of Appeals for the District of Columbia.
The case included a allegation that that the Director overstepped his
authority as the lone decision maker for the Administrative Procedure
Act. The case could have lasting national implications, given that a victory
by PHH would cast a dark cloud over many of the past decisions made by
How did the PHH Corporation achieve a win against the CFPB? Well, to start,
their attorney took the case straight to the top. As opposed to defending
the lending activity of PHH, the strategy was to assault the CFPB's
authority directly. This strategy appears to have gained a degree of success,
with the D.C. bench indicating they are not sympathetic to the CFPB’s
cause. The CFPB is already facing other legal challenges concerning the
constitutionality of their organizational structure.
Both parties met before a panel of judges when the case began on April
12, 2016. Before the hearing, the U.S. Court of Appeals for D.C. sent
both parties a comprehensive list of questions they should be ready to
brief, including the following:
- “What independent agencies now or historically have been headed by
a single person? For this purpose, consider an independent agency as an
agency whose head is not removable at will but is removable only for cause?”
“If an independent agency headed by a single person violates Article
II as interpreted in
Free Enterprise Fund v. PCAOB, 561 U.S. 477 (2010), what would the appropriate remedy be?”
"Would the appropriate remedy be to sever the tenure and for-cause
provisions of this statute, see 12 U.S.C. 5491(c)? cf.
Free Enterprise Fund, 561 U.S. at 508-10. Or is there a more appropriate remedy?”
- “How would the remedy affect the legality of the Director's action
in this case?”
In it appears that PHH is already winning concessions from the court. In
August of 2015, the Circuit Court “issued a stay” against
the $109.2 million penalty levied against the PHH Corp. by CFPB Director
Richard Cordray. His decision in June was based on his belief that PHH
violated the Real Estate Settlement Procedures Act (RESPA) every time
it received an insurance premium payment before the date of July 21, 2008.
Cordray’s final decision necessitated that PHH pay an astounding
increase of $103 million over the court-ordered penalty – a total
of all the insurance premiums it received on or before the July 21st date.
This charge led to PHH appealing their case before the D.C. Appeals Court
on the grounds that it is “arbitrary, capricious, and an abuse of
discretion…” In filing their motion, PHH also included several
questions of constitutionality previously raised during the case of
State National Bank of Big Spring v. Jacob J. Lew. That case focused on whether or not the CFPB is justified being headed
by a single person responsible for enforcing rules across multiple financial
markets. In both cases, the plaintiffs argue that as an independent agency,
a board must head the CFPB and enforcement of decisions with such a profound
effect on financial institutions must not be at the sole discretion of
a single person.
State National Bank of Big Spring v. Jacob J. Lew. United States Court
of Appeals. 24 July 2015. Web.
The outcome is anticipated to be announced in the early fall, and if the
CFPB loses we will likely see its leadership quickly shift from a single
director to a commission.
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