The D.C. Circuit panel’s decision vacated a $109 million penalty against PHH Corp., a mortgage loan provider that the CFPB had charged with engaging in a kickback scheme by only referring customers to mortgage insurers that had contracts with a subsidiary, Atrium Insurance Co. The agency alleged the kickbacks took the form of insurance premiums that mortgage insurers paid to Atrium, a provider of mortgage “reinsurance” that PHH created in 1994.
Kavanaugh sided with PHH on the technical aspects of mortgage lender regulations, ruling that the company’s referral framework was legal so long as the premiums paid to Atrium did not exceed the market rate.
The CFPB will still have a chance on remand to make its case against PHH and “demonstrate that the relevant mortgage insurers in fact paid more than reasonable market value to the PHH-affiliated reinsurer for reinsurance,” Kavanaugh said.
Kavanaugh disagreed with the CFPB’s view that, under Dodd-Frank, there is no statute of limitations for violations of any consumer protection law. “First of all,” he wrote, the Dodd-Frank Act incorporates the statutes of limitations in the underlying laws enforced by the CFPB, including the three-year statute of limitations in the law at issue in the PHH case—the Real Estate Settlement Procedures Act. Kavanaugh also found that the CFPB “violated bedrock principles of due process” by departing from the Department of Housing and Urban Development’s prior regulatory interpretations.
In a prepared statement, PHH said it was “extremely gratified” and “hopeful that the Court’s opinion will provide greater certainty to the entire mortgage industry regarding the industry’s reliance on long-standing regulation as to how to conduct business consistent with RESPA.”
Ted Olson, the Gibson, Dunn & Crutcher partner who argued the case for PHH in the D.C. Circuit, said the CFPB’s structure made the agency feel it had unlimited power and “caused them to do unlawful things.”
“I think that, going back, there’s a lot of things that need to be corrected before this agency can properly go forward,” Olson told the National Law Journal. “But that might be for another day to litigate.”
The D.C. Circuit’s opinion immediate effect was primarily political.
Indeed, House Financial Services Committee Chairman Jeb Hensarling, R-Texas, was quick to seize on the ruling, saying the decision “vindicated what House Republicans have said all along, that the CFPB’s structure is unconstitutional.”
“By design the CFPB is arguably the most powerful and least accountable Washington bureaucracy in American history, and it shows,” he said.
All three judges on the D.C. Circuit panel were nominated by Republican presidents. Given the conservative nature of the three-judge panel, Gupta said the chances of the full D.C. Circuit hearing the case are “pretty high.” Democrat-appointed judges have a majority on the D.C. Circuit, even without Chief Judge Merrick Garland on the bench as he awaits a Supreme Court confirmation vote.
“I expect the government will file a petition for rehearing en banc, and I expect it will have a good chance of being granted,” Gupta said.
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