The Consumer Financial Protection Bureau (CFPB) recently had its wings clipped. The setback for the regulator was the result of a ruling by the U.S. Court of Appeals
for the District of Columbia in a case involving PHH
The appeals court ruling was the first significant judicial rebuke of the CFPB, which has been known to
impose enormous penalties on mortgage companies.
In many cases, those penalties have been so onerous
that affected companies could not afford to effectively
defend their positions.
The appeals court ruling not only provided relief to
PHH, it also could help to revive the use of so-called
marketing services agreements (MSAs). The real estate
industry had been forced to abandon MSAs for the
most part because of compliance risks and uncertainty
stoked by prior CFPB enforcement actions.
In PHH’s case, the company had set up a system that
required mortgage insurers to use PHH’s re-insurance
affiliate for the loans being insured. While this prac-
tice may be questionable on other legal grounds, the
U.S. Department of Housing and Urban Development
(HUD) had determined previously that the payments
by the mortgage insurers to PHH’s captive reinsurer
did not represent indirect kickbacks to PHH under sec-
tion 8(a) of the Real Estate Settlement Procedures Act
(RESPA). Notwithstanding HUD’s position, its successor
regulator, the CFPB, commenced its own administra-
tive review of the practice, and its administrative law
judge determined that the practice was a RESPA vio-
Beyond this, CFPB Director Richard Cordray, in reviewing the administrative law judge’s recommended
decision, wrote his own decision and took some extraordinary actions. The director analyzed and reinterpreted RESPA’s services-rendered exception to prohibited referrals as structured in the PHH case.
Cordray’s view was that the services-rendered exception in RESPA was not complete in and of itself.
Rather, he believed that compliance with the so-called
8(c)(2) exception was only a first step, and he determined that additional referral-fee scrutiny of such
deals was required under Section 8(a) of RESPA —
even when uncompensated referrals were occurring
between the parties involved.
The director further asserted that the CPPB was
not constrained by RESPA’s statute of limitations
for violations when the CFPB was acting through its
administrative-hearing process rather than through
the courts. Based on these novel legal interpretations,
Cordray increased the administrative law judge’s rec-
ommended penalty against PHH from $6.4 million to
$109 million dollars.
PHH appealed Cordray’s decision to the federal
appeals court in Washington, D.C., where a panel of
three judges issued a decision that was a significant
setback for the CFPB. In addition to determining that
the director of the CFPB must, for constitutional reasons, be removable at the will of the U.S. president,
the court also reversed Cordray’s interpretation of the
Stanley M. Gordon is the managing member of Gordon
& Associates ( sgordonlegal.com) in Costa Mesa, California,
which provides counsel for the mortgage and real estate
services industry. Gordon served previously as general
counsel for the Coldwell Banker Residential Group and was
subsequently a chairman of a major mortgage banker and
homebuilder. He has been involved with industry legislative
issues at the federal level for more than 30 years. Reach
Gordon firstname.lastname@example.org or (949) 338-3323.
New Day Coming for MSAs
Marketing services agreements may be revived in
the wake of a court ruling against the CFPB
By Stanley M. Gordon
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