In November, Administrative Law Judge Cameron Elliot of the U.S. Securities and Exchange Commission issued the first “recommended decision” in a litigated Consumer Financial Protection Bureau administrative enforcement action.
In In re PHH Corporation, et. al., the CFPB alleged this residential mortgage lender was engaged in a nearly 15-year “mortgage insurance kickback scheme” by its mortgage origination and reinsurance subsidiaries involving “hundreds of millions of dollars” in allegedly improper reinsurance fees. This action followed on the heels of the CFPB’s consent orders totaling $15.5 million with five mortgage insurers, settling allegations that the insurers’ agreements with mortgage originators violated RESPA.
The CFPB claimed PHH referred borrowers to mortgage insurer “partners,” who “in exchange for this referral,” agreed to purchased “reinsurance” from a wholly-owned PHH subsidiary, at supposedly exorbitant rates, taking the reinsurance fees as kickbacks. The CFPB further contended that PHH “pressured” mortgage insurers into participating in the scheme and “steer[ed]” business toward the mortgage insurers “even when it knew the prices [they] charged were higher than competitors’ prices.”
The ALJ from the SEC, serving pursuant to an interagency agreement, ruled in favor of the CFPB and held that PHH’s reinsurance agreements violated RESPA’s prohibition on kickbacks in exchange for referrals. As a result, he granted injunctive relief and ruled PHH must disgorge more than $6 million in damages (far less than the $430 million disgorgement and civil penalties sought by the CFPB).
The financial services industry is following Cordray’s handling of the appeal in this first contested CFPB adjudication. PHH filed a notice of appeal to Director Cordray in December, and briefing is currently expected to conclude on February 20, 2015.