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From Banking and Finance Law Daily, June 29, 2015

Ball in PHH court

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has fired the latest salvo in the ongoing battle between the bureau and mortgage lender PHH Corporation. CFPB Director Richard Cordray denied PHH’s motion to stay a decision and final order entered against PHH pending appellate review of its case. In response, PHH filed a petition for review with the D.C. Circuit Court of Appeals.

Background. On Jan. 29, 2014, the CFPB filed an administrative complaint against PHH and its affiliated companies charging that the companies carried out a scheme under which mortgage insurers paid kickbacks in exchange for referrals. According to the CFPB, the arrangement persisted over approximately 15 years and allowed the companies to collect “hundreds of millions of dollars in kickbacks.” PHH issued a response stating it would “vigorously defend against the CFPB's allegations.” Since that time, the CFPB and PHH have gone toe-to-toe in a series of legal maneuvers.

On Nov. 25, 2014, Administrative Law Judge Cameron Elliot issued a recommended decision in the action, finding that the mortgage company accepted reinsurance premiums in violation of Sections 8(a) and 8(b) of the Real Estate Settlement Procedures Act. The RD includes imposition of an injunction and disgorgement of almost $6.5 million as to all respondents jointly and severally. The proposed order against PHH enjoined the corporation from violating RESPA Sections 8(a) and 8(b) and engaging in the business of providing captive insurance for a period of 15 years from the date of the order. PHH and its affiliated companies also were ordered to disclose to the bureau’s Office of Enforcement within 30 days of the order all services provided to any of them by any mortgage insurance company since Jan. 1, 2004. PHH filed a notice of appeal following the RD, becoming the first to appeal a CFPB administrative enforcement action.

Decision and order. The CFPB issued a decision and final order in the PHH action on June 4, 2015. The Director’s decision concludes that PHH illegally referred consumers to mortgage insurers in exchange for kickbacks. He also issued a final order that prohibits PHH from violating the law and requires it to pay $109 million to the bureau.

Motion to stay decision and order. On June 16, 2015, PHH moved for a stay of the decision and final order pending appellate review. PHH contends in its motion that a stay is appropriate because:

  • PHH is likely to succeed on the merits of the appeal;
  • the injunctive provisions of the final order are “impermissibly vague, are beyond the scope of the Notice of Charges, and violate” PHH’ s due process rights;
  • there is no need for injunctive relief because no mortgage loans have been placed in reinsurance books since 2009;
  • any payment before PHH has had the opportunity to seek judicial review is unwarranted and would cause irreparable harm; and
  • public interest lies with allowing PHH to “have their day in court.”

The motion concludes by requesting that should the CFPB Director deny PHH’s request for a stay, the implementation of the final order be delayed by an additional 30 days. An addendum to the petition provides statements by PHH executives as well as documents in support of the requested stay.

Proposed orders. On June 16, Cordray entered a proposed order granting a temporary stay until Aug. 3, 2015. A second proposed order dated the same day granted a stay of the final order pending judicial review by the U.S. Court of Appeals for the District of Columbia Circuit.

Encorcement Council position. The Enforcement Council weighed in against the stay, stating that “PHH seeks the extraordinary remedy of a stay of a final administrative order that already contains within it all the relief to which a litigant is normally due.”

The EC further stated that PHH is “unpersuasive” in its arguments. Specifically, the EC found that:

  • PHH failed to establish a likelihood of success on appeal;
  • PHH would not be irreparably harmed if the stay was not granted;
  • the non-money injunctive relief will not cause irreparable harm, and PHH’s contention that it is unlawful is both plainly wrong and irrelevant; and
  • absent a stay, the public interest would be harmed.

PHH response in support of its motion to stay. PHH’s position on its motion to stay is that it should be granted because Cordray’s decision and order “is legally flawed in multiple respects.” Putting the order into effect would “irreparably harm” PHH “with no offsetting benefit to the public interest.”

Director’s decision and final order. On June 24, 2015, Director Cordray entered a decision and final order denying PHH’s motion to stay the June 4 final order. Cordray noted in the decision that the relevant CFPB rule for adjudicative proceedings states that an order "becomes effective at 30 days after the date of service" unless the order is stayed (12 C.F .R. § 1081.407(a)) which means the order is to take effect on July 6, 2015. The rule also sets out the standard for a stay motion, which must address four factors: "the likelihood of the movant's success on appeal; whether the movant will suffer irreparable harm if a stay is not granted; the degree of injury to other parties if a stay is granted; and why the stay is in the public interest." (12 C.F.R. § 1081.407(c)). PHH's motion addresses these factors, the Director said, but PHH “fails to make any showing that would warrant a stay pending appellate review.”

The Director denied the motion to the extent it seeks a stay pending judicial review. However, Cordray also granted a 30-day stay of the order. The order now will take effect on Aug. 5, 2015, to “allow a more orderly process of review” and “give PHH time to seek a stay from the D.C. Circuit.”

Reasoning for denial. The CFPB Director reasoned that PHH's motion fails because PHH did not meet its burden with respect to the second factor, which addresses irreparable harm. “This factor is so crucial to a stay that a failure to show irreparable harm is grounds for denial, even if the other three factors favor such relief (Chaplaincy of Full Gospel Churches v. England, 454 F.3d 290, 297 (D.C. Cir. 2006)). “Accordingly, it is not necessary for me to address the other three factors here.”

As to the harm that would result from the order, the Director responds that PHH’s arguments do not show that the provisions of the injunction would cause PHH harm that would justify a stay.

Final provision. The final provision of the order requires PHH to pay approximately $109 million in disgorgement. Even though the provision permits PHH to make its payment into an escrow account pending appellate review, PHH nonetheless claims that making the payment into an escrow account will cause it irreparable harm. The CFPB answered that claim by stating that PHH failed to provide any evidence as to how this would cause “severe” consequences to its business operations, “yet that is the critical consideration here.”

Petition for review. PHH already made the next move by filing a Petition for Review in the U.S. Court of Appeals for the District of Columbia Circuit on June 19, prior to the Director’s decision and final order. In the petition, PHH states that it is seeking a review of the bureau’s final action “on the grounds that it is arbitrary, capricious, and an abuse of discretion within the meaning of the Administrative Procedure Act, 5 U.S.C. § 701 et seq.; violates federal law, including, but not limited to, the United States Constitution, RESPA, and the Consumer financial Protection Act of 2010, as well as regulations promulgated under those statutes; and is otherwise contrary to law.”

Attorneys: Mitchel Howard Kider (Weiner Brodsky Kider PC) and Theodore B. Olson (Gibson, Dunn & Crutcher LLP) for PHH Corp., PHH Mortgage Corp., PHH Home Loans, LLC, Atrium Insurance Corp., and Atrium Reinsurance Corp. Lawrence DeMille-Wagman, U.S. Commodity Futures Trading Commission, for Consumer Financial Protection Bureau.

Companies: Atrium Insurance Corp.; Atrium Reinsurance Corp.; PHH Corp.; PHH Home Loans, LLC; PHH Mortgage Corp.

MainStory: TopStory CFPB EnforcementActions Loans Mortgages RESPA

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