CFPB versus PHH: Impact on Marketing Services Agreements

Jonathan Foxx

President & Managing Director

On November 5^th, the Consumer Financial Protection Bureau (“Bureau”) stated in a brief filed with the D.C. Circuit that its $109 million disgorgement order against PHH Corp. in a mortgage reinsurance kickback case met all statutory requirements and should be allowed to stand to keep other companies from engaging in similar schemes. The Bureau's position has significant implications for Marketing Services Agreements ("MSAs").

Due to the implications of the Bureau’s authorities and powers, I cover the impact of the PHH matter in some detail in a forthcoming webinar, entitled Marketing Services Agreements: Challenges and Choices. My colleague, Michael Barone, will cover the ins-and-outs of MSAs. This free webinar is hosted by MortgageFlex Systems.

Webinar Registration Link

Presenters

Jonathan Foxx, President & Managing Director

Michael Barone, Executive Director & Director Legal & Regulatory Compliance

Title Marketing Services Agreements: Challenges and Choices

Date November 19, 2015

Time 2PM-3PM ET

Recording No

Topics

PHH Corp – Enforcement Action

Background regarding MSAs

Lighthouse Title – Consent Order

Lessons learned about MSAs

CFPB's Bulletin 2015-05 on MSAs

Synopses – Three Takeaways

Attendee Package

Webinar Slides

Marketing Services Agreements - Checklist

Suite of Services

The Bureau contends that PHH incorrectly interpreted the Real Estate Settlement Procedures Act (“RESPA”) in its appeal of the $109 million disgorgement order. The CFPB and its Director, Richard Cordray, contend that they were correct in levying the foregoing penalty, which, they claim, serves as a necessary deterrent to other firms that might consider engaging in kickback actions.

To quote the Bureau itself:

“Eliminating kickbacks is a primary goal of RESPA. If PHH is permitted to keep the fruits of its kickback scheme merely because it claims it believed its scheme was legal, this will encourage others to take advantage of areas of statutory uncertainty.”

Further, the Bureau contested PHH’s claims that the agency’s ‘single-director structure,’ as opposed to ‘multimember-commission leadership,’ and funding through the Federal Reserve rather than the congressional appropriations process, violate the U.S. Constitution.

To refresh the history of this matter, the Bureau had filed administrative claims against PHH in January 2014, alleging that when PHH originated mortgages, the financial institution referred consumers to mortgage insurers with which it had relationships. In exchange for this referral, the agency claimed, these insurers purchased reinsurance from PHH’s subsidiaries, and PHH took the reinsurance fees as kickbacks.

The Bureau contended that PHH also charged more money for loans to consumers who did not buy mortgage insurance from one of its supposed kickback partners and, in general, charged consumers additional percentage points on their loans.

Then, in June 2015, Director Cordray upheld a November 2014 ruling by Administrative Law Judge Cameron Elliot that PHH engaged in a mortgage insurance kickback scheme under RESPA; but, according to Director Corday, the judge incorrectly assessed the penalties.

Director Cordray’s position may be outlined, as follows:

Rather than requiring that PHH face a penalty for kickbacks on mortgages that closed on or after July 21, 2008 – three years before the CFPB took over RESPA enforcement from the U.S. Department of Housing and Urban Development – the firm should be penalized for each payment it received after that date, regardless of when the mortgage had closed.

Mr. Cordray based his decision on the way mortgage reinsurance premiums are paid. Thus, rather than coming as a onetime payment at the closing date of a mortgage, such premiums are paid by borrowers each time they make a monthly mortgage payment.

To take a line directly from Director Cordray’s opinion, “That means PHH is liable for each payment it accepted on or after July 21, 2008, even if the loan with which that payment was associated had closed prior to that date.”

Thus the penalty changed as a result of a differing reading of the law, which increased PHH’s penalty by over 1600% - from $6.4 million in Judge Elliots ruling, based on the amount borrowers paid on mortgages that closed on or after July 21, 2008 to the new penalty calculation of $109 million!

PHH appealed the decision and the D.C. Circuit put a stay on the ruling. The firm argues that the due process clause bars the government from retroactively punishing conduct that was recognized as lawful at the time.

I cover the PHH matter in considerable depth at the beginning of the webinar, bringing in salient features of the dispute, and at the end of the webinar I provide three synopses regarding the implications of the Bureau’s position and actions with respect to Marketing Services Agreements.

Webinar Registration Link

Revolving Door Regulators

Senator yesterday. Lobbyist today.

Representative yesterday. CEO today.

Cabinet level appointee yesterday. Bank Chairperson today.

Government Agency Director yesterday. Law firm senior partner today.

CFPB Regulator yesterday. Competitor today.

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IN THIS ARTICLE

The Inside-Outside Gambit

The Four Horsemen

A Business Model for Former Regulators

Partners in Business

Making a Market in Non-QM

Timeline

What did they know, and when did they know it?

Extinguishing the Fire

Library

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The Inside-Outside Gambit

There are many forms of corruption. Perhaps the most pernicious is where an elected or duly appointed representative of the citizenry leaves office to use the sloughed off position for financial gain in the private sector.

Let's set up a definition for such (mostly unregulated) behavior. I will give it a phrase: "inside-outside gambits."

What is an inside-outside gambit? It is the use of information obtained in the course of a former governmental position by an official for financial gain, directly or indirectly, soon or immediately after leaving government employment in that position. Such information includes contacts with decision-makers in the government; providing information about proprietary conversations leading up to the promulgating of laws, rules, and regulations; access to insiders and knowledge of their views; navigating the systemic and organizational structure; non-public facts regarding the governmental plans or condition that could provide a financial advantage. Note that I use the phrase "inside-outside," not "insider trading."

I am not talking about a situation where there is the illegal trading of a public company's stock or other securities (such as bonds or stock options) by individuals with access to non-public information about the subject company (such trading being illegal).

However, the effect of “inside-outside gambit” and “insider trading” is practically the same: these strategies lead to an unfair, usually economic, advantage.

A basic concept of law is that an injury must be sustained by a plaintiff. Broadly speaking, no injury, no case.

So who is harmed when an equity trader uses inside information for personal financial benefit? The public, of course. Certainly, that part of the public that invests in the stock market, relying on rules, regulations, and laws to be impartially applied, with equal access to all. And who is harmed when a former government official uses inside information for personal financial benefit almost immediately after being employed in the government position. Of course, the public. Certainly, that part of the public that relies on rules, regulations, and laws to be impartially applied, with equal access to all.

How about when regulators in the most powerful agency that regulates the origination of residential mortgage loans, the Consumer Financial Protection Bureau (CFPB), leave that agency and start a mortgage company soon after leaving the CFPB, to compete or partner with mortgage companies?

CFPB: Spying to Protect the Consumer

It all began with a Bloomberg article. Although the CFPB spying on the financial habits of at least 10 million consumers seems to be a far cry from NSA's spying on the telephone calls, emails, snail mails, website usage, and many other communication media used by hundreds of millions of US citizens, the timing of the Bloomberg article comes at, shall we say, a rather sensitive time - given its publication just shortly prior to the recent revelations regarding the NSA's rather unique way of interpreting the Fourth Amendment of the US Constitution regarding search and seizure.

Probable Cause Conundrum

I call it the "probable cause conundrum," because (1) the Fourth Amendment expressly states that "the right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized," yet (2) a warrant to spy on Americans these days, at least with respect to probable cause and the requirement that a warrant to spy must be limited in scope according to specific information, has been hugely expanded. At least one of the Supremes has interpreted "probable cause" to mean "reasonable." For some reason, I really don't think that point of view was ever the way the Framers considered it, based on the law extant at the time the Constitution was actually drafted. But I digress.

As a result of Tennessee v. Garner [471 U.S. 1 (1985)], inter alia, we all learned that the "reasonableness requirement" applies not just to a search in combination with a seizure, but also to a search without a seizure, as well as to a seizure without a search. But, again, I digress. So not to go too far afield, let us return to that Bloomberg article which, by the way, was published back in April of this year.

To quote the very first paragraph of the article, its author, Carter Dougherty, writes that "the new U.S. consumer finance watchdog is gearing up to monitor how millions of Americans use credit cards, take out mortgages and overdraw their checking accounts. Their bankers aren’t happy about it." And Mr. Dougherty later on states that "Director Richard Cordray has said that the consumer bureau needs raw material to make 'data-driven' decisions based on how financial products and services are used or abused. Research will improve regulation as well as the marketplace."

We don't like to think that our federal agencies are spying on us, watching our communications, perhaps especially our financial habits, determining therefrom how best to "serve" the public interest. Sure, we know that Google and other web giants are constantly monitoring our financial habits - presumably with our permission to do so. Somehow, it's acceptable if private corporations do it, but when the government does it - not so much!

It all becomes rather weird when the NSA (backed by, say, the DOJ) orders private corporations to spy on us, but the latter are not permitted to admit that the former ordered them to do so - with or without our permission - on the basis of what appears to be a new meaning of "probable cause."

What I find interesting is the similarity between the NSA's and the CFPB's reasons for the need to collect, respectively, virtually all communication data on American citizens and also the financial data on millions of American consumers. It seems that spying has an underlying positive cause, one that apparently we citizens simply don't fully appreciate. For if we did appreciate the workings of these agencies that are just trying to protect us, watch over us to make sure we are safe, and do what they can to mitigate our worst fears, we would overwhelmingly and clearly express our gratitude to the NSA and CFPB for their commitment to our protection - and some Americans certainly seem very grateful.

The Fourth Amendment - how quaint it has become!

Justifying Spying

NSA and CFPB – Two Peas in a Pod

But let's look at some of these justifications that both the NSA and the CFPB have in common for spying on us. Or, if you find that phrase to be nettlesome, perhaps the phrase ‘conducting surveillance on us’ is easier to accept.

First Justification: We need a bogeyman, whom we shall call El Coco, its Spanish version, as when a Spanish-speaking parent tells a child 'si no te portas bien vendrá el coco' ("if you're not good the bogeyman will come and get you"). Almost every civilization has had some version of the bogeyman, that amorphous, unpredictable, malevolent being whose primary role is to scare the living daylights out of us and make us willingly compliant and malleable victims.

So, in the case of the NSA, El Coco comes in the form of terrorists and other malcontents; and, in the case of the CFPB, El Coco seems to be residential mortgage lenders and originators (RMLOs) and other members of the financial markets and sometimes even consumers themselves. In both instances, we can thank the government for protecting us from the mischievous schemes of El Coco.

Elizabeth Warren's Interview

In July 2011, I published my interview of Elizabeth Warren, entitled Opening a Dialogue: Elizabeth Warren and the Mortgage Industry.*

I have been told that this interview is one of the last published interviews of Mrs. Warren prior to President Barack Obama's announcement of the nomination of former Ohio Attorney General Richard Cordray as the first director of the Consumer Financial Protection Bureau (CFPB) on July 18, 2011. Until that point, Mrs. Warren was acting in the capacity of the interim director of the CFPB.

READ WARREN INTERVIEW

In August 2011, Mrs. Warren began to receive substantial political support from many political organizations and private citizens, and on September 14, 2011 she announced her campaign as a candidate for Senator of Massachusetts.

Mrs. Warren is known to be a fierce consumer advocate and is considered by many to be the primary visionary behind the creation of the Consumer Financial Protection Bureau. The CFPB - these days known more and more colloquially as the "Bureau" -  was established by the Dodd–Frank Wall Street Reform and Consumer Protection Act and signed into law by President Obama in July 2010. For the first year after the bill's signing, Mrs. Warren worked tirelessly as the CFPB's Special Assistant to the President to “stand up” the Bureau.

But Warren's nomination for the Director's position was not put forward by Mr. Obama because of his conclusion that her nomination would be too politically contentious.

Notwithstanding the political environment, the CFPB received its enumerated authorities on July 21, 2011.

Due to the partisan resistance to virtually any nomination for Director - some members of Congress wanted to disempower the CFPB or defund it – Mr. Obama felt constrained to appoint former Ohio Attorney General Richard Cordray to be the Director of the CFPB in January 2012, through a "recess appointment", over the objections of Republican Senators.

Last week Mrs. Warren, the 63-year-old Harvard Law School professor, was elected the first female U. S. Senator of Massachusetts by the considerable lead of 54% to 46% over Scott Brown, who had been elected in 2010 to fill out the late Edward M. Kennedy’s term. Her acceptance speech included her promise that she would be "a fighter for the middle class".

Soon, Mrs. Warren will take her oath as the junior Senator of Massachusetts.

With this in mind, I thought it would be informative to consider Mrs. Warren's responses to the questions I posed in my interview, in the context of what the CFPB has accomplished to date and has pledged to accomplish in the future.

READ WARREN INTERVIEW

I have written extensively about the CFPB. If interested, please feel free to view or download these articles, newsletters, and recent papers.

For selected issuances involving the CFPB, visit our library.

Although it is in its infancy, perhaps we can begin to discern the broad outlines of the CFPB’s commitment to the vision of consumer advocacy set forth by Mrs. Warren.

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IN THIS ARTICLE

Organizations that Accepted Participation

Organizations that Declined Participation

Questions

In Her Own Words

Library

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Organizations that Accepted Participation

READ WARREN INTERVIEW

Nearly all major mortgage industry associations responded to my invitation to provide questions to me to ask Mrs. Warren. Many interview questions, though very important, were also very specific, and it was just not possible for Mrs. Warren to answer such questions of detailed specificity, prior to the CFPB being empowered to evaluate rulemaking and policy alternatives.

Nevertheless, I proffered a wide enough scope of questions that we were able to obtain firm and clear replies.

Organizations that Accepted Participation

Association of Residential Mortgage Compliance Professionals (ARMCP)
Jonathan Foxx, President

Community Mortgage Bankers Project (CMBP) Glen Corso, Managing Director

Impact Mortgage Management Advocacy & Advisory Group (IMMAAG)
Bill Kidwell, President

National Association of Independent Housing Professionals (NAIHP) Marc Savitt, President

National Association of Mortgage Brokers (NAMB)
Don Frommeyer, Them President Elect

National Association of Professional Mortgage Women (NAPMW)
Laurie Abshier, National President

National Association of Realtors (NAR)
Lucien Salvant, Managing Director

National Credit Reporting Association (NCRA) Terry Clemens, Executive Director

National Reverse Mortgage Lenders Association (NRMLA)
Daryl Hicks, Vice President, Communications

Real Estate Services Providers Council (RESPRO)
Sue Johnson, Executive Director

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Organizations that Declined Participation

American Bankers Association (ABA)
Peter Garuccio, Vice President, Public Relations

Mortgage Bankers Association (MBA) John Mechem, Sr. Director - Public Affairs Communications & Marketing

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