Can the CFPB ignore decades of precedent from the Department of Housing and Urban Development (HUD) and fine a company 18 times more than its own in-house counsel sought?
This week, The Wall Street Journal published a profile of a federal court case accusing the agency of “brazen disregard for judicial authority, agency precedent and fair notice” that “is a symptom of the larger constitutional problems.”
Shortly after its creation, the CFPB was given the authority to enforce the Real Estate Settlement Procedure Act (RESPA), a law passed 40 years ago to keep lenders and realtors from inflating the transaction costs of buying a house. HUD had previously enforced the law and at the time of the CFPB’s creation, it was pursuing a case against PHH, a nonbank mortgage provider.
According to CFPB Director Richard Cordray, PHH was essentially collecting “kickbacks” from mortgage insurance companies for referring clients. PHH referred borrowers to specific mortgage insurance companies and then pushed those insurers to buy its affiliate’s reinsurance. The CFPB says this system allowed PHH to collect up to 40 percent of the mortgage insurance premiums paid by borrowers. While that netted PHH hundreds of millions of dollars, the CFPB says it raised costs for consumers.
There’s little argument PHH violated RESPA. However, instead of saying the company violated the law each time PHH received a new reinsurance contract (the interpretation long used by HUD in these cases), the CFPB claims each monthly payment on that contract constitutes a separate violation. Instead of fining the company $6 million—as a federal judge already penalized the company—the CFPB fined the company $109 million.
Unsurprisingly, PHH is suing the CFPB. In April, a federal court of appeals is considering whether the agency overstepped its authority. Should the court rule against the agency, it could have broad implications for the many other non-bank financial services companies targeted by the CFPB, including payday lenders, homebuilders, and auto loan providers.