Friday, June 26, 2015

PHH appeals its Kickback Penalty

President & Managing Director
Lenders Compliance Group

PHH Corp., the company made famous recently for its alleged mortgage insurance kickback scheme, is taking on the Behemoth Bureau with an attempt to overturn its $109 million penalty. The theory? That the Bureau’s ruling was an abuse of discretion.

Last Friday, PHH petitioned the appeals court to review the CFPB’s order because it is “arbitrary, capricious, and an abuse of discretion within the meaning of the Administrative Procedure Act” and, if that is not enough, it is a violation of federal law, including the Real Estate Settlement Procedures Act and the Consumer Financial Protection Act of 2010.[i]

In early June, Director Cordray supported the findings of the Administrative Law Judge Cameron Elliot on the point of its correctness; however, Mr. Cordray said that Judge Elliot incorrectly applied the law’s provisions when assessing PHH's penalty.

Let’s dig a little deeper. What Mr. Cordray was maintaining was the view that the penalty for RESPA kickbacks for mortgages that closed on or after July 21, 2008 – which, by the way, is exactly three years before the date when the Bureau assumed RESPA enforcement authority from HUD – should be penalized for each payment PHH received after that date.

Here was his reasoning. Mortgage reinsurance premiums are paid by borrowers each time they make monthly payments, not in one lump sum at the time of closing. Thus, to quote Mr. Cordray, “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.” So, using that way of figuring things out, the penalty PHH now faces was elevated to the draconian $109 million.

Judge Elliott’s calculation put the penalty at about $6.4 million, which is based on the amount paid by borrowers on mortgages that closed on or after July 21, 2008. But Mr. Cordray’s new calculation caused the penalty to rise to $109 million, giving new meaning to the concept of geometric and exponential expansion of values!

What a mess! And all this because the Bureau alleged that when PHH originated mortgages it referred consumers to mortgage insurers with which it partnered. Then, in exchange for this referral, these insurers purchased reinsurance from PHH’s subsidiaries. Hence, PHH allegedly took the reinsurance fees as kickbacks. Somewhat convoluted, but easy to follow.

The Bureau asserted that PHH and its affiliates allegedly set up a systematic means whereby PHH received as much as 40 percent of the premiums that consumers paid to mortgage insurers, collecting hundreds of millions of dollars in kickbacks. Well, as Shakespeare wrote, “nothing comes amiss; so money comes withal.”

But the Bureau’s allegations did not stop there. It also claimed that PHH allegedly charged more money for loans to consumers who did not buy mortgage insurance from one of its kickback partners and, in general, charged consumers additional percentage points on their loans. So, from the vantage point of a regulatory violation, this is getting pretty serious.

But why stop when you’re on a roll? The Bureau continued on to allege that PHH pressured mortgage insurers to “purchase” its reinsurance with the understanding or agreement that the insurers would then receive the borrower referrals from PHH. By the way, this fact pattern is otherwise known as “steering.” So, the Bureau claimed that PHH allegedly steered business to its mortgage insurance partners even when it knew the prices its partners charged were higher than competitors’ prices.

The presence of the Administrative Court is pertinent. The Bureau took the position that RESPA’s statute of limitations for kickback claims applied only to cases the Bureau brought in federal courts, not administrative courts.

It’s worth noting that the Bureau would have liked to reach back earlier than July 2008. But that would be a violation of provisions that bar an agency from bringing claims that came before the effective date of a statute. And the Consumer Financial Protection Act, which was included in the Dodd-Frank Act, only came into effect in July 2008. Therefore, the Bureau could only bring claims related to violations as of that date. 

This case is going to be around for a while longer.

Yogi said it best: "It ain't over 'til it's over!"

[i] PHH Corp. et al. v. Consumer Financial Protection Bureau, 15-1177, U.S. Court of Appeals, District of Columbia

Friday, June 19, 2015

The CFPB's Mortgage Rate Tool

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

I have always been a consumer advocate. Compliance and consumer advocacy are cemented together. We simply can’t have one without the other. However, sometimes a zealous regulator can go too far, even for the best of reasons.

Remember the Mortgage Rate Tool? It’s still up!

The rates used are derived from Informa Research Services. The Bureau has this explanation:

“The data is provided by Informa Research Services, Inc., Calabasas, CA. Informa collects the data directly from lenders and every effort is made to collect the most accurate data possible, but they cannot guarantee the data’s accuracy.”

Not sure about that last part, where “they cannot guarantee the data’s accuracy.” But I am certainly sure that accuracy is virtually guaranteed when it comes to disclosure of the Annual Percentage Rate, given the statutory redisclosure, curing requirements, and civil monetary penalties for violations.

Remember back in January, a year after the Consumer Financial Protection Bureau (Bureau) implemented many of its mortgage rules, when Director Richard Cordray said that “rash predictions” voiced during the rulemaking process didn’t happen?

He said that the Bureau had not seen “dramatic changes as some had feared. I recall seeing some rash predictions, such as that the price of mortgages would double and the volume of mortgages could be halved. But by the time these rules went into effect, lenders had already retreated from the worst sorts of lending that took us into the financial crisis.” (My emphasis.)

So, preying lenders “took us into the financial crisis?”

Cordray’s speech coincided with release of the Bureau’s survey that found almost half of consumers do not shop around for a mortgage when purchasing a home. The survey, which was jointly conducted by the Bureau and the Federal Housing Finance Agency (FHFA), also found that three out of four consumers only apply with one lender or broker, and most consumers get their information from lenders or brokers that have their own stake in the outcome.

Here are the Director’s words:

“By not shopping around, consumers often are throwing good money down the drain…”

“At the Consumer Bureau, we are working to reduce the information gap between lenders, who understand mortgage pricing inside out, and consumers, to whom the process can often feel like a mystery. It is time to start changing the culture of how people obtain their mortgages. We need to change the process from one of ‘getting a mortgage’ to one of ‘shopping for a mortgage.’ Consumers have much more power than they may realize. They can use that power to take control of their financial outcomes.”

I’m all for “shopping for a mortgage;’ indeed, the TILA-RESPA Integration Disclosure (TRID) requirements are designed to ensure, among other things, that the shopping process is protected – as it should be. The Bureau said the tool would make it easy to compare different interest rates and how much they will cost over the life of the loan. Who could argue with that well-meaning prospect?

But, if you recall, the Mortgage Rate Tool triggered huge opposition from the mortgage industry. Lots of people spoke up against this rate tool. Camden Fine, President and CEO of the Independent Community Bankers Association of America, wanted the tool removed.

Mr. Fine didn’t mince words in a January 14, 2015 letter to Director Cordray:

“While ICBA and its community bank members support providing robust information and guidance to all consumers regarding the mortgage process, we are very concerned that the Bureau’s ‘Unbiased Rate Tool’ does not adequately represent to consumers mortgage rates and products offered by community banks.”

Furthermore, Fine wrote, “based on the CFPB’s own comments, the source of the rate data does not even include community banks.”

Importantly, he observed, quite accurately, that the Bureau’s rate tool “creates the impression that all lenders should offer the same rates for the same loan, and if a higher rate is offered, as in the case of a non-conforming portfolio loan, it will be presumed that the lender is either overcharging the borrower or not providing the best lending option for that borrower.”

Director Cordray had said that while lenders and brokers could be valuable resources, it was “worth recognizing that they also have an important personal stake in selling the mortgage” and “what is best for them is not always going to be best for the consumer.” (My emphasis.)

To that remark, Mr. Fine called him out, stating that “this statement implies that because a bank may profit from making a loan that the banker doesn’t care about what might be best for the consumer.” Community bank portfolio loans, which are priced based upon the bank’s cost of funds, term, collateral, and payment characteristics and sometimes the higher risks associated with those loans, he said, “justify higher rates” than the rate tool or secondary market surveys might suggest.

Speaking about the inference embedded in Director Cordray’s remarks, Mr. Fine charged that “to insinuate that their intentions are less than honorable is offensive to the fine men and women who have dedicated their lives to the community banking industry for many generations.” Same could be said for most residential mortgage loan originators!

John Councilman, President of NAMB – The Association of Mortgage Professionals, had this to say:

“This tool will do nothing but confuse consumers in their shopping experience”

“These rates do not account for closing costs, APR, Loan Level Price Adjustments or other key factors. More important than rate, is quality of service and closing reputations of others involved in the transaction. If a private company released this exact product, the CFPB and state regulatory authorities would have a team sent in to shut the site down.”

Like his counterpart at the ICBA, Mr. Councilman had this to say:

“What is perhaps most egregious is Director Cordray’s statement that cautioned consumers that [mortgage lenders and brokers] have an ‘important stake in selling the mortgage’ … ‘what is best for them is not always best for the consumer.’ This statement is nothing but divisive, naive, or dishonest; or all three.”

Yet, the Mortgage Rate Tool is still up!