AARP joins the PHH v CFPB Battle

In the continuously unfolding saga of PHH Corporation’s ("PHH") battle with the Consumer Financial Protection Bureau ("Bureau"), we now have a well-known advocacy group joining the side of the Bureau. Last month, the AARP (formerly the “American Association of Retired Professionals”) told the D.C. Circuit that the Bureau should have broad authority to enforce mortgage laws that protect older people.

I have been watching this matter since its inception, commenting from time to time.

AARP asserts that the Real Estate Settlement Procedures Act (“RESPA) is tasked with protecting against kickback scams which, it is contended, inflate mortgage loan settlement costs that distort the market and increase the cost of homeownership. Furthermore, AARP takes the view that the Bureau was given authority to enforce RESPA and, as such, the appellate court should hold that the Bureau has acted within its constitutional authority by leveling a heavy monetary penalty against PHH for exactly the type of harmful scheme it was created to protect against.

Here is AARP’s position:

Widespread mortgage lending abuses also correspond to unprecedented numbers of people entering their retirement years having to make mortgage payments and carrying increasingly unaffordable levels of consumer and health care debt that threaten their ability to afford basic necessities such as food, medicine and shelter.

As a refresher: this case before the D.C. Circuit originated with administrative claims the Bureau filed against PHH in January 2014. The Bureau alleged that when PHH originated mortgages, it referred consumers to mortgage insurers with which it had relationships. In exchange for this referral these insurers purchased reinsurance from PHH’s subsidiaries, and PHH took the reinsurance fees as kickbacks - which is a violation of RESPA.

PHH also 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.

Director Richard Cordray upheld a November 2014 ruling by Administrative Law Judge Cameron Elliot, finding that PHH engaged in a mortgage insurance kickback scheme under RESPA; but, said Director Cordray, the judge incorrectly assessed the penalties.

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

In support of his decision, Director Cordray noted his determination was based on the way mortgage reinsurance premiums are paid; to wit, rather than being applied as a one-time payment at the closing date of a mortgage, such premiums are paid by borrowers each time they make a monthly mortgage payment. Thus, it was the Director’s view, PHH should be liable for each payment it accepted on or after July 21, 2008 – even if the loan associated with the payment had closed prior to that date!

Given the Director’s review, PHH’s penalty was increased fantastically. Whereas Judge Elliott levied a $6.4 million penalty on PHH based on the amount borrowers paid on mortgages that closed on or after July 21, 2008, Director Cordray’s calculation increased the penalty to $109 million.

PHH appealed the decision, and the D.C. Circuit stayed the ruling. PHH then invoked the rule of lenity, asserting that the Bureau was violating RESPA’s statute of limitations. In response, the Bureau took the position that it is entitled to deference.

Which brings us back to AARP. The AARP apparently supports the stiff penalty, saying evidence of the harm to older people inflicted by inflated fees and abusive mortgage-related practices is indisputable: approximately 1.5 million families headed by someone over age 50 lost their home to foreclosure between 2007 and 2011.

PHH has some of the biggest legal talent handling their litigation against the Bureau. The Amici Curiae consist of many of the most influential mortgage industry associations and building industry participants that are subject to RESPA.

Jonathan Foxx
President & Managing Director
Lenders Compliance Group