Litigators often talk to clients about the power of judges and juries. The first Decision of Director issued by CFPB’s Richard Cordray should give counselors and clients alike pause. Pause first because of the ultimate outcome ($109 million disgorgement) and interpretations of RESPA offered. And pause second (perhaps more importantly) because of the focused perspectives announced by the Director and their potential to activate others. With all due respect to the Director and the administrative appeal process, the Director clearly is taking advantage of this opportunity to make known his beliefs. Like a jury or a judge he is meting out justice the way he sees fit. What is fascinating, just like polling a jury after the verdict, is looking for the perspectives which drove the result. The Decision presents yet another glimpse of the Director who now shapes not just CFPB supervision and examination, but also may shape going forward the theories asserted by the plaintiffs’ class action bar.

Many are digesting the Decision and Order (2014-CFPB-0002, June 4, 2015). Here, I will not quote chapter and verse, nor will I analyze the overarching regulatory construct of the administrative appeals process which enabled the Decision. Those whose legal work touches financial services institutions should review the Decision themselves. It is the first. It is public. And it has impact. Each of us can draw our own conclusions. Some will see a righteous vision of justice and others may see, at best, the unintended consequences of concentrated partisan power.

Food for thought: We all may want to consider the impact the Decision could have on how financial institutions ought to assess their business operations and how such institutions may be able to justify those operations and defend themselves in court or before an administrative tribunal.

A “Full Measure of Equitable Relief”…Disgorgement

The Decision affirmed in part, enlarged substantially and effectively overturned (in many ways) the Administrative Law Judge Cameron Elliot’s finding that PHH had violated RESPA §§8(a) and 8(b) (the November 25, 2014 Recommended Decision). The Director agreed that violations had been established by referring business to mortgage insurers with whom certain PHH family companies had captive re-insurance services agreements and by ceding borrower paid mortgage insurance premiums. But the ruling went far beyond where ALJ Elliot was prepared to go. The Decision (a) takes liability back three years before the creation of the CFPB by leveraging HUD’s legacy enforcement authority to reach back to July 21, 2008; (b) concludes that PHH had not established by a preponderance of the evidence any defense under RESPA §8(c)(2) and that violations occur when payments are collected not at loan closing; and (c) increases the disgorgement award to $109 million, more than 18 times larger than the roughly $6 million ALJ Elliot recommended.

RESPA 8(c)(2)… Not an exemption? Merely an Aid to Analyze “Agreements”

Director Cordray announced his stance (and presumably now the Bureau’s) that §8(c)(2) is not an exemption and can only come into play to “clarify the application of section 8(a)” when “there is a question as to whether the parties actually did enter into an agreement to refer…” The Director concluded that an agreement existed to refer business, concurring with ALJ Elliot that a “course of conduct” had been established which constituted an “agreement.” (See Decision, p. 13). As a result, the Director disregarded PHH’s proof regarding the bona fides of the services actually performed and the reasonable amounts paid. He overruled ALJ Elliot’s conclusion that adequate re-insurance risk transfer services had been performed relating to several of the re-insurance book years, proof of the §8(c)(2) defense. (See Decision, pp. 8 and 14-15).

In asserting his contrary views, the Director also summarily rejected the 1997 HUD letter, because it was never published in the Federal Register. In his words, “the letter is not in such a form as to be binding on any adjudicator.” (See Decision, p. 17-18). Expressing his own critique nearly 20 years later, Director Cordray expounds that the 1997 HUD letter contains unsupportable inconsistencies. Eschewing HUD’s perspectives from many years prior to the financial crisis, the Director disavows both the guidance and de-emphasizes the importance of §8(c)(2). The Director concludes that none of the proof offered would have established a substantive exemption, even if he believed one existed. (See Decision, p. 22).

The Director’s position likely will create additional fodder for litigation regarding the interplay between §8(a) and the §8(c)(2). He dismisses the value of rebuttable presumptions and of programs that avoid specific red flags established in other HUD interpretation letters. He rejects PHH’s contentions about the impact of the rule of lenity. (See Decision, p. 20). We all would be well served to continue to monitor developments in this area. Surely, the plaintiffs’ consumer class action bar will be pleased with any further narrowing of the scope of §8(c)(2). The Director clearly has championed that position.

Choice of Forum & Retroactivity …Unlimited Look Back in CFPB Administrative Claims

The Decision emphasizes that the CFPB has a luxury that HUD did not, the CFPB can choose to pursue enforcement claims either in court or by way of administrative proceedings. HUD was bound by a 3 year statute of limitations and was required to bring enforcement actions in courts, which impacted the extent of relief which could be sought. The Director concurs with ALJ Elliot that in an administrative proceeding challenging RESPA, the Bureau’s look back is not limited in time. (See Decision, p. 10). The Bureau’s enforcement proceedings are “not required to mirror precisely an action the HUD could have brought.” (See Decision, p.12). The Director avoids concerns, at least in his mind, over potential unfair retroactivity by indicating the CFPB will not seek the legal remedy of civil money penalties before the date of the Bureau’s creation July 21, 2011.

What is the Violation? Not the Loan Transaction, but Each On-Going Charge Collection

Adding to the eyebrow raising holdings, the Decision concludes that the alleged violation occurs not at loan transaction consummation but instead every time a monthly payment for mortgage insurance is made and the premium ceded. ALJ Elliot differed in his view, focusing on the consumer transaction closing as a triggering event. In overruling ALJ Elliot, the Director also vigorously disagrees with several well established RESPA cases, including the Fifth Circuit’s Snow v. First American Title, 332 F.2d 356 (5th Cir. 2003). The Decision instead cites cases involving other statutes, not RESPA. (See Decision, p. 22-23). The significant impact is clear in the disgorgement. The Decision includes all payments accepted after July 21, 2008, even if associated with loans that closed well before that date. (See Decision, p. 35). Perhaps the triggering event rationale is be shoe horned in order to drive a larger disgorgement penalty. Or perhaps this is another unintended consequence deriving from the administrative claim’s unlimited look back perspective. Again, the plaintiffs’ class action bar surely will think this interpretation quite clever.

Just the Facts…In the Eye of the Beholder

I will not address a variety of other concerns expressed by PHH, like (i) who are covered persons, (ii) due process and notice, (iii) McCarran-Ferguson Act considerations about the filed rates for the insurance at issue, and (iv) the potential for judicial estoppel against the Bureau based on prior settlements with carriers also involved in this case. (See Decision, pp. 27-30). But suffice it say, the Director gives all these additional arguments short shrift.

Let’s be honest, in selecting a jury, both sides are looking for clues as to how a juror may think and what biases the juror may have. In a bench trial, we seek to learn everything we can about the judge’s prior rulings and predilections. That’s because litigators know the power of these fact finders. And the way their perceptions of the facts impact the interpretation of law.

Here, unlike jurors and jurists, the Director wears two hats. The Director leads a governmental supervisory government agency, created from whole cloth with the goal of being a game changer. The Director also, as PHH found out the hard way in this Decision, reviews the Administrative Law Judge’s findings de novo. See 12 C.F.R. §1081.405(a). The Director is not bound by any finding made previously and is not limited to correct only those determinations which he thinks were taken in error of law or by way of abuse of discretion. The Director simply re-decides the case as he sees fit. Here, Director Cordray saw fit to substantially increase the monetary impact of the prior ruling.

Multiple Bites at the Apple Before a Court Weighs In.

Of course, the Director’s decision can be reviewed in a court of appeals, with the petition due within 30 days of the decision. Under 12 U.S.C. §5563(b)(4) the court of appeals “shall have jurisdiction, which upon the filing of the record shall … be exclusive, to affirm, modify, terminate, or set aside, in whole or in part, the order of the Bureau.”

But let’s remember that the record going up on that appeal includes the Director’s attempt to augment or reiterate any arguments the Director believes the Enforcement Division may have missed in presenting the case at the administrative proceeding trial.   Moreover, there is no automatic stay of the Order once the petition is filed. (See 12 U.S.C. §5563 (b)(5)). Absent a stay, the Director’s Decision requires that the disgorgement amount be paid into an escrow account pending any appeal. (See Decision, p. 37).

Admittedly, the Director did show restraint in not attempting to assess civil money penalties on top of the sizable disgorgement. We do not know whether that was driven by the fact that HUD could not have done so for much of the applicable time period or by the Director’s conscience, or both.

The court of appeals, acting under the scope of review in 5 U.S.C. §706, can set aside the Decision (or parts of it) and can hold unlawful any agency action the court believes is arbitrary, capricious, an abuse of discretion, unlawful, or unsupported by the evidence. Assuming a petition is filed (which PHH indicated it would do in its June 4, 2015 public comment (link below)), it will be fascinating to watch the court’s reactions to and treatment of the Decision.

Proving a Company’s Defense… Who is Listening & To What Facts?

The Plaintiffs’ consumer class action bar has a perspective. I hear it every day. Many distrust large institutions including financial institutions. Many distrust counselors who defend financial institutions in the stringent regulatory environment. Many do not believe that most institutions are just trying to get it right. But here’s the problem, facts and defenses depend on who is assessing them. Director Cordray saw the facts very differently from ALJ Elliot, to the tune of over $100 million differently. The same facts can be used to tell two stories, depending on who is hearing them. Understanding the jury’s perspectives is critical. Will jurors listen to the facts establishing a technical statutory defense? Or will jurors bring to bear their own biases and perspectives to filter those facts in support of an entirely different conclusion.

Director Cordray’s Decision is well written and thorough, but the analysis is driven by strong perspectives. Perspectives subtly expressed in the Introduction. “…Consumers face a pile of documents with all the intricate details of the transaction…. Settlement services are unfamiliar to most consumers….” (See Decision, p. 1, emphasis supplied). Throughout the Decision, barely a judgment call goes in favor of the financial institution. Depending on whether the Director is praised or rebuffed in the court of appeals, the plaintiffs’ bar is likely to incorporate many of the Director’s tactics. The devil has always been in the details with RESPA. Going forward we may need to focus on additional and different details.

For another take on the Decision, plus other important consumer banking developments, see “Game Changing RESPA Enforcement Action” by John ReVeal here.

To read PHH’s June 4, 2015 Comment on the Decision, click here.

To read the CFPB’s Announcement regarding the Decision and Order (with links to copies of them), here.