As we all know kickbacks are illegal for lenders, real estate agents and other service providers under RESPA (Real Estate Settlement Procedures Act). And as we all know, the CFPB prosecutes with great gusto businesses that follow the law but don’t display the correct spirit. That’s not my term, it’s theirs. Not only does the CFPB prosecute, they also stand as judge and jury. Once you are found guilty of violating RESPA, and you will be, the head of CFPB Richard Cordray will personally decide if the financial penalty is big enough. Frequently he decides it should be much higher and so he increases it. In the case of PHH, the CFPB administrative judge issued a penalty of $6.4 million. Mr. Cordray personally upped the amount to $109.2 million and decided PHH cannot be in the mortgage insurance business for 15 years. Perhaps that is how the CFPB can afford a $95 million remodel?
This type of action is what has provoked PHH to fight Mr.Cordray and the CFPB in court, and thank goodness. To recap, in 2012 CFPB accused PHH of taking illegal kickbacks from a mortgage insurance company PHH referred customers to. No details, just the general accusation. Turns out the company is owned by PHH. PHH gives a written notice to customers notifying them of their ownership and advising them they can shop around and place their PMI (private mortgage insurance) with any company they choose. PHH doesn’t require the PMI, the investor on the loan does. Frequently, that is Fannie Mae or Freddie Mac.
The PHH owned mortgage insurance company follows state and federal regulations and passes audits from various regulatory agencies. It has been established by independent analysis the PMI premium is appropriate to the risk and commensurate with the market place. It is charged by CFPB that the premium is the kickback.
PHH does take profits from the company since it owns the company. Under RESPA as long as PHH owns 1% or more, they can withdraw profits proportional to their ownership interest.
The CFPB first made this accusation in 2012. The statute of limitations on this type of RESPA violation is 3 years, yet CFPB is demanding documents going back to 1995. As it is PHH agreed to make documents available going back to 2006, three years more than required under the law. When reading the request for documents it is clear CFPB is fishing. Which means they don’t really have anything in particular, just a hunch, a feeling, a grudge? In fact, PHH has repeatedly in writing and on the phone requested a specific accusation so that the documents they provide will be germane to the accusation. The CFPB refuses to make a specific accusation, just broad suspicion and request for detailed documents going back almost 20 years detailing every person, including contractors, who have ever worked in the business.
The crux of the matter is exactly this; the CFPB has not made a specific accusation, just a general accusation, and is asking for volumes of documents specifically outside the statute of limitations. How does one defend themselves against a non specific accusation of wrong doing? You can read the PHH responses to the CFPB Civil Investigative Demand (CID) here.
Here is a quick summary of some of PHH’s objections filed with the court:
The CID fails to identify the nature of the conduct under investigation
Dodd-Frank requires the CID “state the nature of the conduct constituting the violation which is under violation”. It must also cite the provision of law being violated.
The CFPB is not entitled to demand materials going back eleven years across the board
The statute of limitation per Dodd-Frank is three years. It is not retroactive. Documents requested by CFPB must be relevant to the violation alleged. Documents dating many years before an alleged violation are not by definition relevant. This is an undue burden. Some documents requested go back 17 years.
Applicable relevancy and reasonableness standard
CFPB’s subpoena power is not limitless and a party under investigation is entitled to know the nature of the alleged conduct. Under Dodd-Frank “Any person compelled to furnish documentary material, tangible things, written reports or answers to questions…. To the Bureau shall be advised of the nature of the conduct constituting the alleged violation that is under investigation and the provisions of law applicable to such violation”. In 1997 the courts held that an agency’s subpoena power cannot be used for fishing expeditions.
The challenged requests in the CID seek irrelevant documents and/or are unreasonable
The CID does not state any specific actions or practices PHH may have violated under Dodd-Frank or RESPA. Yet the CFPB requested all documents over an eleven year period. The requirement that PHH produce an immense amount of irrelevant paperwork, in a specific form detailed by CFPB, is overly broad and unreasonable not to mention costly. And somehow CFPB doesn’t see how PHH is being harmed.
PHH objects to the CID request for material already in possession of the CFPB
The CFPB is already in possession of some of the requested documents and other documents are easily accessible to them. State records, SEC records and HUD records are some of the documents CFPB already has access to.
PHH objects to the CID’s inclusion of:
“Agents, representatives, consultants attorneys, accountants, independent contractors and other persons working for on behalf of the foregoing.” Really, even the janitor is relevant? How about the attorney? Does this mean that when CFPB investigates you no longer have access to attorney/client privilege? Would you be able to reconstruct and contact every person who has worked for you in any capacity over the past 11 years?
The CFPB requested any routine procedures that might result in destruction of material or things that in any way could be potentially relevant. Seriously, how vague can you be? Potentially relevant to an undefined investigation? Routine procedures?
How about this for a CFPB request: a search of all email communications over a minimum 11 year period, perhaps longer. The CFPB wants a complete list of all current and former employees of any division of PHH having anything to do with mortgage insurance, the selection of mortgage insurance providers or oversight. In addition they want a description of each person’s job and the data existing in that person’s custody, now or in the past, a description of the volume and date range. All this had to be handed over to CFPB within 2 days.
What is especially upsetting is that all during this time PHH was in contact with CFPB trying to figure out what exactly they wanted. Instead they were found guilty of something, fined millions of dollars and prevented from doing business.
Think about all this for a moment. There is nothing about this process that allows for due process, nothing that assumes innocence until proven guilty. Over the past several years the CFPB has gotten away with this behavior because the businesses they picked on had to settle and pay the fine in order to preserve a hope of survival. Finally they picked on someone big enough to fight them.
Real estate agents and brokers should be watching this closely. If PHH looses, then we will have confirmation that following the law means nothing. Simply being in business becomes a risk, perhaps too risky.
All Americans should be watching this case. Due process and innocent until proven guilty are cornerstones of our justice system. We have always demanded the state specifically declare, with detail, alleged violations of law. General allegations, about vague wrong doing are not enough to destroy someone’s reputation, business or personal wealth. General searches of property by government in order to “find” a crime have never been acceptable. Adjudicating the allegation of wrong doing and demanding the accuser prove the allegations before issuing punishment is basic to our founding principles.