CFPB Denies Appeal; Significantly Boosts Penalty For PHH

Posted by Patrick Barnard on June 05, 2015 No Comments
Categories : Residential Mortgage

In his first decision in the appeal of a bureau administrative enforcement proceeding, Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB), upheld an earlier ruling by Administrative Law Judge Cameron Elliot that mortgage company PHH Corp. illegally referred consumers to mortgage insurers in exchange for kickbacks. However, Cordray boosted the penalty to be paid by the firm by more than 17 times to $109 million.

In a decision that no doubt sent shivers through the spines of many mortgage executives, Cordray says Judge Elliot's original ruling – which had limited PHH's violations to kickbacks that were connected with loans that closed on or after July 21, 2008 – had been miscalculated and issued a final order that requires PHH to pay about $109 million. That's far greater than the $6.4 million the firm was to pay under the original decision.

In his 38-page opinion, Codray wrote that the formula used in the first decision to determine the penalty was flawed because it did not take into account the way mortgage reinsurance premiums are paid.

Rather than coming 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, Cordray wrote.

‘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,’ he wrote.

As a result, the number of violations was substantially increased.

The alleged kickback scheme was uncovered as the result of an investigation launched by the Office of the Inspector General at the U.S. Department of Housing and Urban Development (HUD) in July 2011. That investigation, which was later taken over by the CFPB, revealed that when PHH originated mortgages, it referred consumers to mortgage insurers with which it partnered – a violation of the Real Estate Settlement Procedures Act (RESPA). In exchange for this referral, these insurers purchased ‘reinsurance’ from PHH's subsidiaries, Atrium Insurance Corp. and Atrium Reinsurance Corp.

The CFPB alleged in its original order that these reinsurance fees were, in essence, kickbacks and that consumers ended up paying more in mortgage insurance premiums as a result. It further alleged that from the start of the arrangements, and continuing into at least 2009, PHH manipulated its allocation of mortgage insurance business to maximize kickback reinsurance payments for itself.

The CFPB also claimed that PHH set up a system whereby it received as much as 40% of the premiums that consumers paid to mortgage insurers, collecting hundreds of millions of dollars in kickbacks.

In some cases, PHH charged more money for loans to consumers who did not buy mortgage insurance from one of its kickback partners, the bureau said in a January 2014 release. This was achieved by charging the consumers additional percentage points on their loans.

When the case was first announced last year, the bureau noted that an administrative law judge from within the bureau's Office of Administrative Adjudication would rule on the case. The bureau said at the time that its administrative proceedings are similar to those of other federal regulators, including the Securities and Exchange Commission, the Federal Trade Commission, and prudential regulators like the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp.

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