Enforcement: PHH Suit Gone but Other Enforcement Activity Continues

Financial Services Law

As the Consumer Financial Protection Bureau (CFPB or Bureau) withdraws from enforcement, activity continues in the courts and with certain other regulators. In Texas, a federal court denied a stay of the looming compliance date for the Payday, Vehicle Title and Certain High-Cost Installment Loans Rule; the CFPB dropped the long-running PHH litigation; state attorneys general called for the consumer complaint database to remain public; and the Bureau released its first complaint snapshot since Mulvaney took leadership.

In addition, other regulators continue to remain active, with new settlements and orders announced by the Federal Trade Commission (FTC) and Federal Deposit Insurance Corp. (FDIC).

What happened

PHH—In a move away from the Bureau’s former reputation as an instrument for consumer advocates, the CFPB formally dismissed its longstanding enforcement action against PHH Corp. The move came as no surprise.

The high-profile dispute began under Director Cordray’s leadership, when the Bureau argued that the company violated Section 8(a) and 8(c)(2) of the Real Estate Settlement Procedures Act (RESPA) for accepting improper kickbacks. An administrative law judge imposed a $6.4 million penalty against PHH, but Cordray upped the ante with a $109 million order, or full disgorgement. PHH not only appealed the new interpretation of RESPA and the judgment, but also included a direct challenge to the constitutionality of the CFPB.

Although a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit agreed that as an independent agency with a single director, the Bureau was unconstitutional, the en banc panel reversed in January 2018, finding the CFPB structure to be constitutional.

However, the court vacated the $109 million penalty and sent the case back to the CFPB for review. In response, the parties filed a joint statement recommending the case be dismissed, and on June 7, Mulvaney agreed, dismissing the action.

“Thus, it is now the law of this case that PHH did not violate RESPA if it charged no more than the reasonable market value for the reinsurance it required the mortgage insurers to purchase, even if the reinsurance was a quid pro quo for referrals,” Mulvaney wrote, terminating the matter.

Payday Rule—Another high-profile inheritance from the prior administration is the Payday, Vehicle Title and Certain High-Cost Installment Loans Rule. The rule, among other new consumer protections, declares it an “unfair and abusive practice” for any lender to make covered short-term or longer-term balloon payment loans before reasonably determining that consumers have the ability to repay the loans according to their terms.

Two industry groups filed suit, arguing that the Bureau failed to comply with the Administrative Procedure Act when it promulgated the rule. In May, the parties filed a joint request asking a Texas federal court to stay both the case and the rule itself, scheduled to take effect Aug. 19, 2019.

U.S. District Judge Lee Yeakel agreed that the litigation should be stayed due to pending agency rulemaking to reconsider the rule. However, he denied without explanation the motion to stay the compliance date.

State AGs Push Back—The Bureau also faced pushback from a coalition of 14 state attorneys general, who wrote in response to one of the CFPB’s many requests for information. Led by New York’s new AG Barbara D. Underwood, the regulators wrote to urge the Bureau to keep its consumer complaint database open to the public.

“As the chief consumer protection officers of our states, we have found the database to be an invaluable resource to identify trends and patterns, and to determine if an issue is widespread or isolated,” the AGs from California, Delaware, Hawaii, Illinois, Iowa, Maryland, Massachusetts, Minnesota, New York, North Carolina, Oregon, Pennsylvania, Vermont and Washington wrote. “In addition to the benefits the database provides to our offices and other state consumer protection agencies, it also represents an admirable commitment to transparency that benefits all Americans.”

The database fulfills a statutory requirement, the AGs argued, pointing to one of the six “primary functions” of the CFPB as set forth by Dodd-Frank: “collecting, researching, monitoring and publishing information relevant to the functioning of markets for consumer financial products and services to identify risks to consumers and the proper functioning of such markets,” with the letter emphasizing the term “publishing.”

Consumers can make informed decisions to avoid bad actors in the marketplace, responsible companies are able to identify problems and better understand their customers, and law enforcement can identify patterns of misconduct by product, industry and geographic region, all thanks to the database, the AGs said.

The letter noted that press reports have suggested the Bureau has already made the decision to cut public access to the database (based on Mulvaney’s statement at an industry conference declaring “I don’t see anything in here [Dodd-Frank] that says I have to run a Yelp for financial services sponsored by the federal government”).

“We are submitting this letter with the expectation that the CFPB will respect the request for comments and information process it has initiated and will carefully weigh the comments it receives,” the AGs wrote. “We urge the CFPB to retain the public consumer database as it serves consumers, state law enforcement and honest businesses.”

CFPB Complaint Report—In other Bureau news, the CFPB released its first complaint report since Mulvaney was appointed acting director. “Complaint snapshot: Debt collection” included complaint data as of April 1, 2018, with debt collection complaints accounting for roughly 400,500, or 27 percent of the approximate 1,492,600 complaints.

The most common concerns shared by consumers included attempts to collect a debt not owed (39 percent), written notification about a debt (17 percent) and communication tactics (17 percent).

FTC Enforcement—The FTC reached deals in two separate actions that had been initiated under prior commission members involving a student loan services scam and “phantom debt” collectors.

In the first case, two entities were named in one of the agency’s Operation Game of Loans initiative, accused of violating the FTC Act, the Telemarketing Sales Rule and the Credit Repair Organizations Act by falsely promising to reduce or eliminate student loan debt and offering nonexistent credit repair services while illegally charging upfront fees. The defendants “bilked millions of dollars” from consumers, the FTC alleged, in some instances pretending to be from the Department of Education.

Pursuant to the settlement, the defendants in one action are permanently banned from debt relief and credit repair activities; a $17 million judgment was partially suspended after payment of roughly $4 million. In the second, the $9 million judgment was similarly put on hold due to inability to pay, and the defendants face a prohibition on debt relief and telemarketing activities.

In a second action, the agency reached a deal with a debt collection operation and its principals over charges the defendants used false threats (such as arrest and imprisonment) to get people to pay for debts they did not owe. The defendants used trade names that sounded like law firms in order to trick consumers into paying the nonexistent debts, the FTC alleged.

The stipulated final order entered in North Carolina federal court bans the defendants from debt collection activities as well as buying or selling debt. The multimillion-dollar judgment against the defendants will be partially suspended after the surrender of specific assets.

FDIC Activity—The latest FDIC consent orders from the regulator included actions against banks for unsafe or unsound banking practices as well as Bank Secrecy Act and anti-money laundering (BSA/AML) violations.

In the case of a South Dakota-based financial institution, the FDIC ordered the bank to retain qualified management, develop an independent external loan review, adopt a risk reduction plan, limit extension of credit to adversely classified borrowers, and develop a written plan to address weaknesses in the bank’s audit and internal controls and procedures.

In another matter involving a Maryland bank, the consent order instructs the financial institution to address the alleged BSA/AML violations by performing an enhanced risk assessment of the bank’s operations, revising and implementing internal controls for BSA/AML compliance, and taking whatever additional steps are necessary to achieve compliance (including retaining qualified management and increasing board participation).

To read the CFPB blog post about disbanding the advisory groups, click here.

To read the order in In re PHH Corp., click here.

To read the order in Community Financial Services Ass’n of America v. CFPB, click here.

To read the letter from the AGs, click here.

To read the complaint snapshot, click here.

To read about the Game of Loans settlement, click here.

To read the complaint and stipulated final order in the phantom debt case, click here.

To read the FDIC consent order with the South Dakota bank, click here.

To read the FDIC consent order with the Maryland bank, click here.

Why it matters

Since Acting Director Mulvaney took over leadership of the CFPB last November, he has made it his mission to level what he viewed as an imbalance in the Bureau’s regulatory and enforcement efforts tipped in favor of consumers. Those efforts are clear in the disbanding of the three advisory groups and the dismissal of the case against PHH Corp. Whether the CFPB has tipped the scales too far in the opposite direction—as many critics maintain—is a question for another day.