The US Court of Appeals for the District of Columbia Circuit has overruled the Consumer Financial Protection Bureau’s (CFPB) decision to prohibit PHH Corporation’s captive reinsurance arrangement.
The appeals court also threw out a $109 million penalty awarded against the mortgage lender, and took the decision to place the CFPB under the purview of the US president.
In its decision issued earlier in October, the appeals court ruled: “We agree with PHH that Section 8 of the act allows captive reinsurance arrangements so long as the amount paid by the mortgage insurer for the reinsurance does not exceed the reasonable market value of the reinsurance.”
The CFPB “incorrectly interpreted” Section 8 of the Real Estate Settlement Procedures Act to bar captive reinsurance arrangements involving mortgage lenders such as PHH and their affiliated reinsurers when it issued the $109 million penalty.
The appeals court was damning in its verdict of the CFPB, which was created by the US Dodd-Frank Act following the 2008 financial crisis as an independent agency but without any significant oversight. PPH questioned the constitutionality of this structure in its appeal against the penalty.
“The [CFPB] director enjoys more unilateral authority than any other officer in any of the three branches of the US government, other than the president,” the appeals court claimed.
“In this case, the single-director structure of the CFPB represents a gross departure from settled historical practice. Never before has an independent agency exercising substantial executive authority been headed by just one person.”
The appeals court handed over supervision of the CFPB to the US president, giving the highest office in the US “the power to remove the director at will, and to supervise and direct the director”.
“We are extremely gratified that the DC Circuit Court of Appeals overturned the director’s decision related to our former mortgage reinsurance activities,” PPH said in a statement.
“We are hopeful that the court’s opinion will provide greater certainty to the entire mortgage industry regarding the industry’s reliance on long-standing regulation as to how to conduct business consistent with the Real Estate Settlement Procedures Act.”
“Regarding the court’s decision to remand the case to the CFPB to determine whether any mortgage insurers paid more than reasonable market value to the PHH-affiliated reinsurer, we will continue to present the facts and evidence to demonstrate that we complied with the Real Estate Settlement Procedures Act and other laws applicable to our former mortgage reinsurance activities in all respects.”
