On November 25, 2014, US Securities and Exchange Commission Administrative Law Judge (ALJ) Cameron Elliot issued the first-ever "recommended decision" in a contested Consumer Financial Protection Bureau (CFPB) adjudication.
In In re PHH Corporation, et. al., the CFPB alleged that PHH Corporation and its affiliates (residential mortgage lenders) had been engaged in an illegal kickback scheme. According to the CFPB, PHH did business exclusively with mortgage insurance companies that had agreed to purchase reinsurance from a wholly owned PHH subsidiary, at supposedly exorbitant rates. The CFPB claimed that PHH's reinsurance agreements violated the Real Estate Settlement Procedures Act, which prohibits kickbacks in exchange for referrals in real estate transactions.
After 300 days of vigorous litigation, SEC ALJ Elliot agreed with the CFPB, granting limited injunctive relief and finding PHH and its affiliates liable for more than $6 million in disgorgement damages—far less than the $430 million of disgorgement and civil penalties sought by the CFPB. Judge Elliot's recommended decision will become final, and judicially reviewable, after the Director of the CFPB, Richard Cordray, approves the decision.
Although the PHH case ultimately turned on contested questions of fact, the case may offer a preview of what to expect in future CFPB adjudications. A few things stand out:
- The CFPB runs a "rocket docket" and disposes of cases quickly, compared to the federal courts. By regulation, CFPB ALJs are required to issue recommended decisions no later than 300 days after charges are filed, while it might take years to resolve a comparable case in federal court. Charges in this case were filed on January 29, and the hearing began on March 24. Prior to and during the course of the hearing, Judge Elliot conducted multiple rounds of dispositive briefing.
- The CFPB is not directing smaller matters to administrative adjudication. As noted, the CFPB sought damages of $430 million. The decision in this case exceeded 100 pages even through previous rulings on dispositive motions had significantly narrowed the issues and Judge Elliot took judicial notice of many relevant facts.
- Although PHH was ultimately held liable for only a fraction of the damages that the CFPB sought, it would be a mistake to underestimate the potential for huge liability in CFPB adjudications. Civil penalties can run up to $1 million per day for knowing violations. The reason that Judge Elliot did not assess civil penalties was that he considered the violations to have occurred on the day each loan closed, which in this case was before the CFPB had been granted the authority to issue penalties.
- The CFPB's mandatory disclosure rule is not a substitute for civil discovery. The CFPB is required to provide "documents obtained ... prior to the institution of proceedings, from persons not employed by the Bureau, in connection with the investigation leading to the institution of proceedings." In this case, the CFPB provided PHH with a hard drive that contained every document that PHH had produced in response to a wide-ranging investigation the previous year. This production occurred just five weeks before the hearing commenced. PHH objected to the document dump, arguing that it constituted "trial by ambush." Judge Elliot, however, sided with the CFPB, finding that the Bureau had satisfied its disclosure obligations under the regulations. PHH also filed a "Motion Requesting a List of Documents withheld by Enforcement Counsel," which Judge Elliot denied. He concluded that the regulations do not require any type of privilege log, and, moreover, that certain documents such as work product are not subject to production in the first instance, so they cannot properly be considered "withheld." It is clear that, especially considering the expedited time frame of CFPB enforcement actions, respondents should not count on the CFPB's disclosures, but should build their own cases as soon as an enforcement action seems likely.
PHH filed a notice of appeal to Director Cordray on December 4, and a motion to extend time to file an opening brief on December 9.
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