In the latest development in PHH Corp. v. Consumer Financial Protection Bureau (CFPB), PHH and the Bureau have both filed letters addressed to the D.C. Circuit arguing over the impact of a recent Supreme Court decision on the case. At issue is whether the Supreme Court’s decision in Encino Motorcars, LLC v. Navarro, No. 15-415 (U.S. June 20, 2016) eliminates the usual deference courts would give to the CFPB’s interpretation of the Real Estate Settlement Procedures Act (RESPA), under which the Bureau penalized PHH to the tune of $109 million.
As we previously reported, PHH is appealing the penalty imposed on it by the Bureau under Director Richard Cordray’s June 4, 2015 decision for alleged violations of RESPA related to mortgage reinsurance. Among the issues on appeal in PHH is Cordray’s decision not to follow the Housing and Urban Development’s (HUD) previous interpretation of RESPA as it relates to mortgage reinsurance arrangements. HUD was the agency responsible for enforcing RESPA before the CFPB assumed responsibility for enforcement in 2011. In a 1997 letter, HUD opined that captive reinsurance arrangements are permissible under RESPA so long as the payments are for services actually performed, and are bona fide compensation that does not exceed the value of the services. In making this determination, HUD read Section 8(c)(2) of RESPA to provide an exemption to Section 8(a), which generally prohibits the exchange of any fee or thing of value pursuant to an agreement to refer settlement service business.
Based in part on the HUD letter, the administrative law judge who first heard the PHH case also interpreted Section 8(c)(2) to provide an exemption to Section 8(a). Cordray, however, rejected that interpretation, instead concluding that Section 8(c)(2) merely clarifies Section 8(a) in situations where there is some question whether the parties actually entered into an agreement to refer settlement service business, and does not provide an exemption to Section 8(a).
On June 23, PHH called the D.C. Circuit’s attention to Encino, where the Supreme Court held that the U.S. Department of Labor’s interpretation of the Fair Labor Standards Act (FLSA) should not receive Chevron deference. Chevron deference—to which the CFPB claims it is entitled in the PHH case—is given to an agency’s interpretation of a statute that the agency is responsible for enforcing, so long as the statute is ambiguous and the agency’s interpretation is reasonable. In Encino, the Department of Labor reversed its long-standing interpretation that automobile dealer service advisors are covered by an exemption from overtime pay requirements in FLSA. In issuing its interpretation, the Department of Labor “offered barely any explanation” for its changed position, despite the fact that its new interpretation “could necessitate systemic, significant changes” in the industry. The Supreme Court noted that an “unexplained inconsistency” in an agency’s interpretation can render its interpretation arbitrary and capricious, in which case the interpretation “is itself unlawful and receives no Chevron deference.” Ultimately, the Court held that the Department of Labor needed “a more reasoned explanation” for its decision to depart from its existing policy, and noted that agencies must “be cognizant that longstanding policies may have ‘engendered serious reliance interests that must be taken into account.’”
In its letter to the Court, PHH argues that Cordray likewise “reversed a longstanding interpretation” of RESPA “on which the entire industry had relied for years” and that he “barely acknowledged” PHH’s reliance interests on the previous policy, “spurning them as ‘not particularly germane.’” The Director’s summary rejection of HUD’s interpretation, PHH argues, renders the CFPB’s policy arbitrary and capricious, and it should receive no deference under Chevron.
In its response letter filed on June 27, the CFPB remained dismissive of PHH’s arguments, commenting that the 1997 HUD letter was “nothing more than an unofficial staff interpretation,” and that industry members “relied on it at their own risk.” Otherwise, the CFPB argues that Director Cordray’s interpretation of RESPA was reasonable, and that the court should give it Chevron deference.
PHH was argued on April 12, 2016, and the decision of the D.C. Circuit is still pending.