Director Cordray Conducts First Ever CFPB Enforcement Appeal Hearing

On March 9, 2015, Consumer Financial Protection Bureau (CFPB) Director Richard Cordray held oral arguments in the first appeal of a CFPB administrative enforcement action.  Both counsel for the CFPB and Respondents PHH Mortgage Corporation and Atrium Insurance Corporation appealed to Cordray from the Administrative Law Judge’s (ALJ) Recommended Decision, which ordered Respondents to disgorge over $6 million in referral payments given and received through a “captive” mortgage reinsurance arrangement.  The ALJ held that these payments were “kickbacks” in violation of Sections 8(a) and 8(b) of the Real Estate Settlement Procedures Act (RESPA).  The Recommended Decision also enjoined Respondents from engaging in the “captive” reinsurance business for 15 years, and required the Respondents to disclose to the CFPB within 30 days “all services provided to any of them by any mortgage insurance company since January 1, 2014.”

As Director Cordray observed at the outset of the hearing, because it was the first appeal of CFPB administrative enforcement action under the Title X procedures of the Dodd-Frank Act, the appeal hearing itself and the format for the appeal was precedent-setting.  The CFPB’s Rules of Practice for Adjudication Proceedings provide that any party has the right to file a notice of appeal and file an opening appeal brief after a hearing officer issues a recommended decision in an administrative adjudication.  77 Fed. Reg. 39058, 39100 (June 29, 2012).  The Director may either adopt the recommended decision or order additional briefing “with respect to any findings of fact or conclusions of law contained in the recommended decision.”  Id. at 39058.  And the Director may hold oral argument if the Director determines that it would be helpful.  Id. at 39081.  Beyond those proscriptions, however, there was no certainty on how the hearing should proceed.

During the hearing, Director Cordray allowed each party thirty minutes to develop their arguments with few interruptions, and conducted the proceeding in a manner less formal than a traditional judicial appeal.  Respondents’ counsel began his argument by asking a rhetorical question of Director Cordray’s experience as a state attorney general, which, surprisingly, Director Cordray then answered. Director Cordray also tipped his hand on some of the relevant legal issues, telling counsel for the CFPB that he was “not persuaded” that the caselaw supported their theory that Respondents’ captive reinsurance arrangement was a “continuing violation,” which would make each violation actionable even if it occurred outside the limitations period.  Director Cordray also stated in response to the CFPB’s argument that he thought “the ALJ handled offsets in a sensible manner.”

Although CFPB administrative appeal hearings resemble judicial appeals in form, there are some key procedural differences.  The CFPB’s Office of Administrative Adjudication considers itself “an independent judicial office,” but an ALJ’s recommended decision only becomes final upon review by the CFPB Director, which raises natural questions regarding the “independence” of the administrative process.  The CFPB’s Rules also require that a recommended decision “be supported by reliable, probative, and substantial evidence,” 77 Fed. Reg. at 39099, but the standard of review to be applied by the Director on appeal is unclear.

Director Cordray’s decision will be closely watched given the implications it has for the agency’s administrative process and the broader political scrutiny of the CFPB.  In a recent speech criticizing the SEC’s increasing reliance on in-house adjudications, U.S. District Court Judge Jed Rakoff noted that the SEC won 100% of its administrative enforcement actions for the fiscal year ending September 30, 2014, compared with a success rate of only 61% for its federal court trials during the same period, which raises some concern about process.  The CFPB’s administrative process and other aspects of the agency itself raise similar questions, and likely will be put under the political microscope regardless of Director Cordray’s decision.  Because both the CFPB and Respondents appealed the ALJ’s Recommended Decision, Director Cordray could deny both appeals, which would give the appearance of impartiality while simultaneously giving the CFPB a significant enforcement victory and staving off further criticism of the CFPB.

Given the substantial procedural and home-court advantages, consumer finance companies should be prepared for the CFPB to increasingly rely on administrative enforcement actions, especially given that Section 1055 of the Dodd-Frank Act permits the CFPB to seek the same remedies in administrative proceedings that it can in federal court.  With fewer procedural protections in the administrative process and appellate review by the CFPB’s Director, targets of CFPB administrative actions should also be wary of their chances of success.  LenderLaw Watch will continue to follow this matter and report on the outcome of Director Cordray’s decision and the implications it carries.