A Legal Battle Brews Over the Power of America's Consumer Finance Watchdog – Wall Street Journal

Richard Cordray, director of the Consumer Financial Protection Bureau.

Richard Cordray, director of the Consumer Financial Protection Bureau.


Tom Williams/CQ Roll Call

WASHINGTON—In late 2014, an in-house judge for the government’s new consumer-finance watchdog ruled that a New Jersey lender took illegal “kickbacks” from mortgage insurers, boosting costs for borrowers. The company said the decision invoked a new, overly aggressive interpretation of an old law and appealed to the agency chief.

That gambit backfired in a big way and launched a legal battle over the man who has become one of the country’s most powerful financial regulators.

When Richard Cordray, director of the Consumer Financial Protection Bureau, responded seven months later, he not only upheld the decision, he ordered lender PHH Corp.


to cough up $109 million in allegedly ill-gotten gains. That was $103 million—or 18 times—more than the judge sought. Mr. Cordray has said that he applied the law more strictly than had been common since its 1974 enactment, a move he justified as part of his bureau’s postcrisis mission to toughen decades of lax consumer protection.

The argument has moved to a federal appeals court. Advocates from left and right have jumped into PHH Corporation. et al v. CFPB, scheduled to receive a District of Columbia Circuit Court of Appeals hearing on April 12. A “breathtaking assertion of raw administrative power,” the U.S. Chamber of Commerce said in a brief supporting the plaintiff. Underscoring the case’s broader implications for the industry’s long-standing practices, mortgage bankers, home builders and a dozen other groups also back PHH’s case, being argued by Theodore Olson, a leader of the Washington conservative legal community who was solicitor general under President George W. Bush.

The agency’s powers are justified “to protect consumers from widespread abuses in the financial services market place,” countered a brief by AARP Inc., the seniors advocacy group.

“The PHH lawsuit is the first serious test of the CFPB’s enforcement authority,” said Isaac Boltansky, an analyst for Compass Point Research & Trading, an investment firm specializing in financial services. “If the court rules against the bureau, the calls for a change to its leadership structure will intensify.”

The court case is just one sign that, four years after the agency’s creation, debate rages over its authority to police a vast swath of the sector, from credit cards and mobile-phone payments to college accreditation.

Opposition has grown as the agency ventures into businesses previously escaping federal scrutiny, like payday lending and credit-reporting agencies. The bureau has filed hard-to-prove charges of alleged racial discrimination in auto loans and drawn criticism with proposed mandatory arbitration curbs facilitating lawsuits against service providers from banks to nursing homes.

One conservative-leaning group aired a television ad depicting the CFPB as a Soviet-style bureaucracy. In an email to staff following its broadcast, Mr. Cordray—a veteran Ohio Democratic politician who served as state attorney general—quoted Winston Churchill: “You have enemies? Good. That means you’ve stood up for something, sometime in your life.”

Mr. Cordray declined an interview request. A CFPB spokesman declined to comment for this article.

The argument often turns on the CFPB’s “single-director” structure—an unusual system designed to empower its leader to make sweeping changes swiftly.

The director is appointed to a five-year term by the president, with wide discretion to implement and enforce rules, in contrast with committee-based agencies—like the five-member Securities and Exchange Commission— where commissioners from both parties vote on major decisions.

For CFPB opponents, the PHH case highlights problems with that structure, as the 56-year-old Mr. Cordray, whose term began in 2012, could single-handedly overrule a judge and impose a penalty based on a new legal interpretation, without advance notice. At the SEC, reversing such a ruling requires a unanimous commission vote.

Defenders of Mr. Cordray note the bureau has largely met timetables for primary rule making required by the 2010 Dodd-Frank financial-overhaul law, while the SEC has missed key deadlines. They say its concentrated power offers better protection than oversight previously fragmented among seven other agencies. The CFPB says since its creation it has handled more than 770,000 complaints and provided more than $11 billion in compensation for alleged damages to more than 25 million consumers.

Some congressional Republicans have tried to turn the CFPB into an SEC-like multimember commission but have been stymied by Democratic lawmakers and President Barack Obama. A GOP victory in November’s elections would likely prompt a CFPB overhaul.

Meantime, critics are working the courts, as they have against other Obama policies, from health to the environment.

Multiple lawsuits have challenged CFPB constitutionality. While most have been dismissed, one from a small Texas bank—handled by C. Boyden Gray, White House counsel under the first President Bush—is currently on the docket of the District of Columbia District Court. Briefs are due by March.

The PHH case revolves around the CFPB’s new hard-line interpretation of the four-decade-old Real Estate Settlement Procedure Act, designed to keep lenders and realtors from inflating home-sale transaction costs. Respa had been enforced by the Department of Housing and Urban Development, which opened the PHH probe. The CFPB picked up responsibility for Respa, and the PHH case, shortly after it began operating.

PHH, based in Mount Laurel, N.J., has roots dating to the 1950s, emerging in its current form in 2005 when spun off from Cendant Corp., a travel and housing company now called Avis Budget Group.


PHH is part of the rapidly growing sector of nonbank mortgage providers. It said it closed $36 billion in mortgage financing while servicing 1.1 million loans in 2014.

The company said it provides “end-to-end mortgage solutions”—and the practice triggering the investigation involved a reinsurance business the lender ran on the side.

The CFPB said PHH referred borrowers to mortgage-insurance companies and in return pressured those insurers to buy its affiliate’s reinsurance. The CFPB said that allowed PHH to collect up to 40% of the mortgage insurance premiums—“hundreds of millions of dollars” over a number of years—effectively raising consumer costs. In his ruling, Mr. Cordray called those payments “kickbacks.”

The two sides disagree little on the facts and largely agree Mr. Cordray interpreted Respa differently than HUD. They disagree on whether he had a more appropriate reading of the law or a “radical” reinterpretation, as PHH said in one filing.

PHH said Mr. Cordray departed “drastically from precedent” by declaring the company not only violated the law when it originated a reinsurance contract but committed a “continuing violation” with each monthly payment. That was the difference between the judge’s $6 million penalty and Mr. Cordray’s $109 million.

Mr. Cordray wrote that his reading of the law simply differed from HUD’s. In one passage, he wrote: “To the extent” HUD guidance had been “inconsistent with my textual and structural interpretation” of RESPA, “… I reject it.” In another, he said the in-house judge had “misunderstood” the case he used as a precedent.

“This brazen disregard for judicial authority, agency precedent and fair notice is a symptom of the larger constitutional problems,” PHH argued in one court filing. “The CFPB places legislative, executive and judicial power all ‘in the same hands’ of a single person—what James Madison called ‘the very definition of tyranny.’”

Write to Yuka Hayashi at

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