11. Commitments and Contingencies

Legal Contingencies

The Company and its subsidiaries are routinely, and currently, defendants in various legal proceedings that arise in the ordinary course of PHH's business, including class actions and other private and civil litigation. These proceedings are generally based on alleged violations of consumer protection laws (including the Real Estate Settlement Procedures Act ("RESPA")), the Telephone Consumer Protection Act of 1991 and the Servicemember's Civil Relief Act of 2003, employment laws, laws governing our mortgage servicing and lending activities and contractual obligations. Similar to other mortgage loan originators and servicers, the Company and its subsidiaries are also routinely, and currently, subject to government and regulatory examinations, investigations and inquiries or other requests for information. The resolution of these various legal and regulatory matters may result in adverse judgments, fines, penalties, injunctions and other relief against the Company as well as monetary payments or other agreements and obligations. In particular, legal proceedings brought under RESPA and other federal or state consumer protection laws that are ongoing, or may arise from time to time, may include the award of treble and other damages substantially in excess of actual losses, attorneys' fees, costs and disbursements, and other consumer and injunctive relief. These proceedings and matters are at varying procedural stages and the Company may engage in settlement discussions on certain matters in order to avoid the additional costs of engaging in litigation.

The outcome of legal and regulatory matters are difficult to predict or estimate and the ultimate time to resolve these matters may be protracted. In addition, the outcome of any legal proceeding or governmental and regulatory matter may affect the outcome of other pending legal proceedings or governmental and regulatory matters.

A liability is established for legal and regulatory contingencies when it is probable that a loss has been incurred and the amount of such loss can be reasonably estimated. The Company recognizes legal costs associated with loss contingencies as they are incurred. In light of the inherent uncertainties involved in litigation, legal proceedings and other governmental and regulatory matters, it is not always possible to determine a reasonable estimate of the amount of a probable loss, and the Company may estimate a range of possible loss for consideration in its estimates. The estimates are based upon currently available information and involve significant judgment taking into account the varying stages and inherent uncertainties of such matters. Accordingly, the Company’s estimates may change from time to time and such changes may be material to the consolidated financial results.

As of June 30, 2018, the Company’s recorded liability associated with legal and regulatory contingencies was $16 million and is presented in Other liabilities in the Condensed Consolidated Balance Sheets. Given the inherent uncertainties and status of the Company’s outstanding legal proceedings, the range of reasonably possible losses cannot be estimated for all matters. For matters where the Company can estimate the range, the Company believes reasonably possible losses in excess of the recorded liability are not significant as of June 30, 2018.

There can be no assurance that the ultimate resolution of these matters will not result in losses in excess of the Company’s recorded liability, or in excess of the estimate of reasonably possible losses. As a result, the ultimate resolution of any particular legal matter, or matters, could be material to the Company’s results of operations or cash flows for the period in which such matter is resolved.

In March 2018, the Company entered into a Release and Settlement Agreement with an insurance carrier to settle certain claims and other matters associated with the Company's previously disclosed legal and regulatory settlements. The Company received a settlement payment of $15 million during the three months ended March 31, 2018 which was accounted for as a gain when the payment was received, and recorded within Other income in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). In addition, the Company is currently in discussions with its insurance carriers about additional insurance claims for other regulatory matters and any insurance proceeds from these claims would represent a gain contingency which will be recognized if, and when, realized or realizable and earned.

The following are descriptions of the Company’s significant legal and regulatory matters:

BCFP Enforcement Action. In January 2014, the Bureau of Consumer Financial Protection (the “BCFP”) initiated an administrative proceeding alleging that the Company’s reinsurance activities, including its mortgage insurance premium ceding practices, have violated certain provisions of RESPA and other laws enforced by the BCFP. Through its reinsurance subsidiaries, the Company assumed risk in exchange for premiums ceded from primary mortgage insurance companies.

In June 2015, the Director of the BCFP issued a final order requiring the Company to pay $109 million, based upon the gross reinsurance premiums the Company received on or after July 21, 2008. Subsequently, the Company filed an appeal to the United States Court of Appeals for the District of Columbia Circuit (the “Court of Appeals”).

In October 2016, the Court of Appeals issued its decision, vacating the decision of the Director of the BCFP, and finding in favor of the Company’s arguments, among others, around the correct interpretations of Section 8 of RESPA, the applicability of prior HUD interpretations around captive re-insurance and the applicability of statute of limitations to administrative enforcement proceedings at the BCFP. In February 2017, the Court of Appeals granted the BCFP's request to rehear the case en banc and oral arguments took place in May 2017.

In January 2018, the en banc Court of Appeals reinstated the October 2016 panel decision as it related to the RESPA issues, which included vacating the BCFP’s order imposing $109 million in disgorgement penalties. In February 2018, the en banc court remanded the matter back to the BCFP for further proceedings in compliance with the reinstated panel opinion. In June 2018, the Acting Director of the BCFP filed an Order to dismiss the administrative proceeding against the Company which closed out the matter without penalty. There was no impact to the Company’s financial statements during the six months ended June 30, 2018 from this matter.

Other Subpoenas and Investigations. The Company previously disclosed that it had received a document subpoena from the U.S. Attorney’s Office for the Southern District of New York which requested production of certain documents related to, among other things, foreclosure expenses that the Company incurred in connection with the foreclosure of loans insured or guaranteed by FHA, Fannie Mae or Freddie Mac. In March 2018, the United States District Court for the Southern District of New York entered an order unsealing a qui tam lawsuit that originally had been filed in that District in 2012, and which had been the basis for the government’s investigation. At that time, the Court also disclosed that the U.S. Attorney’s Office for the Southern District of New York has declined to intervene against all servicer defendants named in the qui tam complaint, including the Company. Notwithstanding the decision of the U.S. Attorney's Office, in April 2018 the private plaintiff that had initiated the qui tam suit filed a Third Amended Complaint in that action naming a number of servicer defendants and other defendants, including the Company. The Company subsequently filed a motion to dismiss, and in June 2018 the United States District Court for the Southern District of New York issued an order granting the Company’s motion and dismissed the claims against the Company with prejudice. The action remains pending with respect to certain other servicer defendants.

Repurchase and Foreclosure-Related Reserves

Repurchase and foreclosure-related reserves are maintained for probable losses related to repurchase and indemnification obligations and for on-balance sheet loans in foreclosure and real estate owned. A summary of the activity in repurchase and foreclosure-related reserves is as follows:



	Six Months Ended June 30,
	2018			2017
	(In millions)
Balance, beginning of period	$	40		$	73
Realized losses	(4		)	(13		)
Increase (decrease) in reserves due to:
Changes in assumptions	(1		)	2
New loan sales	—			1
Balance, end of period	$	35		$	63

Repurchase and foreclosure-related reserves consist of the following:



	June 30, 2018		December 31, 2017
	(In millions)
Loan repurchase and indemnification liability	$	27	$	29
Adjustment to value for real estate owned	6		9
Allowance for probable foreclosure losses	2		2
Total	$	35	$	40

Loan Repurchases and Indemnifications. The liability for loan repurchases and indemnifications represents management’s estimate of probable losses based on the best information available and requires the application of a significant level of judgment and the use of a number of assumptions including borrower performance, investor demand patterns, expected relief from the expiration of repurchase obligations, the expected success rate in defending against requests and estimated loss severities.

The Company's exposure to repurchase and indemnification claims consists primarily of estimates for claims from private investors, losses for specific non-performing loans where the Company believes it will be required to indemnify the investor and losses from government mortgage insurance programs. As of June 30, 2018, the estimated amount of reasonably possible losses in excess of the recorded liability was not significant.

The maximum amount of losses cannot be estimated because the Company does not service all of the loans for which it has provided representations or warranties. As of June 30, 2018, $39 million of loans have been identified in which the Company has full risk of loss or has identified a breach of representation and warranty provisions; 20% of which were at least 90 days delinquent (calculated based upon the unpaid principal balance of the loans).