The courts are now reacting to what some view as regulatory overreach flowing from U.S. laws enacted in the wake of the financial crisis. The most recent example is the October 11, 2016 decision of the U.S. Court of Appeals for the D.C. Circuit in PHH Corporation v. CFPB, which may have implications for the constitutionality of single-headed independent agencies that exceed their authorities and which may impact the determinations of other such agencies.

To put this decision in some perspective, in March 2016, U.S. District Court Judge Rosemary Collyer in Washington, D.C. invalidated the decision of the Financial Stability Oversight Council designating MetLife a “systemically important financial institution.”1 That ruling is now on appeal to the D.C. Circuit. That court is also deciding Perry Capital v. Lew, a challenge to the long-standing conservatorships of Fannie Mae and Freddie Mac.2 In the PHH case, the D.C. Circuit issued a striking defeat to the Consumer Financial Protection Bureau (CFPB), by finding that: (i) in creating the CFPB, Congress had not satisfied the constitutional requirements for an independent agency; and (ii) the CFPB exceeded and misused its enforcement authority. The decisions in MetLife and PHH are likely to further embolden financial services firms to challenge actions by regulators that such firms perceive to be unauthorized or overreaching.

The PHH case involves a mortgage lender’s challenge to a US$109 million disgorgement order issued by the CFPB, based on the agency’s finding that the lender’s captive reinsurance arrangement with mortgage insurers violated the Real Estate Settlement Procedures Act (RESPA). The court extensively analyzed the history of independent agencies – which it referred to as “a headless fourth branch of the U.S. Government” – noting that, in almost all instances, independent agencies are established as multi-member organizations so as to lessen constitutional concerns regarding the power given to such entities. Relying on Supreme Court separation of powers precedents, the court found that the CFPB was unconstitutionally structured because it is an independent agency headed by a single Director.3 The court, however, fashioned a narrow remedy, concluding that the provision of the Dodd-Frank Act that limited the President’s authority to remove the Director only for cause could be stricken, resulting in the Director’s serving at the will of the President. Significantly, the court relied in part on a severability clause preserving the remainder of the Dodd-Frank Act if any particular provision were to be held unconstitutional. Thus, the court decided that its ruling did not impact the CFPB’s ongoing operations, requiring the court to consider the legality of the CFPB’s actions against PHH.

With regard to the specific enforcement issues of the case, the court concluded that the CFPB applied a new, and unlawful, interpretation of RESPA to PHH. The CFPB had reversed a long-standing position taken by the Department of Housing and Urban Development (HUD), which had interpretive jurisdiction over RESPA prior to the transfer of that authority to the CFPB under the Dodd-Frank Act. The CFPB’s own RESPA regulation, transferred from HUD, continued to reflect HUD’s position. The court thus found the CFPB’s retroactive application of its new position to be a violation of PHH’s due process rights, stating that “[t]he Due Process Clause does not countenance the CFPB’s gamesmanship.” Finally, the court rejected the CFPB’s argument that while judicial actions for violations of RESPA were subject to a statute of limitations, no statute of limitations applies where the CFPB brought an administrative action for an alleged RESPA violation.4

The court remanded the case to the CFPB to allow the agency to consider whether PHH’s conduct was permissible under the court’s ruling regarding the applicable provisions of RESPA.