You may have heard by now that the CFPB has suffered a serious setback in the case of PHH Corporation v. CFPB. The U.S. Court of Appeals for the District of Columbia issued its opinion on Tuesday that sided with the mortgage company. The CFPB had fined the mortgage company over $100 million for practices that it found to be in violation of the Real Estate Settlement Procedures Act. As a result, PHH went on offense by challenging the authority of the CFPB.
The Court agreed with PHH's arguments. In essence, the Court held that the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, unconstitutionally permits the CFPB's Director to serve in such a manner that he or she is not subject to removal by the President. Constitutional scholars have expressed reservations about Dodd-Frank based upon the inability of the President to fire the CFPB Director at will--a fundamental power that a President must have with respect to the heads of Executive Departments. The Court noted the difference between the CFPB and other so called "independent agencies of government" formed by statute that are run by committees--such as the Federal Trade Commission and the Securities and Exchange Commission. In the Court's opinion, this distinction renders the CFPB Director's service without "serving at the pleasure of the President" to be unconstitutional.
While PHH won this battle, it didn't necessarily win the war. The remedy for such defect in Dodd-Frank, said the Court, is simply to make Director Cordray's tenure subject to the will of the President. And, that is what the Court ordered, which fixed that issue.
But, more important than this issue, which has received all of the press coverage, was the decision of the Appeals Court to side with PHH on two more very important issues:
First, PHH argued successfully that the CFPB is making and applying regulatory interpretations retroactively. Industry has long argued that when the CFPB took over regulatory enforcement authority under Dodd-Frank from the Federal Reserve Board and the Department of Housing and Urban Development, in regulating Truth-in-Lending and RESPA respectively, it could not just make up the rules as it went along, not bound by the precedent of the prior regulators. The Court of Appeals agreed with PHH that this approach by the CFPB was a violation of the due process rights of PHH.
Second, the Court ruled that the CFPB must respect statutes of limitation when it undertakes a review of conduct of a company. The significance of this cannot be overstated. The reason that the Bureau's settlements have been so draconian is due in large part to their ability to challenge conduct of a company going back for many, many years. In other words, the CFPB has not, until now, been constrained by the applicable statute of limitations. This makes a considerable difference in its bargaining strength.
While it remains to be seen whether the CFPB appeals the decision to the U.S. Supreme Court, it is clear that a serious chink has been put in the CFPB's previously impenetrable armor.