On April 12, 2016, the Court of Appeals for the D.C. Circuit heard oral arguments in PHH Corp. v. Consumer Financial Protection Bureau, which challenges the CFPB’s imposition of a $109 million penalty for RESPA violations.

The case stems from a 2014 CFPB administrative proceeding alleging that PHH created a kickback scheme, in which it referred mortgage insurance business to mortgage insurers in exchange for entering into reinsurance contracts with PHH’s wholly-owned subsidiary, generating substantial revenue in the form of premiums. PHH argued that the premiums were lawful because it provided actual reinsurance services in exchange for the premiums and was exempt under RESPA Section 8(c)(2) (providing that payments received for actual services performed are not “kickbacks.”) PHH also claimed that its practices conformed to a 1997 HUD Interpretative Letter addressing captive reinsurance and Section 8(c)(2) of RESPA. An administrative law judge rejected PHH’s Section 8(c)(2) defense, concluding that the premiums PHH received exceeded the fair market value of the services performed, and imposed a $6.4 million penalty. PHH appealed to the Director of the CFPB, Richard Cordray. Cordray rejected both PHH’s and the ALJ’s interpretation of Section 8(c)(2), and held that to be lawful, payments for services must be “bona fide” — which he defined as not being tied in any way to a referral of business. Applying this standard, Cordray concluded that all of PHH’s reinsurance payments had been tied to business referrals and therefore violated RESPA. He also rejected the ALJ’s findings concerning the applicable statute of limitations. The ALJ had limited the CFPB’s jurisdiction to premiums associated with loans that closed within a three-year limitations period after the CFPB was created; Cordray asserted that PHH had violated RESPA every time it collected a premium since July 2008, even if the loan had closed years before that. Applying these parameters, Cordray ordered PHH to disgorge $109 million in past payments.

PHH petitioned for review by the D.C. Circuit, challenging the CFPB’s interpretation of Section 8(c)(2) and the applicable statute of limitations. PHH also asserted that the CFPB itself was unconstitutional. Several days before the oral arguments, the D.C. Circuit Panel requested additional briefing on the constitutionality issue, signaling that this likely would be a focal point of the oral argument. Indeed, at the oral argument, two of three judges that participated aggressively questioned the CFPB’s counsel about the CFPB’s structure, particularly the extent of authority vested in a single Director, which one Judge described as “very problematic.” The Panel also indicated concern with the CFPB’s willingness to jettison HUD’s long standing interpretation of Section 8(c), noting that the entire industry had relied upon HUD’s interpretation. Judge Brett Kavanaugh observed that the CFPB’s decision to “pull the plug” was “very problematic.” The Panel was also troubled by Cordray’s seemingly-arbitrary approach to the statute of limitations. Judge Kavanaugh observed that under its theory, the CFPB could impose liability for decades-old conduct. Judge Randolph asked why the standard reasons for having a set limitations period – e.g. difficulty obtaining evidence, loss of memory, etc. – did not apply equally here, forcing the CFPB’s counsel to concede that those reasons were present in this case and that he knew of no legislative history justifying the omission of a statute of limitations for administrative adjudications.

The Panel’s most heated questioning pertained to the structure of the CFPB, particularly that it is headed by a single director who is removable only by the President for cause. Judge Kavanaugh observed that it is “very problematic” that such a powerful official was able to make a decision that aimed to overturn a practice long seen by companies as acceptable. “You are concentrating huge power in a single person and the president has no power over it,” Judge Kavanaugh said. The CFPB has a “very unusual structure” that has “few precedents,” he added. The Panel’s aggressive and sharp questioning of the CFPB may indicate a willingness to declare that the CFPB, in its present form, is unconstitutional and to order significant structural changes, including potentially the elimination of a single Director at the helm.

An audio recording of the oral argument is available here.