The D.C. Circuit held oral arguments on April 12, 2016 in the case PHH Corp v. Consumer Financial Protection Bureau (CFPB), a case challenging the CFPB’s constitutionality as well as its interpretations of the Real Estate Procedures Settlement Act (RESPA), including its view that no statute of limitations applies to RESPA violations challenged by the Bureau in an administrative proceeding. As we noted previously, CFPB Director Richard Cordray, in the Bureau’s first appellate decision, imposed a $109 million penalty on PHH for alleged RESPA violations involving improper kickbacks related to mortgage reinsurance where agreements were in place with lenders, a dramatic increase over the $6 million penalty that had been imposed by the administrative law judge at the trial level.
Several aspects of yesterday’s oral arguments signal trouble for the CFPB:
- First, the D.C. Circuit seemed deeply concerned by the CFPB’s single-director structure. Unlike other federal agencies governed by nonpartisan or bipartisan commissions or by a director who serves at the pleasure of the President, the CFPB is headed by a single director who is removable only “for cause.” Moreover, the Bureau receives funding outside of Congressional appropriations, further insulating it from any effective executive or legislative supervisions. As Judge Brett Kavanaugh pointedly observed, this arrangement concentrates huge amounts of power in one person with little oversight. Signaling that an unconstitutional finding could be on the horizon, Judge Kavanaugh questioned to what the remedy should be if the court determined that this structure was unconstitutional. The Bureau argued that any defect could be remedied simply by invalidating Dodd-Frank’s “for cause” requirement, such that the director would serve at the pleasure of the President. Counsel for PHH urged the court not only to find the Bureau’s structure unconstitutional, but also to rule upon the merits of the challenge and vacate Director Cordray’s decision in the case.
- Second, the court also seemed troubled by the Bureau’s interpretations of RESPA. PHH has argued that it, as well as the mortgage industry as a whole, had relied upon pre-CFPB interpretations of RESPA section 8(c) by the Department of Housing and Urban Development (HUD), which it contends permitted the arrangements challenged by the Bureau in this case. According to PHH, the CFPB turned the tables on it after the Bureau began enforcing RESPA in 2011 – and in particular with the Director’s decision in the PHH case – in a way that was unfair and violated due process. Appearing sympathetic to this argument, Judge Kavanaugh questioned whether the CFPB gave fair notice of its interpretation, and alluded to the widespread understanding in the industry that such arrangements were legal under the prior HUD guidance. In a colorful comment, Judge Kavanaugh analogized the CFPB’s sanction of PHH to a police officer saying “you may cross the street here,” but then giving you a $1000 ticket when you get to the other side.
- Third, the court seemed skeptical of the Bureau’s position that no statute of limitations applies to RESPA violations challenged by the Bureau in administrative proceedings. According to the CFPB, the statute of limitations related to RESPA does not apply to agency actions or decisions, but only applies to court or judicial proceedings. Judge Randolph expressed skepticism with this argument, observing that in cases dating back to the 1800s, the court has said it would be an “abomination to have a federal official not bound by a statute be allowed to bring an action decades after the event.”
Although a written decision by the panel is expected this summer, it is highly likely that the disappointed party will seek review by the full D.C. Circuit, and perhaps eventually by the Supreme Court.