In a significant setback for the Consumer Financial Protection Bureau (CFPB), a panel of the D.C. Circuit held that the CFPB's structure violated the U.S. Constitution and invalidated a CFPB order that had imposed a $109 million civil penalty and broad injunctive relief on mortgage lender PHH for alleged violations of the Real Estate Settlement Practice Act (RESPA). The CFPB had found that PHH violated RESPA's ban on referral payments by entering into captive reinsurance arrangements. That is, PHH would refer its borrowers to mortgage insurers, who would in turn purchase mortgage reinsurance from a PHH subsidiary. The CFPB concluded that the insurers' commitment to buy reinsurance from a PHH subsidiary violated Section 8(a) of RESPA which bars the payment or receipt of "any fee, kickback, or thing of value" for a referral in connection with a covered "real estate settlement service." In doing so, the CFPB rejected PHH’s argument that the mortgage insurers were paying reasonable market rates for the reinsurance, and, therefore, that its conduct was specifically permitted by Section 8(c) of RESPA, which states that "the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed" is not prohibited.

By a 2-1 vote, the Court held that the CFPB's organizational structure is unconstitutional, in essence because Congress gave the CFPB Director too much power to act on his own – i.e., without being supervised by the President or sharing power with a multi-member board. And, the panel unanimously agreed that the CFPB's order was invalid because its order misinterpreted RESPA, disregarded the applicable three-year statute of limitations and had been made unlawfully retroactive without fair notice.

The CFPB's Structural Constitutional Problem

The Court viewed the constitutional problem as arising from two related Dodd-Frank provisions. The first grants unified control over the CFPB to the Director, who acts as the singular "head of the Bureau." 12 U.S.C. § 5491(b)(1). The second states that the President (who is elsewhere authorized to appoint the Director), "may remove the Director," but only in cases of "inefficiency, neglect of duty, or malfeasance in office." 12 U.S.C. § 5491(c)(3). These provisions, plus the CFPB's power to enforce consumer protection laws, including by imposing monetary penalties, led the D.C. Circuit to conclude that when measured in terms of his power to act unilaterally, "the Director of the CFPB is the single most powerful official in the entire U.S. Government, other than the President." Op. 25. It further held that this "concentration of enormous executive power in a single unaccountable, unchecked Director" (Op. 27) violates constitutional separation of powers principles—the rules, that is, that govern the allocation of power within the federal government.

Though the Constitution gives the President express power to appoint high-ranking government officials, it does not clearly state who has the power to remove such officials from office. The broad general consensus, however, is that the power to remove goes hand-in-hand with the President’s appointment power. A related and more controversial question has been whether Congress may adopt statutes that regulate or limit the President's exercise of the removal power. The courts have said the answer is "sometimes." They have indicated that there are officers (such as the heads of traditional cabinet agencies like the Department of Defense) who cannot be insulated from the President's removal power. On the other hand, they have held that Congress may validly protect the commissioners of "independent" agencies like the Federal Trade Commission or the Securities and Exchange Commission from removal, permitting them to be fired only in limited circumstances, such as in cases of official misconduct while in office.

The CFPB contended that these same precedents support the validity of the removal protection that the Director enjoys. The D.C. Circuit disagreed. It viewed multi-member agencies like the Federal Trade Commission and Securities and Exchange Commission as categorically distinct because "no single commissioner or board member possesses authority to do much of anything" without persuading others to go along. Op. 44. The Court held that an official invested with powers like the Director’s cannot be insulated from Presidential control, at least where the official can take significant official acts without the concurrence of one or more other officials. It concluded that the appropriate remedy is to invalidate the provision that insulates the Director from the President’s removal power.

Judge Henderson dissented from this portion of the Court's decision. She did not address the majority's analysis, but contended that it was unnecessary to decide the constitutional question because the CFPB’s order was invalid for independently sufficient reasons.

The full ramifications of the Court's constitutional holding are not entirely clear at this time. The decision leaves the Bureau's powers largely unchanged. As the Court emphasized, the CFPB "will continue to operate and to perform its many duties." Op. 10. The difference the Court envisioned is that "the President now will be a check on and accountable for the actions of the CFPB." Op. 10. Thus, for example, the decision opens the door for the CFPB Director to be replaced upon a change in administration. Whether the White House actually decides to oversee the CFPB in the manner of ordinary executive branch agencies remains to be seen. It is possible that occupants of the White House will prefer to let the Bureau operate with its accustomed independence rather than embrace accountability for the CFPB's decisions, or that Congress would resist presidential efforts to oversee the CFPB. In other words, the political branches will have a say in whether the Court's decision changes, in practical ways, the relationship between the President and the Director.

Critically, in light of the Court's telling footnote, questions will also be raised about the "legal ramifications of [the Court’s] decision for past CFPB rules or for past agency enforcement actions." Op. 69 n. 19. The Court did not decide whether those past agency actions are affected by its ruling, leaving open for future cases whether prior CFPB orders and regulations are subject to challenge on the ground that they were imposed by an agency at a time when it was unconstitutionally structured.

The CFPB's $109 Million Order Held Invalid

The Court also held that CFPB's order penalizing PHH was legally invalid in several pivotal respects. These holdings may prove helpful to financial institutions defending enforcement actions by the CFPB, even apart from the specific RESPA issues involved.

First, at times the CFPB has taken aggressive positions, both in litigation and negotiations, with respect to the statute of limitations that applies to its enforcement actions and the periods for which the Bureau may attempt to recover consumer remediation. In this case, the CFPB took the position that there was no statute of limitations on administrative enforcement for RESPA violations, even though there is a three-year statute of limitations on such enforcement matters brought in court. Characterizing the Bureau's position as "absurd," the court concluded that the CFPB is subject to the statute of limitations in the federal consumer financial services statute (e.g., RESPA) when it enforces the statute under the Dodd-Frank Act, and that the three-year statute of limitations on agency enforcement in court contained in RESPA also applies to such enforcement actions in the CFPB's administrative law judge proceedings. Op. 100. This reasoning should apply equally to other federal consumer financial services statutes enforced by the CFPB, such as the Truth in Lending Act and the Electronic Fund Transfer Act.

Second, the CFPB has revisited many positions established by the Federal Reserve and other banking agencies under the many federal consumer financial services statutes that the CFPB now administers. Often these new CFPB positions have been established in enforcement actions, without the benefit of public notice and comment, and financial institutions have not been given adequate time to adjust their practices to comply prospectively with new interpretations. This decision holds that the CFPB's enforcement action violated PHH's due process rights by retroactively applying a new legal interpretation to conduct that occurred before the new interpretation. In particular, the Court emphasized the Supreme Court's recent statement in Christopher v. SmithKline Beecham Corp. that
"[i]t is one thing to expect regulated parties to conform their conduct to an agency's interpretations once the agency announces them; it is quite another to require regulated parties to divine the agency's interpretations in advance or else be held liable when the agency announces its interpretations for the first time in an enforcement proceeding and demands deference." Op. 85-86.

Moreover, the panel's concept of fair notice appears quite broad. The court rejected the CFPB's arguments that nothing in the interpretive letter expressly gave regulated entities a reason to rely on the CFPB's position, noting it found the argument "deeply unsettling in a Nation built on the Rule of Law." Op. 87. Judge Kavanaugh elaborated that "[w]hen a government agency officially and expressly tells you that you are legally allowed to do something, but later tells you 'just kidding' and enforces the law retroactively against you and sanctions you for actions you took in reliance on the government's assurances, that amounts to a serious due process violation. The rule of law constrains the governors as well as the governed." Id. (emphasis in original). The court also rejected the argument that the due process protections did not apply because the agency position was not set forth in a formal regulation, finding top agency officials repeatedly gave the guidance at issue and concluding that the Due Process clause "does not countenance the CFPB’s gamesmanship." Op. 88.

Finally, with respect to the particular substantive issue under RESPA, the court soundly rejected the CFPB's new interpretation, saying that the "case is not a close call." The PHH court rejected the CFPB's argument that the RESPA prohibition on paying referral fees is violated by an arrangement in which one company agrees to refer customers to another company in exchange for the purchase of another service, albeit at a reasonable market rate. Instead, the court concluded that RESPA does not prohibit a tying arrangement so long as the only payments exchanged are bona fide (i.e., fair market value) payments for goods or services and not payments for referrals. The court refused to provide Chevron deference to the CFPB's RESPA interpretation because it found that the statute was not ambiguous and concluded that policy issues related to whether the practices being challenged should be prohibited should be addressed to Congress and the President.