In a landmark decision impacting the consumer financial services industry and beyond, a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit has declared unconstitutional a core component of the structure of the Consumer Financial Protection Bureau (CFPB), and overturned a $109 million penalty against mortgage lender PHH Corporation (PHH), allegedly for improper kickbacks under the Real Estate Settlement Procedures Act (RESPA).

In June 2015, CFPB director Richard Cordray added $103 million to what was originally a $6.4 million penalty imposed by an administrative law judge. Cordray's ruling concluded that PHH's actions violated Section 8(a) and 8(c)(2) of RESPA, ordering PHH to disgorge all $109 million its captive reinsurance subsidiary had received in reinsurance premiums since July 2008. PHH appealed from this ruling, challenging not just the RESPA interpretation as contrary to longstanding agency guidance, but also the very constitutionality of the CFPB.

Constitutionality of the CFPB

Noting that the Dodd-Frank statute granted the CFPB director unfettered powers, and that he could be dismissed only for cause, the court commented that Cordray "enjoys significantly more unilateral power than any single member of any other independent agency." Indeed, "other than the President, the Director of the CFPB is the single most powerful official in the entire United States Government, at least when measured in terms of unilateral power," because Congress failed to grant the president the power to discharge the director at will. This, the court concludes, makes the CFPB power structure unconstitutional. "As an independent agency with just a single Director, the CFPB represents a sharp break from historical practice, lacks the critical internal check on arbitrary decisionmaking, and poses a far greater threat to individual liberty than does a multi-member independent agency." Therefore, the Court concludes, the CFPB must now operate as an executive agency, with the president granted the power to supervise and direct its director, plus the power of removal at any time, for any reason. Although the court hinted during oral argument, and PHH likewise argued, that there were other aspects of the CFPB that rendered it unconstitutional, the court declined to reach that result.


The court was likewise troubled by the CFPB's attempt to reverse longstanding analysis of RESPA section 8(a) that directly supported PHH's position. Section 8(a) of the Act bans payments for referrals in the real estate settlement process. Section 8(a) provides: "No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person." Id. § 2607(a). Section 8(c)(2) provides that "Nothing in this section shall be construed as prohibiting . . . (2) 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." In these enforcement proceedings, the CFPB declared illegal PHH's practice of reinsuring mortgage insurers that had been referred to borrowers. PHH argued that this practice was legal under RESPA because the mortgage insurers would pay no more than reasonable market value to the PHH-affiliated reinsurer for the reinsurance they purchased, and thus the mortgage insurers were paying reasonable market value for reinsurance, as allowed by the statute's safe harbor at section 8(c)(2). Reviewing the statutory text, the court agreed with PHH. "Section 8(c) specifically bars the aggressive interpretation of Section 8(a) advanced by the CFPB in this case. Section 8(c) was designed to provide certainty to businesses in the mortgage lending process. The CFPB's interpretation flouts that statutory goal and upends the entire system of unpaid referrals that has been part of the market for real estate settlement services."

There were due process concerns as well. For many years, HUD, the agency charged with interpreting these same provisions, agreed with PHH's position that payment of reasonable market value for settlement services performed was not a violation of Section 8. And when the CFPB was assigned this regulatory authority, it blessed the prior interpretations. Addressing the obvious due process concerns with the CFPB's action in overturning this precedent, the court put it in simple terms: "Imagine that a police officer tells a pedestrian that the pedestrian can lawfully cross the street at a certain place. The pedestrian carefully and precisely follows the officer's direction. After the pedestrian arrives at the other side of the street, however, the officer hands the pedestrian a $1,000 jaywalking ticket. No one would seriously contend that the officer had acted fairly or in a manner consistent with basic due process in that situation. Yet that's precisely this case. Here, the CFPB is arguing that it has the authority to order PHH to pay $109 million even though PHH acted in reliance upon numerous government pronouncements authorizing precisely the conduct in which PHH engaged."

Rejecting the kind of regulation through enforcement that has marked numerous CFPB actions to date, the court then stated as follows: "The CFPB obviously believes that captive reinsurance arrangements are harmful and should be illegal. But the decision whether to adopt a new prohibition on captive reinsurance arrangements is for Congress and the President when exercising the legislative authority. It is not a decision for the CFPB to make unilaterally." The case was remanded to the CFPB for further review consistent with the court's decision.

A copy of the decision may be found here.