On Oct. 11, the U.S. Court of Appeals for the D.C. Circuit deemed the Consumer Financial Protection Bureau (CFPB) “unconstitutionally structured” and overturned its enforcement action, including a $109 million penalty, against PHH Corp., a New Jersey-based mortgage lender. Despite its rulings, the D.C. Circuit made clear that the CFPB will continue to operate and perform its duties.

The CFPB originally fined PHH for an alleged kickback scheme whereby PHH referred customers to insurers who then purchased reinsurance from a PHH subsidiary. In seeking to vacate the enforcement order, PHH made both constitutional and statutory arguments.

Constitutional Arguments

PHH argued that the CFPB’s status as an independent agency headed by a single director violates Article II of the U.S. Constitution. To analyze this issue, the D.C. Circuit employed a “history-focused approach” focusing on separation of powers decisions from the Supreme Court.

The D.C. Circuit observed that “[t]he CFPB’s concentration of enormous executive power in a single, unaccountable, unchecked Director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decisionmaking and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency.” The D.C. Circuit added that the CFPB’s structure lacks critical checks and constitutional protections, despite the agency wielding vast power over the U.S. economy.

In outlining a remedy for these constitutional flaws, the D.C. Circuit rejected calls to shut down the CFPB or invalidate the entire Dodd-Frank Act. Instead, the Court voided the for-cause removal provision, granting the President power to remove the CFPB director at will, and to supervise and direct the director.

Statutory Arguments

As provided below, the Court largely sided with PHH on its three statutory arguments:

  1. PHH argued that Section 8 of the Real Estate Settlement Procedures Act (RESPA) bars so-called captive reinsurance arrangements involving mortgage lenders and their affiliated reinsurers. The Court agreed that Section 8 of RESPA allows captive reinsurance arrangements so long as the amount paid by the mortgage insurer for the reinsurance does not exceed the reasonable market value of the reinsurance.
  2. PHH claimed the CFPB departed from the Department of Housing and Urban Development’s consistent prior interpretations of RESPA, and then retroactively applied its new interpretation of RESPA against PHH. The ourt agreed that the CFPB’s order and retroactive application here “violated bedrock principles of due process.”
  3. PHH contended that much of its alleged misconduct occurred outside of RESPA’s three-year statute of limitations. In rejecting the CFPB’s arguments that a statute of limitations does not exist here, the Court ruled that the three-year statute of limitations that has traditionally applied to agency actions enforcing Section 8 of RESPA will continue to apply.

We will continue to monitor the effects of this significant ruling on financial services companies.

The full text of the decision in PHH Corp. v. CFPB, No. 15-1177 (D.C. Cir. Oct. 11, 2016) can be read here.