Unconstitutional structure
Order invalid

In a significant setback for the Consumer Financial Protection Bureau (CFPB), a panel of the DC Circuit held that its structure violates the Constitution and invalidated its order to impose a $109 million civil penalty and broad injunctive relief on mortgage lender PHH for alleged violations of the Real Estate Settlement Procedures Act.


The CFPB had found that PHH violated the Real Estate Settlement Procedures Act's ban on referral payments by entering into captive reinsurance arrangements. That is, PHH would refer its borrowers to mortgage insurers, which in turn would 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 the act, 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 the act, 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.

Unconstitutional structure

By a two-to-one vote, the court held that the CFPB's organisational structure was unconstitutional, in essence because Congress gave the CFPB's director too much power to act on his own (ie, without being supervised by the president or sharing power with a multi-member board). The panel unanimously agreed that the CFPB's order was invalid because it misinterpreted the Real Estate Settlement Procedures Act, disregarded the applicable three-year statute of limitations and had been made unlawfully retroactive without fair notice.

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".(1) The second states that the president – who is elsewhere authorised to appoint the director – "may remove the Director", but only in cases of "inefficiency, neglect of duty, or malfeasance in office".(2) These provisions – plus the CFPB's power to enforce consumer protection laws, including imposition of monetary penalties – led the DC 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 – that is, the rules governing the allocation of power within the federal government.

Presidential control
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. However, the general consensus 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 answered 'sometimes'. They have indicated that certain officers, including the heads of traditional cabinet agencies such as the Department of Defence, 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 – such as the Federal Trade Commission or the Securities and Exchange Commission – from removal, permitting them to be fired only in limited circumstances, such as in case 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 DC Circuit disagreed; it viewed multi-member agencies such as 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" (Op 44) without persuading others to go along. The court held that an official invested with powers such as those of the director 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 CFPB's powers largely unchanged. As the court emphasised, the CFPB "will continue to operate and to perform its many duties" (Op 10). The difference that 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 director to be replaced upon a change in administration. Whether the White House 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 CFPB operate with its accustomed independence, rather than embrace accountability for its 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 practice, the relationship between the president and the director.

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, 19). The court did not decide whether those past agency actions are affected by its ruling – leaving future cases open on whether prior CFPB orders and regulations are subject to challenge on the grounds that they were imposed by an agency at a time when it was unconstitutionally structured.

Order invalid

The court also held that the CFPB's order penalising PHH was legally invalid in several pivotal respects. These holdings may prove helpful to financial institutions defending enforcement actions by the CFPB, apart from the specific Real Estate Settlement Procedures Act issues involved.

Statute of limitations
At times the CFPB has taken aggressive positions, in both litigation and negotiations, with respect to the statute of limitations that applies to its enforcement actions and the periods for which it 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 Real Estate Settlement Procedures Act violations, even though there is a three-year statute of limitations on such enforcement matters brought in court. Characterising the CFPB's position as "absurd", the court concluded that the CFPB is subject to the statute of limitations in the federal consumer financial services statute (eg, the Real Estate Settlement Procedures Act) 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 the Real Estate Settlement Procedures Act also applies to such enforcement actions in the CFPB's administrative law judge proceedings (Op 100). This reasoning should also apply to federal consumer financial services statutes enforced by the CFPB, such as the Truth in Lending Act and the Electronic Fund Transfer Act.

Retroactive enforcement
The CFPB has revisited many positions established by the Federal Reserve and other banking agencies under the many federal consumer financial services statutes that it now administers. Often these new positions were established in enforcement actions without the benefit of public notice and comment, and without giving financial institutions adequate time to adjust their practices to comply prospectively with new interpretations. The court held 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 emphasised the Supreme Court's recent statement in Christopher v SmithKline Beecham Corp:

"It 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 to 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 its position, noting that it found the argument "deeply unsettling in a Nation built on the Rule of Law" (Op 87). Judge Kavanaugh elaborated that:

"When 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." (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 that 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).

Misinterpretation of Real Estate Settlement Procedures Act
Finally with respect to the particular substantive issue under the Real Estate Settlement Procedures Act, 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 act's 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 the act does not prohibit a tying arrangement, so long as the only payments exchanged are bona fide (ie, fair market value) payments for goods or services, and not payments for referrals. The court refused to provide Chevron deference to the CFPB's Real Estate Settlement Procedures Act interpretation because it found that the statute was not ambiguous, and concluded that policy issues on whether to prohibit the practices being challenged should be addressed to Congress and the president.

For further information on this topic please contact James A Huizinga, Kwaku A Akowuah or John K Van De Weert at Sidley Austin LLP by telephone (+1 202 736 8000) or email ([email protected], [email protected] or [email protected]). The Sidley Austin LLP website can be accessed at www.sidley.com.


(1) 12 USC Section 5491(b)(1).

(2) 12 USC Section 5491(c)(3).