While certainly a big blow to the Bureau, the court’s remedy did not go as far as some CFPB opponents would have liked.

In a blockbuster ruling on October 11, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the structure of the Consumer Financial Protection Bureau (CFPB or Bureau), through which the agency is headed by a single director who is not subject to removal without cause, is unconstitutional. The court also set aside an enforcement action that resulted in a $109 million order against PHH, a non-bank mortgage lender. In its 110-page decision, the court stopped short of shutting down the Bureau and instead provided a more narrow remedy, which includes giving the president the power to remove the Bureau’s director at will and sending the enforcement action back to the CFPB for further review. This much-anticipated ruling represents a major hit to the Bureau.


The CFPB ordered mortgage lender PHH to pay $109 million for allegedly violating the Real Estate Settlement Procedures Act (RESPA) by accepting kickbacks from mortgage insurers and ultimately raising the cost for home buyers who needed mortgage insurance. The case was first sent to an administrative judge, who found that PHH violated the law and issued an order requiring PHH to disgorge $6.5 million in ill-gotten gains. However, CFPB Director Richard Cordray overturned the administrative judge’s order and instead imposed a $109 million fine on the company. PHH appealed the director’s decision and sought to vacate the order.

Unconstitutional Argument

PHH argued that the CFPB’s status as an independent agency headed by a single director violates Article II of the U.S. Constitution. The court agreed. The court stated that the “overarching constitutional concern with independent agencies is that the agencies are unchecked by the President, the official who is accountable to the people and who is responsible under Article II for the exercise of executive power.”1 The court pointed out that “[n]o head of either an executive agency or an independent agency operates unilaterally without any check on his or her authority. Therefore, no independent agency exercising substantial executive authority has ever been headed by a single person. Until now.”2 As such, the court found that the CFPB’s structure of power that is concentrated in a single person who is unaccountable to the president represents a structure that is unconstitutional.

PHH argued that the constitutional flaw means that the court must shut down the entire agency until Congress, if it chooses, passes new legislation fixing the constitutional flaw. However, the court took a more narrow approach and simply severed the statute’s unconstitutional provision from the statute. That results in the president’s now having the power to remove the director at will and to supervise and direct the director. In doing so, the court allows the CFPB to continue operating and performing its duties, but it must “do so as an executive agency akin to other executive agencies headed by a single person, such as the Department of Justice and the Department of Treasury.”3


PHH argued that the CFPB incorrectly interpreted section 8 of RESPA to bar captive reinsurance arrangements involving mortgage lenders such as PHH and their affiliated reinsurers. The court agreed with PHH that captive reinsurance arrangements are allowed under section 8 of RESPA so long as the amount paid by the mortgage insurer for the reinsurance does not exceed the reasonable market value of the reinsurance. The court remanded to the lower court the question of whether the relevant mortgage insurers paid more than reasonable market value to the PHH-affiliated reinsurer.

Due Process and Statute of Limitations

Another key issue raised by PHH was that the CFPB departed from consistent prior interpretations issued by the Department of Housing and Urban Development and that the CFPB then retroactively applied its new interpretation of RESPA against PHH, thereby violating PHH’s due process rights. The court agreed with PHH and ruled that it violated “bedrock principles of due process.”4

Additionally, the court addressed the question of whether a statute of limitations applied to the CFPB’s enforcement effort. The Bureau has taken the position that, under the Dodd-Frank Act, there are no statutes of limitations for any CFPB administrative actions to enforce any consumer protection law. The court disagreed and held that a three-year limit applies to the enforcement of the alleged kickback violations, which prevents the CFPB from attempting to punish alleged conduct that took place before then.

This ruling is likely to have a significant impact on the way the Bureau approaches enforcement and should end the CFPB’s practice of looking back to seek compensation for transgressions from many years ago, even before the formation of the Bureau.

What Happens Now?

The court granted PHH’s petition for review, vacated the CFPB’s order, and remanded to the CFPB for further proceedings consistent with the opinion of the court. In doing so, the CFPB may determine, within the applicable three-year statute of limitations, whether the relevant mortgage insurers paid more than reasonable market value to the PHH-affiliated reinsurer.

Pepper Points

  • While certainly a big blow to the Bureau, the court’s remedy did not go as far as some CFPB opponents would have liked. Many Republicans have called for eliminating the Bureau altogether or, in the alternative, replacing the director with a multimember commission. This ruling provides a different course in which the Bureau proceeds with a single director, but one who is answerable to the president and can be removed without cause.

  • This ruling potentially could turn the CFPB into a political football, depending on who occupies the White House, since the CFPB is now treated as any other federal agency where the head can be replaced solely at the discretion of the president.

  • The more important issue in the case is the RESPA analysis since the court strongly rebuked the CFPB for its de novo interpretation of section 8 of RESPA and its position that no statute of limitations applies to administrative actions.

  • The strong language of the court will no doubt fuel efforts by those in Congress who believe the CFPB needs to have an oversight board and be subject to the congressional appropriations process.