The DC Circuit Court of Appeals recently held that the single-director structure of the Consumer Financial Protection Bureau (“CFPB”) was unconstitutional, and gave the President the authority to fire the director at will in order to provide a check on the CFPB’s expansive power.

The background of the case can be found here. PHH, a mortgage lender, was the subject of a CFPB enforcement action regarding allegations that it referred consumers to mortgage insurers who then purchased reinsurance from a PHH subsidiary. The captive reinsurance agreements, according to the CFPB, were an illegal kickback scheme and violated the Real Estate Settlement Procedures Act (“RESPA”) that resulted in a $109 million order against PHH. PHH sought to vacate the order. In its appeal, PHH argued that the CFPB, an independent agency headed by a single Director, violates Article II of the Constitution.

The D.C. Circuit agreed with PHH that the single-director structure given to the CFPB by Congress in the 2010 Dodd-Frank Act left the CFPB’s top official without any check on its authority as the director could only be fired by the President for cause. However, rather than dismantling the CFPB, the Court determined that giving the President the authority to fire the director at will would address the question of accountability at the CFPB. In this regard, the Court stated: “The president is a check on and accountable for the actions of those executive agencies, and the President now will be a check on and accountable for the actions of the CFPB as well.”

The Court also found that the CFPB violated PHH’s due process rights by applying a retroactive penalty against PHH, finding that its captive reinsurance agreements violated RESPA. First, the Court noted that the CFPB had reinterpreted RESPA, a rule it inherited from the U.S. Department of Housing and Urban Development (“HUD”), in a way that invalidated HUD’s previous interpretation. HUD’s interpretation was that captive reinsurance arrangements were lawful “as long as the mortgage insurer paid no more than reasonable market value to the reinsurer for reinsurance actually furnished.” According to the Court, “[r]etroactivity — in particular, a new agency interpretation that is retroactively applied to proscribe past conduct — contravenes the bedrock due process principle that the people should have fair notice of what conduct is prohibited.” The D.C. Circuit also found that the CFPB was wrong in asserting that it could bring an administrative case beyond the three-year statute of limitations provided under RESPA. Noting that the CFPB could theoretically bring an action for a violation that occurred a century ago, the Court noted that “[w]e need not wait for an enforcement action 100 years after the fact. This court looks askance now at the idea that the CFPB is free to pursue an administrative enforcement action for an indefinite period of time after the relevant conduct took place.”

Thus, the D.C. Circuit vacated the CFPB’s order and remanded for the CFPB to determine whether consistent with RESPA’s three year statute of limitations, the mortgage insurers paid more than reasonable market value for the reinsurance to PHH’s captive reinsurer. PHH Corp. v. Consumer Financial Protection Bureau, No. 15-1177, (D.C. Cir. Oct. 11, 2016).