On October 11, 2016, the United States Court of Appeals for the D.C. Circuit issued a highly anticipated decision in PHH Corp. v. CFPB (Case No. 15-1177). In a 110-page decision, the D.C. Circuit held that the CFPB's structure as a single-director independent agency is unconstitutional. The decision on the constitutional issue, however, may have "important but limited real-world implications." The Court described its remedy, severing the "for-cause" removal provision from the Dodd-Frank Act, as a "targeted remedy" that "will not affect the ongoing operations of the CFPB."
The Court's decision comes as part of a closely watched case in which PHH, a nonbank mortgage lender, appealed CFPB Director Richard Cordray's $109 million order against the firm for allegedly improper payments involving mortgage reinsurance arrangements. Importantly, the Court's decision made clear that it was not disbanding the CFPB, but instead severing the "for cause" provision of the CFPA. In other words, the President can now remove the CFPB Director "at will" and can "supervise and direct" the Director, and need not rely on a case of "inefficiency, neglect of duty, or malfeasance in office" to remove the Director.
In addition, the Court also made three additional rulings on PHH's substantive statutory arguments:
(1) consistent with long-standing guidance from the Department of Housing and Urban Development (HUD), Section 8 of the Real Estate Settlement Procedures Act (RESPA) allows captive mortgage reinsurance arrangements, as long as the amount paid for the reinsurance does not exceed reasonable market value;
(2) the CFPB violated PHH's due process rights by retroactively applying a new RESPA Section 8 interpretation that contravened this prior guidance against PHH without fair notice; and
(3) the CFPA incorporates the statutes of limitations of the underlying statutes enforced by the CFPB, including for actions brought in the CFPB's administrative proceedings.
In addressing the unconstitutional nature of the CFPB's single-director structure, the Court explained that the "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 decision-making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency." To remedy this constitutional flaw, the Court held that the "for-cause" provision of the CFPA must be severed from the rest of the statute, such that the President can now remove the Director "at will." However, the Court made clear that the CFPB will continue to operate as it has in the past, but will now be under the "ultimate supervision and direction of the President."
The Court's rulings as to PHH's substantive statutory arguments are likely to have more immediate impact. First, the Court rejected the CFPB's new interpretation of RESPA Section 8, noting that this was "not a close call" and that the CFPB's interpretation "upends the entire system of unpaid referrals that has been part of the market for real estate settlement services." The Court also rejected the CFPB's argument that the Bureau's interpretation should be afforded Chevron deference, explaining that no deference was warranted because the "safe harbor" provision of RESPA Section 8(c) "clearly permits captive reinsurance arrangements so long as the mortgage insurer pays reasonable market value for reinsurance actually provided."
Second, the Court ruled that even if the CFPB's new interpretation comported with the statute (which it did not), the CFPB violated PHH's due process rights by retroactively applying its new interpretation to conduct that pre-dated that new interpretation. The Court equated the CFPB's enforcement conduct to a scenario where a police officer tells a pedestrian that she can cross the street lawfully, and then says "just kidding" and hands her a jaywalking ticket when she reaches the other side. According to the Court, this "gamesmanship" by the CFPB violates bedrock principles of due process. Notably, the Court remanded the case for further proceedings on whether the relevant mortgage reinsurers actually paid reasonable market value, which is what RESPA proscribes and what the long-standing HUD guidance provided.
Third, a precursor issue to the inquiry on remand into reasonable market value is the question of whether PHH's relevant activity occurred outside of the applicable statute of limitations. In its decision, the Court rejected the CFPB's "alarming" and "absurd" interpretation of the Dodd-Frank Act that the no statute of limitations applies to CFPB administrative actions. The Court also expressed concern that "the CFPB's Dodd-Frank-based argument – if accepted . . . would apply not only to action to enforce Section 8" but would "extend to all 19 of the consumer protection laws that Congress empowered the CFPB to enforce." The Court made clear the CFPB's interpretation was at odds with the plain language of the Dodd-Frank Act, Supreme Court precedent, and the broad history and purpose of statutes of limitations, explaining that "[a] much more logical, predictable interpretation of the agency's authority is that three-year limitations period in Section 2614 [of RESPA] applies equally to CFPB court actions and CFPB administrative actions." In other words, the CFPB cannot "circumvent" the statute of limitations in RESPA (or, presumably, other consumer financial protection laws and the Dodd-Frank Act itself) by proceeding administratively.
Although the CFPB may appeal the panel's decision to the entire D.C. Circuit en banc or seek certiorari to the U.S. Supreme Court, the decision is nonetheless likely to have considerable impact on CFPB's enforcement actions in the future.