In a divided ruling of the entire U.S. Court of Appeals for the D.C. Circuit, the court held today that the Consumer Financial Protection Bureau (CFPB) structure is constitutional, reflecting a legislative desire to establish a truly independent agency. The ruling reverses the key ruling in an earlier decision of a three-judge panel of the same court, while reinstating the earlier panel’s rejection of the CFPB’s “absurd” analysis of the anti-kickback provisions of the Real Estate Settlement Procedures Act (RESPA).

What happened

As we earlier reported, a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit in October 2016 declared unconstitutional a core component of the structure of the Consumer Financial Protection Bureau. In that earlier ruling, the court was deeply concerned that the Dodd-Frank statute granted the CFPB director unfettered powers, allowing the director’s dismissal only for cause. Indeed, said that court, then-Director Richard Cordray “enjoys significantly more unilateral power than any single member of any other independent agency.” Prohibiting the President from dismissing the director except for cause makes the CFPB power structure unconstitutional, said the court: “As an independent agency with just a single Director, the CFPB represents a sharp break from historical practice, lacks the critical internal check on arbitrary decisionmaking, and poses a far greater threat to individual liberty than does a multi-member independent agency.” Therefore, the court concluded, the CFPB must now operate as an executive agency, with the President granted the power to supervise and direct its director, plus the power of removal at any time, for any reason.

The three-judge panel was likewise troubled by the CFPB’s attempt to reverse the industry’s longtime understanding of RESPA section 8(a), which directly supported the regulated entity’s position. Section 8(a) of the act bans payments for referrals in the real estate settlement process, as follows: “No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” Id. § 2607(a). Section 8(c)(2) provides that “[n]othing in this section shall be construed as prohibiting . . . (2) 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.” In these enforcement proceedings, the CFPB declared illegal PHH’s practice of reinsuring mortgage insurers that had been referred to borrowers. PHH argued that this practice was legal under RESPA because the mortgage insurers would pay no more than reasonable market value to the PHH-affiliated reinsurer for the reinsurance they purchased, and thus the mortgage insurers were paying reasonable market value for reinsurance, as allowed by the statute’s safe harbor at section 8(c)(2). Reviewing the statutory text, the court agreed with PHH, concluding: “Section 8(c) specifically bars the aggressive interpretation of Section 8(a) advanced by the CFPB in this case. Section 8(c) was designed to provide certainty to businesses in the mortgage lending process. The CFPB’s interpretation flouts that statutory goal and upends the entire system of unpaid referrals that has been part of the market for real estate settlement services.”

The entire D.C. Circuit then accepted en banc review, vacating the October 2016 ruling. The case was argued in May 2017, so its decision was long awaited.

Writing for an 8–3 majority, Judge Nina Pillard expressly disagreed with the three-judge panel’s view on CFPB director independence. “Congress’s decision to provide the CFPB Director a degree of insulation,” she wrote, “reflects its permissible judgment that civil regulation of consumer financial protection should be kept one step removed from political winds and presidential will. We have no warrant here to invalidate such a time-tested course.”

On RESPA, and as the dissent recognizes, the court reaches a very different conclusion. In rulings reinstated by the panel, the court rejects (1) then-Director Cordray’s new interpretation of the RESPA anti-kickback provision; (2) Cordray’s attempt to apply that interpretation retroactively to the regulated entity; (3) his construction of RESPA’s limitations provision; and (4) his theory that the CFPB is bound by no limitations period in any administrative enforcement action under any of the laws the agency administers. As the three-judge panel noted at the time, the issues were not even “a close call.” To the contrary, the CFPB flunked “Rule of Law 101,” committing “gamesmanship” using “absurd” reasoning. All these conclusions are now reinstated.

Although the RESPA discussion is favorable to the regulated entity, the ruling is unusual as a blow, at least partially, to both sides of the dispute, in that both the regulated entity and the Trump administration sought to limit the CFPB’s authority. As such, we expect both sides will consider an appeal by petition for writ of certiorari to the Supreme Court. Stay tuned.

Why it matters

While revival of the RESPA rulings reflects a court sharply critical of the bureau’s overreach, those seeking to preserve CFPB independence are largely hailing the decision, even if it means that a Trump appointee will have even greater sway over the powerful independent agency. But what’s next for Leandra English’s challenge, in which she seeks temporary appointment as acting director? English’s lawsuit is currently on expedited review by the same D.C. Circuit. Look for a ruling that might force President Trump’s hand, potentially handing Ms. English temporary control of a newly emboldened CFPB.