U.S. Court of Appeals Issues Major Ruling Against CFPB

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The U.S. Court of Appeals for the District of Columbia Circuit recently issued a decision in PHH v. CFPB that fundamentally transforms the power of one of the newest and most powerful agencies in the federal government, the Consumer Financial Protection Bureau (CFPB). First, the court held that the structure of the CFPB was unconstitutional and struck down a provision that only allows the president to dismiss the director of the CFPB for cause. After this decision, the director now serves at the pleasure of the president. Second, the court agreed with Petitioner PHH that the CFPB did not correctly interpret the statute that PHH allegedly violated and, in any event, violated PHH’s due process rights by retroactively applying an interpretation not consistent with prior established precedent on that issue. Third, the court held that the statute of limitations of three years applies for any enforcement action under Real Estate Settlement Practices Act (RESPA) regardless if the action is “brought in court or administratively.”

In 2010, Congress created the CFPB in response to the 2008 financial crisis. Congress created the CFPB as an independent agency with a single director and with the authority to enforce various federal financial consumer protection laws including those that other agencies were already enforcing. One of these is the Real Estate Settlement Procedures Act (RESPA). Prior to the creation of the CFPB, the U.S. Department of Housing and Urban Development (HUD) enforced RESPA. The primary provision at issue in this case is Section 8 of RESPA.

Section 8 prohibits mortgage insurers from paying referral fees to lenders who refer borrowers to that insurer. However, HUD also interpreted Section 8 to permit lenders and mortgage insurers to enter into bona fide transactions with each other, provided there are no referral fees. This included permitting a mortgage insurer to procure reinsurance from a lender’s reinsurance captive, provided the mortgage insurer paid reasonable market value for the reinsurance. The court noted that HUD repeatedly reaffirmed this interpretation and industry relied on it.

When the CFPB took over enforcement responsibility for RESPA, it applied a new interpretation of Section 8 that prohibited the captive reinsurance arrangement even where the mortgage insurer only paid reasonable market value. As a result of this new interpretation, the CFPB brought an administrative action against PHH, a mortgage lender and owner of a reinsurance captive for mortgage insurance, and ordered it “to pay $109 million in disgorgement and enjoined PHH from entering into future captive reinsurance arrangements.” PHH petitioned the Court of Appeals for review.

First, PHH argued that the structure of the CFPB was unconstitutional. Unlike other federal independent agencies which are led by a multi-member commissions, Congress only gave the CFPB a single director and granted that director significant autonomous authority with no oversight and no meaningful checks on his or her authority. As with the leaders of other independent federal agencies, Dodd-Frank contained a provision that only permits the president to dismiss the CFPB director for cause. The court held that a single director of an independent agency with that much authority and no meaningful check on that authority violated the Constitution. While PHH requested that the court invalidate the CFPB in its entirety, the court instead chose a more limited remedy of invalidating the provision that only permits the president to dismiss the director for cause. This has the effect of turning the CFPB into a more traditional federal agency reporting directly to the president. The director now serves at the pleasure of the president.

Second, PHH argued that the CFPB did not correctly interpret Section 8 of RESPA. The court agreed with PHH that Section 8 “allows captive reinsurance arrangements so long as the amount paid by the mortgage insurer for the reinsurance does not exceed the reasonable market value of the reinsurance.” Furthermore, the CFPB violated PHH’s due process rights by applying a vastly different interpretation from “consistent prior interpretations by HUD” and then retroactively applying that interpretation to PHH. The court did hold that, on remand, the CFPB could examine whether the “relevant mortgage insurers in fact paid more than reasonable market value to the PHH-affiliated reinsurer for reinsurance.”

Finally, PHH argued that “the alleged misconduct occurred outside of the three-year statute of limitations and therefore may not be the subject of a CFPB enforcement action.” The CFPB argued that there were no statute of limitations for “any CFPB enforcement actions to enforce any consumer protection laws.” In the alternative, the CFPB contended that the three-year statute of limitations provision under Section 8 of RESPA only applied to actions brought in court and not to administrative actions. The court held against the CFPB on both counts noting that Dodd-Frank incorporated “the statute of limitations in the underlying statutes enforced by the CFPB in administrative proceedings.” The court did permit the CFPB to determine on remand whether any alleged wrongdoing took place within the three-year statute of limitations.

The court decided the case in a 2-1 vote on the issue of the constitutionality of the CFPB structure and 3-0 on the question of whether RESPA permits transactions between lenders and mortgage insurers. One judge dissented on the constitutional question on the basis that PHH had a statutory remedy and therefore, the court did not have to decide the constitutional question.

The CFPB can now either appeal to the entire U.S. Court of Appeals or appeal directly to the U.S. Supreme Court.