Summary

In PHH v. CFPB (Oct. 11, 2016), the U.S. Court of Appeals for the D.C. Circuit held that the Consumer Financial Protection Bureau (“CFPB”) was unconstitutionally structured, and that the agency’s enforcement powers are subject to the statutory limitation periods of the consumer protection statutes it enforces.  The action arose from a $109 million enforcement penalty levied by the CFPB against mortgage lender PHH Corp. (“PHH”) for allegedly violating Section 8 of the Real Estate Settlement Procedures Act (“RESPA”) by operating a captive reinsurance arrangement.  Most notably, the Court held that the CFPB could no longer operate as an independent government agency under a sole director, but must be brought under the Executive Branch.  The Court overturned the “for-cause” termination provisions regarding the director.[1]  Ultimately, the court salvaged the agency and invoked the Dodd-Frank Act’s severability clause to render the director’s service “at will,” subject to the discretion of the President.  Although the agency weathered this constitutional challenge, the case exposed a true chink in the CFPB’s armor for all of Wall Street to see.

Background

At issue in the appeal was whether PHH, a captive reinsurance agency, could charge premiums for mortgage insurance associated with loans provided by its affiliated mortgage company.  Ignoring longstanding guidance of the Department of Housing and Urban Development (“HUD”), and applying its own novel interpretation of Section 8 of RESPA, the CFPB determined that the arrangement violated the law, and issued a $109 million penalty against PHH.  On appeal, PHH not only challenged the CFPB enforcement decision itself, it also challenged the constitutionality of the CFPB’s structure.

The Holding

The Court ruled:

1. The CFPB’s structure as an independent agency with a single director is unconstitutional.  Severing the offending removal provision, the D.C. Circuit effectively turned the CFPB, which was, by definition, an independent agency (its head was removable by the President only for cause), into an executive agency, giving the President full removal and supervisory power over the CFPB director.  This cabins the CFPB’s unilateral power to enforce the 19 consumer protection statutes for which it is responsible.  Describing the authority formerly placed with the director as “a gross departure from settled historical practice,”[2] the agency head will now be subject to the President and his or her policy directives.  The switch to an executive agency means that the President, as a direct line to the electorate, will remain accountable for CFPB actions, thereby preventing encroachments on individual liberty.
2. The CFPB’s enforcement power is not unlimited under Dodd-Frank, which established the agency; rather, an action brought by the agency is subject to the same statute of limitations period found in the underlying statute being enforced.  With respect to RESPA, the CFPB has three years to enforce the statute, “whether brought in court or administratively.”[3]  Ultimately, the Court stated that Dodd-Frank does not give, as the CFPB argued, broader enforcement power than the 19 statutes it allows the CFPB to enforce.
3. Lastly, HUD’s interpretation of RESPA in “Regulation X” is the correct interpretation of Section 8, and the CFPB’s new interpretation prohibiting captive reinsurance arrangements was not supported by statute and therefore was invalid.  The Court scolded the CFPB for propounding its unfounded interpretation and applying it retroactively against PHH, which was a violation of PHH’s due process.  In vacating the CFPB’s ruling, the question on remand is whether the premiums charged by PHH were for “reasonable fair market value.”[4]

Conclusion

The D.C. Circuit struck a blow to the young agency, cabining its power in two major ways. First, the CFPB’s director no longer has unilateral decision-making authority in enforcing the nation’s consumer protection statutes. Although other agencies, too, have single directors at their helm (e.g. Department of Justice), they (as the CFPB now is) are executive agencies, and subject to significant oversight by the President. The Court also seemed to invite Congress to revisit Dodd-Frank and restructure the CFPB to create a multi-member board at the head of the agency, like the Federal Communications Commission or the Securities and Exchange Commission.[5]

The Court avoided the issue of whether the CFPB’s unconstitutional structure alone was enough to vacate the PHH penalty by finding that the company had not violated RESPA in the first instance.  As such, it is not clear whether the CFPB’s prior decisions are in jeopardy, though the Court did indicate that it did not envision open season on the CFPB’s past rules and decisions.  Nevertheless, where a CFPB prior action was tied closely to the director’s authority, it may be possible to challenge such a ruling or enforcement action, given the ruling in this case. 

Second, the CFPB’s seemingly unbridled authority to regulate the economic sector is now definitively curtailed by the limitations periods imposed by Congress in the 19 consumer protection statutes enforced by the agency.[6]  The bottom line is that, contrary to the CFPB’s assertions, “time does [] run against the King.”[7]

Given the significance of this ruling, the Court’s decision will likely be appealed to the Supreme Court.  Saul Ewing will continue to monitor the issues raised by this and related decisions. [8]