D.C. Circuit Grants Rehearing in PHH Case

by McGuireWoods LLP

On Thursday, February 16, 2017, the D.C. Circuit granted the Consumer Financial Protection Bureau’s (CFPB) petition for rehearing en banc in PHH Corporation v. Consumer Financial Protection Bureau.  The Order marks the latest twist in a case that tests the constitutional and statutory limits of the CFPB.

As we previously reported, in 2014 an Administrative Law Judge (ALJ) found that PHH Corporation (PHH) violated the Real Estate Settlement Procedures Act (RESPA) by accepting kickbacks from mortgage insurers. PHH appealed the decision to CFPB Director Richard Cordray.  In a 38 page decision—the first administrative appellate decision for the CFPB—Cordray affirmed that PHH had violated RESPA but expanded PHH’s liability from $6 million to $109 million by holding that no statute of limitations applied to the CFPB’s administrative proceedings.

PHH appealed the matter to the D.C. Circuit.  On October 11, 2016, a three-judge panel ruled against the CFPB and held, among other things, that the CFPB’s single independent director structure was unconstitutional.  The October 11 Opinion also rejected the CFPB’s statutory arguments on the statute of limitations and RESPA.

On November 18, 2016, the CFPB filed its petition for rehearing en banc.  While the petition was pending, attorney generals from 16 states and the District of Columbia filed a motion to intervene in the case.  In the motion, the attorney generals raised concerns regarding the Trump Administration’s commitment to defending the constitutionality of the CFPB’s structure given President Trump criticism of the CFPB and the Dodd-Frank Wall Street Reform and Consumer Protection Act.  However, the attorney generals’ motion was denied on February 2, 2017.

The D.C. Circuit’s February 16 Order vacates the three-judge panel’s prior October 11 Opinion and sets oral arguments in the case for Wednesday May 24, 2016.

Notably, in the February 16 Order, the Court specially asked the parties to address three Constitutional issues in their briefs:

  1. Is the CFPB’s structure as a single-Director independent agency consistent with Article II of the Constitution and, if not, is the proper remedy to sever the for-cause provision of the statute?
  2. May the court appropriately avoid deciding the constitutional question given the panel’s ruling on the statutory issues in the case?
  3. If the en banc court, which has today separately ordered en banc consideration of Lucia v. SEC 832, 832 F.3d 277 (D.C. Circ. 2016), concludes in that case the administrative law judge who handled that case was an inferior officer rather than an employee, what is the appropriate disposition of this case?

Although the first two questions relate directly to the issues at the heart of the October 11 Opinion, the third question regarding the status of the ALJ adds a new focus to the appeal.  Lucia v. SEC, the case referenced in the Order, concerns the constitutionality of the use of Securities and Exchange Commission (SEC) ALJs in administrative proceedings.  Briefly addressed by Judge Randolph is his October 11 concurring opinion in PHH, the issue centers on the requirement under Article II, section 2, clause 2 that “inferior officers” be appointed by the President, the courts of law, or the heads of the department.

In PHH, the initial administrative decision was rendered by a Securities and Exchange Commission (SEC) ALJ. Rather than being appointed as an inferior officer, the SEC’s Chief Administrative Law Judge assigned the ALJ to the PHH case pursuant to an agreement between the CFPB and the SEC. If the SEC ALJ is in fact an inferior officer within the meaning of Article II, the ALJ’s assignment arguably violates the Constitution. The D.C. Circuit could use this Appointment Clause issue as grounds to decide the case without reaching the issue of the constitutionality of the CFPB’s structure.

PHH will file its opening brief on these issues by March 10, 2017.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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