As was expected, the Consumer Financial Protection Bureau (CFPB) is fighting back against a recent ruling in the U.S. Court of Appeals for the District of Columbia Circuit that vacated the bureau’s enforcement action against mortgage lender PHH for alleged mortgage insurance kickbacks and a subsequent ruling that the bureau’s leadership structure is unconstitutional.
The bureau on Friday filed a petition with the D.C. Circuit Court to have its case against PHH reheard before the entire court instead of just the three-judge panel that dismissed the case in October. In its petition, the CFPB says it is asking the court rehear the case “en banc” (which means the full court), not just because it doesn’t agree with the court’s ruling with regard to its constitutionality, but also because the court misinterpreted key sections of the Real Estate Settlement Procedures Act (RESPA) as part of its ruling that enforcement action against the lender should be tossed.
The three-judge panel, the bureau asserts, “misinterpreted [RESPA] in a manner that so fundamentally defeats the statutory purpose as to warrant rehearing en banc.”
“The panel held that RESPA permits referrals made in exchange for kickbacks in the form of lucrative mortgage reinsurance business, thus defeating RESPA’s statutory prohibition of kickbacks for referrals of real estate settlement service business,” the bureau states in its petition. “To reach that result, the panel overstepped its role in reviewing an administrative decision, ignored key portions of the statutory text and interpreted the term ‘bona fide’ in a manner inconsistent with Supreme Court precedent. If the ruling stands, it will become easy for lenders and others who make referrals of real estate settlement service business to disguise kickbacks and evade RESPA’s prohibition.”
The bureau additionally asserts that the court’s “dramatic and unprecedented ruling” that the bureau’s structure is unconstitutional “sets up what may be the most important separation-of-powers case in a generation since the independent counsel statute was challenged in Morrison v. Olson [in 1988].”
The petition states that the ruling is in direct conflict with previous case law and, further, that if it is allowed to stand, it could end up limiting the power of Congress to create independent administrative agencies headed by a single director. What’s more, it could spawn similar rulings that the leadership structure of other agencies with single directors – such as the Social Security Administration, the Federal Housing Finance Agency and the Office of Special Counsel – are also unconstitutional.
If the full court chooses not to hear the case en banc, then President-Elect Donald Trump could replace Richard Cordray, director of the CFPB, at will – however, it is unclear whether that would happen.
Meanwhile, a larger issue is whether the Trump administration will seek to quickly dismantle the Dodd-Frank Act, which gave birth to the CFPB. Should that happen, the future of the bureau is unclear: It could be completely dissolved and replaced with another agency, or the Trump administration might decide to let it live on, only with curtailed powers.
In June 2015, Cordray upheld an earlier ruling by Administrative Law Judge Cameron Elliot that mortgage company PHH Corp. illegally referred consumers to mortgage insurers in exchange for kickbacks. However, Cordray boosted the original penalty of $6.4 million by more than 17 times to $109 million.
Cordray’s justification for raising the penalty was because Judge Elliot’s original ruling – which had limited PHH’s violations to kickbacks that were connected with loans that closed on or after July 21, 2008 – had been miscalculated. Specifically, Codray wrote that the formula used in the first decision to determine the penalty was flawed because it did not take into account the way mortgage reinsurance premiums are paid.
Rather than coming as a one-time payment at the closing date of a mortgage, such premiums are paid by borrowers each time they make a monthly mortgage payment, Cordray wrote.
“That means PHH is liable for each payment it accepted on or after July 21, 2008, even if the loan with which that payment was associated had closed prior to that date,” he wrote.
But, more importantly, the three-judge panel agreed with PHH that the CFPB was granted too much power when Congress “established the [bureau] as an independent agency headed not by a multi-member commission but, rather, by a single director.”
As such, the three-judge panel ruled that the bureau’s leadership structure is “unconstitutional” and that its current director can be removed from the position by the president “for cause.”
“This is a case about executive power and individual liberty,” Circuit Court Judge Brett Kavanaugh wrote in his ruling. “The U.S. government’s executive power to enforce federal law against private citizens – for example, to bring criminal prosecutions and civil enforcement actions – is essential to societal order and progress but simultaneously a grave threat to individual liberty.”
Kavanaugh points out that up until the creation of the CFPB in 2009, all other independent federal agencies that “exercise executive power by bringing enforcement actions against private citizens and by issuing legally binding rules that implement statutes enacted by Congress … have historically been headed by multiple commissioners, directors or board members who act as checks on one another.”
“Each independent agency has traditionally been established, in the Supreme Court’s words, as a ‘body of experts appointed by law and informed by experience,’” he wrote in his ruling.
“In other words, to help preserve individual liberty under [the president’s] Article II [authority], the heads of executive agencies are accountable to and checked by the president, and the heads of independent agencies, although not accountable to or checked by the president, are at least accountable to and checked by their fellow commissioners or board members,” Kavanaugh wrote. “No head of either an executive agency or an independent agency operates unilaterally without any check on his or her authority. Therefore, no independent agency exercising substantial executive authority has ever been headed by a single person.
“Until now,” he added.
Kavanaugh said because the CFPB is an independent agency, as opposed to an executive agency, its single-leader structure means that the director “possesses more unilateral authority – that is, authority to take action on one’s own, subject to no check – than any single commissioner or board member in any other independent agency in the U.S. government.”
In fact, Richard Cordray, current director of the CFPB, “enjoys more unilateral authority than any other officer in any of the three branches of the U.S. government, other than the president,” Kavanaugh wrote.
Although the court could have basically shut the CFPB down, it decided to let the bureau continue to operate. But it is now, in effect, an executive agency, which means the president has the power to remove its director at any time.
So far, the court’s ruling has not had any immediate impact on how the CFPB operates – however, Trump has already issued a decree that all new regulatory enforcement actions should be temporarily frozen until he takes office. Whether that might dissuade the CFPB from carrying out additional enforcement actions over the next two months is yet to be seen.
Some have suggested that it would be fairly simple to “fix” the CFPB’s current structure so that it can remain an independent agency by changing the status of the director so that the director can be fired by the president at any time for just cause.
With regard to the CFPB’s specific allegations of mortgage insurance kickbacks brought against PHH, all three judges for the U.S. Court of Appeals for the District of Columbia came down firmly on the side of the lender.
“First, PHH argues that the CFPB incorrectly interpreted Section 8 of the RESPA to bar so-called captive reinsurance arrangements involving mortgage lenders, such as PHH and their affiliated reinsurers,” Kavanaugh explained. “In a captive reinsurance arrangement, a mortgage lender [such as PHH] refers borrowers to a mortgage insurer. In return, the mortgage insurer buys reinsurance from a mortgage reinsurer affiliated with [or owned by] the referring mortgage lender. We agree with PHH that Section 8 of the act 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.
“Second, PHH claims that, in any event, the CFPB departed from the consistent prior interpretations issued by the Department of Housing and Urban Development and that the CFPB then retroactively applied its new interpretation of the act against PHH, thereby violating PHH’s due process rights. We again agree with PHH: The CFPB’s order violated bedrock principles of due process.
“Third, in light of our ruling on the constitutional and statutory issues, the CFPB on remand still will have an opportunity to demonstrate that the relevant mortgage insurers, in fact, paid more than reasonable market value to the PHH-affiliated reinsurer for reinsurance, thereby making disguised payments for referrals in contravention of Section 8,” Kavanaugh continued. “PHH claims, however, that much of 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 responds that, under Dodd-Frank, there is no statute of limitations for any CFPB administrative actions to enforce any consumer protection law,” he added. “In the alternative, the CFPB contends that there is no statute of limitations for administrative actions to enforce Section 8 of the RESPA. We disagree with the CFPB on both points. First of all, the Dodd-Frank Act incorporates the statutes of limitations in the underlying statutes enforced by the CFPB in administrative proceedings. And under the Real Estate Settlement Procedures Act, a three-year statute of limitations applies to all CFPB enforcement actions to enforce Section 8, whether brought in court or administratively.”
In its petition, the bureau states that the three-judge panel misinterpreted RESPA when it decided that the act “permits referrals made in exchange for kickbacks in the form of lucrative mortgage reinsurance business.” This interpretation, the bureau says, defeats “RESPA’s statutory prohibition of kickbacks for referrals of real estate settlement service business.”
“To reach that result, the panel overstepped its role in reviewing an administrative decision, ignored key portions of the statutory text, and interpreted the term ‘bona fide’ in a manner inconsistent with Supreme Court precedent,” the bureau writes. “If the ruling stands, it will become easy for lenders and others who make referrals of real estate settlement service business to disguise kickbacks and evade RESPA’s prohibition.”