CFPB Consent Order Against PHH Vacated; Judges Say Bureau Structure ‘Unconstitutional’


A trio of federal court judges for the District of Columbia Circuit has vacated a consent order brought by the Consumer Financial Protection Bureau (CFPB) against mortgage lender PHH Corp. seeking $109 million for alleged violations of the Real Estate Settlement Procedures Act (RESPA).

Perhaps more importantly, separate rulings issued by two of the three judges on Tuesday assert 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 has ruled that the bureau’s leadership structure is “unconstitutional” and that it’s 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.

“The director alone decides what rules to issue; how to enforce, when to enforce and against whom to enforce the law; and what sanctions and penalties to impose on violators of the law,” he wrote. “To be sure, judicial review serves as a constraint on illegal actions but not on discretionary decisions within legal boundaries; therefore, subsequent judicial review of individual agency decisions has never been regarded as sufficient to excuse a structural separation of powers violation. That combination of power that is massive in scope, concentrated in a single person and unaccountable to the president triggers the important constitutional question at issue in this case.”

Kavanaugh arrives at the conclusion that “the CFPB is unconstitutionally structured” and that only an act of Congress can change its leadership structure from the current single-director structure to a board or commission structure. He said it is incumbent on the court in deciding the PHH case to acknowledge that the bureau’s structure is fundamentally flawed when considering its enforcement actions.

Whether the court’s action will have any immediate impact on how the CFPB operates is unclear. It is also unclear what steps need to be taken next in order to “fix” the CFPB’s current structure so that it can remain an independent agency. As per the court’s decision, the CFPB can 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.

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 sum, we grant PHH’s petition for review, vacate the CFPB’s order against PHH and remand for further proceedings consistent with this opinion,” Kavanaugh wrote. “On remand, the CFPB may determine, among other things, whether, within the applicable three-year statute of limitations, the relevant mortgage insurers paid more than reasonable market value to the PHH-affiliated reinsurer.”

Although she agreed with her two colleagues on the statutory arguments for dismissing the CFPB’s consent order against PHH, Circuit Judge Karen Lecraft Henderson said she felt the constitutional matter of the CFPB’s leadership structure should be dealt with separately and should not have been part of the court’s decision with regard to CFPB enforcement action against PHH.

“In no uncertain terms, PHH has asked this court to vacate the CFPB’s order, outlining three distinct reasons why it is entitled to that relief,” Henderson wrote. “As my colleagues ably demonstrate, PHH’s statutory arguments are sufficient to accomplish its goal.

“But my colleagues don’t stop there,” she wrote. “Instead, they unnecessarily reach PHH’s constitutional challenge, thereby rejecting one of the most fundamental tenets of judicial decision-making. With respect, I cannot join them in this departure from long-standing precedent.”

Henderson basically says the leadership structure of the CFPB is a separate matter from determining whether PHH had committed any violations of the regulations.

“My colleagues, however, insist that the constitutional issues be addressed before the statutory ones because resolution of the former could afford PHH broader relief,” she wrote, adding, “Our focus should be on providing the full relief requested by the prevailing party, not the broadest relief implicated by its claim.

“Although I agree that when constitutional questions are ‘indispensably necessary’ to resolving the case at hand … I do not believe that it is ‘indispensably necessary’ to resolve the for-cause removal issue here.”

Joining Judge Kavanaugh and Judge Henderson in the decision was Senior Circuit Judge A. Raymond Randolph.

In a statement released Tuesday, David H. Stevens, president and CEO of the Mortgage Bankers Association (MBA), said the association “is gratified that the court has issued an extremely thoughtful opinion. It addresses all of the key issues raised by the PHH case, including the proper interpretation of the Real Estate Settlement Procedures Act; the need for due process, including reasonable statutes of limitations; and the very constitutionality of the CFPB itself.”

“All that said, we recognize that the CFPB does important work to protect consumers and that this case is far from settled and expect the government to continue to litigate it,” Stevens added. “We will continue to fight on behalf of our members, particularly on the RESPA and due process issues, as they go to the heart of a core argument that [the] MBA has been making for several years now – that lenders need clear, consistent and reasonable interpretations of the rules in order to be able to best serve their borrowers and contribute to a smoothly functioning real estate market.”

In a separate statement, Lisa Donner, executive director of Americans For Financial Reform, said her group is disappointed by the decision because “the CFPB is doing exactly what Congress established it to do: serve as an effective enforcer of fair rules of the road to prevent unfair deceptive and abusive financial practices, practices that led to the financial crisis and cost trillions of dollars in lost homes, lost jobs and lost wealth.”

“Precisely because the CFPB is achieving that mission, Wall Street banks, predatory lenders and their allies have worked determinedly to undermine and defang it, including by compromising its decision-making structure, independence and authority,” Donner wrote. “Compromising the CFPB’s independence would be a huge gift to Wall Street greed and a loss for consumers. We are hopeful that this erroneous decision will be overturned.”

Mike Calhoun, president of the Center for Responsible Lending, said he, too, is disappointed with the decision but not surprised because “conservative members of Congress have consistently tried to weaken [the] CFPB’s authority for meritless and political reasons.”

“Today, these two judges have made common cause with that effort,” Calhoun wrote. “If the 2008 financial crisis showed us anything, it’s that consumers need an independent regulator to look after the interests of consumers. We’ve already seen the agency hard at work against bad actors like ITT Tech, car-title and payday lenders, and big banks that deceive their customers. Any efforts to change [the] CFPB’s structure would reduce its effectiveness and harm hardworking people across the country.”

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