United States: D.C. Circuit's PHH Ruling Reins in CFPB

On October 11, 2016, the U.S. Court of Appeals for the District of Columbia Circuit held in PHH Corporation v. Consumer Financial Protection Bureau, case no. 15-1177, that the CFPB's structure of a single independent director, removable only for cause, violates the separation of powers provisions of Article II of the Constitution. In addition, the Court unanimously (1) held that CFPB Director Richard Cordray's prior order that the CFPB could enforce its new interpretation of the Real Estate Settlement Procedures Act ("RESPA") violated PHH's constitutional due process rights and (2) rejected the CFPB's contention that it is not subject to any statute of limitations when bringing a RESPA enforcement action through the administrative adjudication process.

The Court's holdings are major setbacks for the CFPB, particularly its enforcement activities. The decision may temper the CFPB's expansive view of its authority – recently emboldened following the publicity surrounding the Bureau's and other authorities' enforcement actions against Wells Fargo (with the lion's share of credit given to the CFPB), as well as the CFPB's summary judgment victory in its litigation against CashCall Inc. for servicing loans that were invalid under state laws. The CFPB is likely to appeal the PHH ruling, either through seeking a rehearing en banc or directly filing a petition for a writ of certiorari with the Supreme Court. Given the important constitutional questions presented, it is reasonable to expect that the Supreme Court will grant review.

While the Court's ruling that the CFPB's structure is unconstitutional will grab headlines, it will have little to no immediate impact on the CFPB's current operations. PHH had argued for the Court to void the entire Dodd Frank Act or require the CFPB to cease operations pending passage of legislation creating a new leadership structure. The Court, however, adhered to the established principle that, when possible, constitutional infirmities in legislation are to be addressed by invalidating only the unconstitutional portions of the legislation, leaving the remainder intact. The Court accepted the CFPB's argument that the appropriate remedy is to sever the portion of the statute providing that the Director may only be removed for cause. The Court's holding grants the President the authority to remove the Director at his or her discretion, thereby allowing the CFPB to be overseen in a manner similar to executive offices such as the Department of Justice and the Treasury Department. Notably, the holding leaves in place the CFPB's prior acts, including its regulations and prior enforcement actions and settlements. While the Court's opinion, decrying the concentration of power in the CFPB and its Director, will provide ammunition to calls for legislative changes to the structure of the agency, the likelihood of passage of any such legislation remains low.

The Court's ruling, if affirmed, will have substantial impact on future enforcement actions by the CFPB as further discussed below. Given the influence of the D.C. Circuit, courts and administrative law judges may immediately begin citing the Court's ruling, even while any appeal is pending.

The CFPB commenced its enforcement action against PHH in 2014, alleging that PHH's captive reinsurance program for private mortgage insurance violated RESPA. The CFPB brought the enforcement action even though a prior guidance letter from the Department of Housing and Urban Development (which had jurisdiction over RESPA before the Dodd Frank Act transferred that authority to the CFPB) specifically permitted the challenged practice provided that mortgage insurers paid a reasonable market value to the reinsurers. After an administrative law judge found in favor of the CFPB, PHH appealed the decision to Director Cordray, who affirmed the retroactive enforcement. Director Cordray also ruled that the CFPB could pursue action for violations of RESPA dating back to three years before the inception of the Bureau, far longer than the three year statute of limitations provided for in RESPA, resulting in the assessment of a $109 million civil penalty against PHH. On review, the Court rejected Director Cordray's reasoning that administrative RESPA enforcement actions brought by the CFPB are not subject to a statute of limitations.

The D.C. Circuit further held that the CFPB incorrectly interpreted RESPA and that reinsurance agreements do not constitute kickbacks if they provide fair value. This ruling is a substantial victory for entities subject to RESPA, which had been forced to contemplate major changes in their business arrangements to comply with the CFPB's RESPA interpretation.

Particularly significant is the Court's holding based on principles of due process or fair notice that, even if the CFPB's interpretation of RESPA were correct, it could not be enforced retroactively. The Court emphasized that the CFPB may not "turn around and retroactively apply [a] new interpretation to proscribe conduct that occurred before the new interpretation was issued." Rather, companies are entitled to rely on prior guidance. This ruling is particularly important given the frequency with which the CFPB interprets federal financial consumer protection laws to impose obligations different from the industry's prior understanding. For example, this holding provides a means to challenge CFPB enforcement actions that raise novel legal theories, particularly where prior regulatory authority or case law allowed the later challenged practice. It similarly provides additional arguments against CFPB theories of unfair, deceptive or abusive acts or practices ("UDAAPs") seeking to impose new obligations, particularly where the challenged conduct is also the subject of rulemaking. Also highly impactful is the Court's rejection of the CFPB's argument that it is not subject to statutes of limitations when it brings action under certain statutes (such as RESPA) through the administrative adjudication process rather than the courts. Although the CFPB to date has not relied extensively on this argument, there had been a substantial threat that it would increasingly pursue this strategy in the future. If upheld, this ruling on the limitations issue should substantially reduce liability exposure for activities from the distant past.

The CFPB has 45 days to request rehearing en banc by the D.C. Circuit, or 90 days to file a petition for a writ of certiorari with the Supreme Court. PHH also could elect to appeal solely the portion of the Court's determination that Congress need not pass legislation providing for a new structure for the CFPB.

The attorneys of Stroock's Financial Services/Class Action Group are well-positioned to answer any questions you may have about the scope and impact of this decision, as well as related issues.

Originally published October 2016

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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