On October 11, 2016, the U.S. Court of Appeals for the D.C. Circuit issued its long-awaited opinion in PHH Corp. v. Consumer Financial Protection Bureau. The appeal relates to an action brought by the Consumer Financial Protection Bureau ("CFPB") against PHH for alleged violations of the Real Estate Settlement Procedures Act ("RESPA") relating to PHH's "captive reinsurance arrangements." RESPA is one of the many pre-existing "enumerated consumer laws" listed in the Dodd-Frank Act for which interpretation and enforcement authority was assigned to the newly created CFPB in 2011.
Under a typical captive reinsurance arrangement, a mortgage lender (such as PHH) owns a subsidiary mortgage insurance company that reinsures mortgage risk written by third party insurance companies. These third party insurance companies are referred business by the mortgage lender and write mortgage insurance with respect to such consumers; these mortgage insurers then reinsure (or "cede") such risk back to the lender's captive mortgage company for a fee paid to the captive. Section 8 of RESPA bars the payment of "referral fees" in connection with the rendering of real estate settlement services (such as mortgage insurance). Captive insurance arrangements were not considered to involve a prohibited referral fee – and, thus, are permissible under Section 8 – by the agency previously responsible for administering RESPA, the Department of Housing and Urban Development ("HUD"), provided the amount paid to the mortgage reinsurance company for the ceding of risk did not exceed reasonable market value.
Nonetheless, the CFPB rejected HUD's prior position and held that the PHH captive reinsurance structure violated Section 8 of RESPA as a prohibited referral arrangement, regardless of whether the amount paid to the reinsurer was consistent with market value. The CFPB imposed a $109 million fine on PHH for these alleged violations of Section 8 of RESPA, including violations that occurred prior to the CFPB's re-interpretation of Section 8. In doing so, the CFPB held that the three-year statute of limitations in RESPA did not apply to administrative determinations made by the CFPB.
In its appeal from the CFPB's ruling, PHH argued that the CFPB's determination was unenforceable because the CFPB was unconstitutionally organized as an agency under the control of a single Director not subject to Presidential removal except for cause. The court agreed that the CFPB was unconstitutionally structured in violation of the President's Article II powers because excessive power was conferred on a single individual not subject to the control of the Executive Branch. The court noted that the CFPB's structure was distinguishable from "independent agencies" that historically have been headed by multiple individuals or commissioners. These independent agencies, the court reasoned, pass constitutional muster under prior rulings because the existence of multiple commissioners serves as an alternative check on excessive authority wielded by an individual other than the elected President. In contrast to such independent agencies, the power granted the Director of the CFPB was clearly unconstitutional. In this regard, the majority opinion emphasized that:
Indeed . . . the 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.
Rather than striking down all of the Dodd-Frank Act provisions creating the CFPB, the D.C. Circuit instead held that the constitutional deficiency could be cured by interpreting the Dodd-Frank Act to allow the President of the United States to fire the CFPB's Director without cause, thus effectively transforming the CFPB from an independent agency to an executive agency, and thus enabling it to continue to operate. The court declined to consider the legal ramifications of its ruling on past CFPB rulemaking and enforcement actions.
Turning to the merits of PHH's RESPA arguments, the D.C. Circuit agreed with PHH on all points:
- With respect to Section 8 of RESPA, the court reaffirmed the original construction adopted by HUD, ruling that Section 8 of RESPA permits a mortgage lender such as PHH to maintain captive reinsurance arrangements so long as the amounts paid by the third party mortgage insurance companies to the captive mortgage reinsurance company do not exceed reasonable market value.
- In addition, the court ruled that the CFPB violated PHH's due process rights by retroactively applying its new interpretation, which departed from consistent, prior interpretations issued by HUD that covered referral arrangements for mortgage-loan reinsurance. In this regard, the court stated that the CFPB "violated bedrock principles of due process." The CFPB's abrupt re-interpretation was described as "upend[ing] the entire system of unpaid referrals that has been part of the market for real estate settlement services . . . [and] flout[ing] . . . decades of carefully and repeatedly considered official government interpretations."
- Finally, the D.C. Circuit ruled that the CFPB was bound by RESPA's three-year statute of limitations, and could not avoid the restriction by asserting that the statute of limitations was not incorporated by the Dodd-Frank Act when Congress moved responsibility from HUD to the CFPB, or by asserting that the statute of limitations applied solely to judicial rather than administrative proceedings.
The decision is a major political blow to the autonomy of the CFPB. Moreover, the D.C. Circuit's decision makes clear that the CFPB does not have unlimited ability to reinterpret statutory provisions previously interpreted by other agencies responsible for the statute, at least not without fair warning, and may be unable to apply such interpretations retroactively.
In a partially dissenting opinion, one judge ruled that, given that the court had vacated the CFPB's disciplinary action on statutory and due process grounds, it was neither necessary nor appropriate for the court to reach the constitutional question of the CFPB's structure.
The CFPB announced that it disagrees with the D.C. Circuit's opinion and is "considering options for seeking further review" – which, undoubtedly, include seeking en banc review or the filing for a writ of certiorari.
A more detailed description and commentary on the CFPB decision will appear shortly in a Clients and Friends Memorandum that will be included in the Cabinet news.
Commentary / Scott Cammarn
Section 8 of RESPA has been one of the most contested provisions of consumer credit law due to its sweeping language, the vague nature of its prohibition, and its draconian sanctions (which include criminal penalties). Throughout the 80s and early 90s, the industry contested the proper interpretation of Section 8 with regard to a variety of arrangements, including, but not limited to, captive reinsurance arrangements. Some of these disputes were resolved following the issuance of a HUD letter in 1997 allowing captive reinsurance arrangements, provided that the fair market value conditions are met. HUD reaffirmed its interpretation several times thereafter, and its position regarding fair market value was widely cited in treatises and court cases. The industry relied on this HUD letter for 18 years until the CFPB abruptly rejected HUD's conclusion in 2015. The CFPB apparently neglected to appreciate this very long history surrounding Section 8, or failed to appreciate that PHH likely would not be cowed. In seeking to apply its own re-interpretation of Section 8 retroactively, notwithstanding these prior HUD interpretations allowing such arrangements, the CFPB committed a gross overreach, leaving PHH with little choice but to appeal. In doing so, the CFPB invited the D.C. Circuit to re-examine the controversial structure of the CFPB. The CFPB's actions violate the most fundamental tenet of dispute resolution – pick your battles.
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