On Oct. 11, the U.S. Court of Appeals for the D.C. Circuit
deemed the Consumer Financial Protection Bureau (CFPB)
"unconstitutionally structured" and overturned its
enforcement action, including a $109 million penalty, against PHH
Corp., a New Jersey-based mortgage lender. Despite its rulings, the
D.C. Circuit made clear that the CFPB will continue to operate and
perform its duties.
The CFPB originally fined PHH for an alleged kickback scheme
whereby PHH referred customers to insurers who then purchased
reinsurance from a PHH subsidiary. In seeking to vacate the
enforcement order, PHH made both constitutional and statutory
PHH argued that the CFPB's status as an independent agency
headed by a single director violates Article II of the U.S.
Constitution. To analyze this issue, the D.C. Circuit employed a
"history-focused approach" focusing on separation of
powers decisions from the Supreme Court.
The D.C. Circuit observed that "[t]he CFPB's
concentration of enormous executive power in a single,
unaccountable, unchecked Director not only departs from settled
historical practice, but also poses a far greater risk of arbitrary
decisionmaking and abuse of power, and a far greater threat to
individual liberty, than does a multi-member independent
agency." The D.C. Circuit added that the CFPB's structure
lacks critical checks and constitutional protections, despite the
agency wielding vast power over the U.S. economy.
In outlining a remedy for these constitutional flaws, the D.C.
Circuit rejected calls to shut down the CFPB or invalidate the
entire Dodd-Frank Act. Instead, the Court voided the for-cause
removal provision, granting the President power to remove the CFPB
director at will, and to supervise and direct the director.
As provided below, the Court largely sided with PHH on its three
PHH argued that Section 8 of the Real
Estate Settlement Procedures Act (RESPA) bars so-called captive
reinsurance arrangements involving mortgage lenders and their
affiliated reinsurers. The Court agreed that Section 8 of RESPA
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.
PHH claimed the CFPB departed from
the Department of Housing and Urban Development's consistent
prior interpretations of RESPA, and then retroactively applied its
new interpretation of RESPA against PHH. The ourt agreed that the
CFPB's order and retroactive application here "violated
bedrock principles of due process."
PHH contended that much of its
alleged misconduct occurred outside of RESPA's three-year
statute of limitations. In rejecting the CFPB's arguments that
a statute of limitations does not exist here, the Court ruled that
the three-year statute of limitations that has traditionally
applied to agency actions enforcing Section 8 of RESPA will
continue to apply.
We will continue to monitor the effects of this significant
ruling on financial services companies.
The full text of the decision in PHH Corp. v. CFPB, No.
15-1177 (D.C. Cir. Oct. 11, 2016) can be read here.
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