United States: In Long-Awaited Decision, D.C. Circuit Reverses CFPB Enforcement Ruling And Finds CFPB Structure Unconstitutional In Part

Last Updated: November 4 2016
Article by Sabrina M. Rose-Smith

Today the D.C. Circuit issued its opinion in PHH Corporation v. Consumer Financial Protection Bureau. In the long-anticipated decision, the court found the CFPB's structure unconstitutional in insulating the Director from removal by the President, rejected several of the Bureau's interpretations of RESPA, held the Bureau's efforts to apply that interpretation retroactively violated due process, and clarified that RESPA's three-year statute of limitations applies to all the Bureau's enforcement actions, whether in court or before an administrative law judge. The D.C. Circuit did not invalidate the Bureau in its entirety, holding that the Bureau's unconstitutional structure could be remedied by severing the unconstitutional tenure provision of the statute.

Today, the United States Court of Appeals for the District of Columbia Circuit issued its long-awaited opinion in PHH Corporation v. Consumer Financial Protection Bureau (No. 15-1177), the first-ever court challenge to an administrative adjudication by the Bureau. The Bureau had held that the reinsurance of mortgage insurance policies in a case it adjudicated had violated the Real Estate Settlement Procedures Act (RESPA). In an opinion covering over 100 pages, the three-judge panel concluded 1) the Bureau's single-Director structure was unconstitutional in part, due to separation of powers principles, 2) the Bureau's interpretation of RESPA was wrong, 3) the Bureau's attempt to apply its novel reinterpretation of RESPA retroactively violated due process, and 4) the three-year limitations period included in RESPA applied to the CFPB's administrative enforcement of the statute. The decision was unanimous as to the RESPA and due process issues.

There was a partial dissent by Judge Henderson, who agreed with disposition of the RESPA and due process issues but stated that the court should not have decided the separation-of-powers question because it was unnecessary to do so. Judge Randolph filed a separate concurrence agreeing with the majority and arguing that, in addition, the Administrative Law Judge (ALJ) who heard the case had not been appointed in a manner consistent with the Constitution.

The Bureau could seek review by the en banc D.C. Circuit (a rehearing petition would be due November 25, 2016) and, failing that, by the Supreme Court.

Goodwin attorneys Tom Hefferon and Willy Jay were among the counsel for PHH on this appeal. The content and opinions of this document are ours alone, and do not necessarily reflect the views of our client PHH or of other clients.

Background

Under the relevant provisions of the Dodd-Frank Act, the Bureau is headed by a single Director, who serves a five-year term and cannot be removed by the President except for cause. Under the Director's supervision, the Bureau enforces 19 consumer statutes, including RESPA.

The Bureau accused PHH Corporation and several of its affiliated companies (collectively, PHH) of violating RESPA by referring borrowers to certain mortgage insurance companies allegedly in exchange for a percentage of insurance premiums those insurers received from borrowers. In the first-ever litigated CFPB enforcement action, an ALJ found that PHH had violated RESPA and recommended that PHH be ordered to disgorge over $6 million. Director Richard Cordray heard the administrative appeal from this decision; among other rulings, the Director affirmed the finding of a RESPA violation, concluded that there was no statute of limitations on Bureau administrative proceedings, and increased the disgorgement amount to $109 million.

PHH sought review in the D.C. Circuit, and a panel of that court had stayed the Bureau's order pending appeal.

The Bureau's Structure Is Unconstitutional In Part

The D.C. Circuit first held that "the CFPB is unconstitutionally structured because it is an independent agency headed by a single Director." Slip Op. at 64. In reaching this holding, the panel examined the history of federal agencies, and observed that they fell into two categories—executive agencies directly overseen by the President and independent agencies headed by multi-member bodies. Id. at 5. A "sharp break" from traditional agency structures, the CFPB fit into neither of those traditional structures: its head—the Director—is independent because he could be removed by the President only "for cause," yet the Director runs the Bureau alone and not as part of a multi-member body. Id. at 53. The D.C. Circuit concluded that structure violates the separation of powers. Id. at 64.

Despite this unconstitutional structure, the D.C. Circuit declined to strike the agency down completely. Instead, the court concluded the remedy for this constitutional violation was to strike the "for cause" restriction on the removal of the Director, making the Bureau an executive agency under the direct supervision of the President and making the Director removable at the pleasure of the President. Id. at 69. The D.C. Circuit also stated its view that this remedy would not "affect the ongoing operations of the CFPB." Id. at 10.

The Director's $109 Million Disgorgement Award Falls

The D.C. Circuit then reversed the $109 million disgorgement award issued by Director Cordray, making three separate legal holdings, each of which the court found required reversal.

First, it held that RESPA Section 8 permits 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." Id. at 12. Although the court grounded its decision in the text of RESPA itself, and therefore did not implicate questions of administrative deference, the court also explained that Regulation X and previous Department of Housing and Urban Development (HUD) guidance interpret the statute the same way. Id. at 76. Importantly, the D.C. Circuit held that Section 8(c) creates a "safe harbor," a ruling which expressly overrules the Director's conclusion that Section 8(c) clarified, rather than limited, Section 8(a)'s prohibition on kickbacks. Id. at 73. The D.C. Circuit also concluded that Section 8(c) is an element of the statute rather than an affirmative defense, and so on remand the CFPB would bear the burden of proving that reinsurance premiums exceeded fair market value. Id. at 89-90, n. 27.

Second, the D.C. Circuit held that even if the Bureau's interpretation were a permissible one, it could not retroactively apply that interpretation to PHH's past conduct without violating the Due Process Clause. In reaching this conclusion, the court first found that the CFPB's RESPA interpretation diverged from that of HUD, which enforced RESPA before the Bureau's creation. Entities like PHH, the D.C. Circuit found, had followed HUD's interpretation of RESPA for decades, and had carefully crafted their captive reinsurance entities to comply with that interpretation. Id. at 82. The Director's later decision that those "captive reinsurance agreements were prohibited by Section 8" all along was not consistent with due process. Id. at 83. The court made clear that both this holding and its holding regarding RESPA interpretation are binding precedent and cannot be dismissed as dicta.

Third, the D.C. Circuit held that RESPA's three-year limitations period applies to administrative enforcement actions just as it does to actions in court. The Bureau took the position that no limitations period applied to its administrative enforcement because the Dodd-Frank Act does not specify a limitations period for administrative enforcement, and RESPA speaks only of limitations on "actions," which the Bureau argued meant lawsuits. Id. at 91. Noting that the Bureau's position would apply to "all 19 of the consumer protection statutes the CFPB enforce" (id. at 91-92), the D.C. Circuit rejected the Bureau's position. The court first explained that Dodd-Frank incorporates the limitations periods in the underlying statutes, and under RESPA "a three-year statute of limitations applies to all CFPB enforcement actions to enforce Section 8, whether brought in court or administratively." Id. at 12-13. The panel did not decide whether each "above-reasonable-market value" payment for reinsurance "triggers a new three-year statute of limitation for that payment," leaving that question for remand. Id. at 100, n. 30.

Final Words

The court's decision was lengthy and detailed, and is important reading for those interested in RESPA issues or who are regulated by the Bureau. As noted in Judge Henderson's separate opinion, the D.C. District Court also has before it another case challenging the Bureau's structure and operations, which had been held in part by that court pending the decision to be handed down in the PHH case. State Nat'l Bank of Big Spring v. Lew, No. CV 12-1023 (ESH), 2016 WL 3812637, at *1 (D.D.C. July 12, 2016). Now that the D.C. Circuit has spoken, further developments in the law related to the Bureau's structure are likely.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions