United States: Implications Of The DC Circuit Court's Ruling In PHH v. CFPB

On January 31, 2018, the US Court of Appeals for the District of Columbia Circuit issued a ruling en banc in PHH Corporation v. CFPB that may have a significant impact on the future operations of the CFPB, as well as on industry participants' responses to supervision and enforcement. Specifically, the court upheld the constitutionality of the CFPB's structure as an independent financial federal regulator with a director removable only for cause by the President. But the court also indicated an increased willingness to entertain challenges to CFPB actions and reinstated the October 2016 decision of the three-judge panel of the same court, holding that the Director of the CFPB (Director) misinterpreted the anti-kickback provisions of the Real Estate Settlement Procedures Act of 1974 (RESPA), which resulted in the court vacating the $109 million fine imposed against PHH.

The court's decision has meaningful implications for the future of the CFPB and its regulated entities. In the near term, the single-director structure of the CFPB will remain, leaving the sole decision-making authority to whoever serves as the CFPB's Director. The court's decision may also provide financial institutions with some reassurance that the CFPB's discretion in bringing enforcement actions and imposing significant penalties remains subject to judicial oversight. Banks and holding companies should be aware, however, that the prudential banking regulators (Federal Reserve, OCC and FDIC) remain active in the consumer financial protection area, with their regulatory actions linking supervision and enforcement of consumer financial protection laws with safety and soundness considerations. This linkage by the prudential bank regulators of consumer protection issues to safety and soundness considerations may prove more sheltered from judicial review than the CFPB's single enforcement focus on consumer protection.


In 2014, the CFPB filed a notice of charges against PHH and its captive reinsurer, Atrium, alleging that certain premiums ceded by mortgage insurers to PHH through Atrium were made in consideration of PHH's continued referral of mortgage insurance business, and therefore were in violation of RESPA's anti-kickback provisions. The CFPB adjudicated the charges against PHH in an administrative proceeding, using an administrative law judge (ALJ) from the Securities Exchange Commission. The ALJ found that PHH had violated RESPA and ordered a disgorgement of $6.4 million of PHH's profits. The CFPB's Director subsequently adopted a different interpretation of RESPA in support of a broader finding of misconduct by PHH, raising PHH's fine up to $109 million.

In October 2016, a three-judge panel of the court granted PHH's petition for review, ultimately ruling in favor of PHH on the company's dispute of the CFPB's RESPA enforcement order and $109 million fine against PHH, and on its challenge of the constitutionality of the CFPB's structure. In February 2017, the court granted the CFPB's petition for en banc review by the full court, providing the bureau with the opportunity to defend the constitutionality of its independent structure.

In the current en banc opinion, the court's majority reinstated the decision of the three-judge panel that the CFPB's interpretation of RESPA did not support imposing a $109 million disgorgement penalty. In considering the constitutionality of the CFPB, the court reviewed the purpose of the bureau and the need for its independence, including consideration of Congress's intent in creating the bureau as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). Secondly, the court analyzed the means of independence that Congress chose—removal by the President only for "inefficiency, neglect of duty, or malfeasance in office"—to determine whether the for-cause provision in the federal statute impedes the President's duty to take care that the consumer financial protection laws are faithfully executed. The court found that Congress's intent and purposes for making the bureau independent (e.g., to address consumer abuses as identified during the 2008 financial crisis, shield it from "manipulation or self-dealing by political incumbents," and place the agency on the same footing as its federal financial regulator counterparts) were justified.1 The court also found that the means used to shield the CFPB Director from removal (the for-cause provision) were within Congress's Article I legislative powers, consistent with US Supreme Court precedent, and consistent with Article II of the Constitution.2


Absent further review by the US Supreme Court, the court's decision could have major implications for both government enforcement agencies and corporations subject to oversight by the CFPB and the other federal financial regulators. The federal financial regulators may make greater efforts to ensure that the public is aware of the agencies' interpretations of federal financial laws prior to issuing supervisory guidance or bringing enforcement actions and imposing penalties against companies or individuals for violations, and businesses may be encouraged to challenge enforcement actions, rulemakings, and supervisory guidance that are based on expansive views of authority by the regulators.

The federal financial regulators' approaches to rulemakings, interpretations, enforcement actions, and other regulatory measures will, however, depend on the philosophies and positions of the chosen leaders. The President has a number of cabinet positions to fill in the federal financial regulatory agencies, including a CFPB Director to be chosen by July 2018. As a single-director led agency, the philosophy of the CFPB Director ultimately nominated by the President and confirmed by the Senate will dictate the direction of the CFPB in enforcing the federal consumer financial laws. The CFPB's Acting Director, Mick Mulvaney, is already impacting the direction of the CFPB, communicating to staff that the CFPB's mission would be transitioned from "aggressively 'pushing the envelope'" to one that meets its Congressional mandate but goes no further. As evidence of these changes under Mulvaney's direction, the CFPB has already delayed new rulemakings and ordered review of the CFPB's policies and practices.

In addition, litigation is pending as to whether Mulvaney is authorized to act as the interim director, or whether Leandra English, Cordray's chosen predecessor, should be in the role. However, the President is authorized to nominate a new Director for a five-year term in July. That person, if confirmed by the Senate, will dictate the direction of the CFPB on a going-forward basis regarding enforcement of federal consumer financial laws.

Finally, industry participants should remain cognizant that the federal banking agencies have their own tools to supervise and enforce the consumer financial laws and regulations, and there are indications that these regulators will continue to focus on consumer issues as part of their supervision of the safety and soundness of regulated entities. For example, in August 2017, the Federal Reserve issued proposed guidance which, in part, informed institutions that the agency would consider how violations of consumer financial protection laws impact the safety and soundness of the institution and both the Federal Reserve and the Office of the Comptroller of the Currency have issued enforcement actions against institutions under their safety and soundness authority for widespread violations of federal consumer financial laws.3 Companies should be aware that their primary regulators will continue to look for consumer abuses and should remain mindful that unlike the CFPB, which mainly relies on penalties and injunctive relief, the prudential regulators have the authority to limit the expansionary and business activities of the financial institutions they supervise.


1 The court stated "(t)hat independence shield the nation's economy from manipulation or self-dealing by political incumbents and enables such agencies to pursue the general public interest in the nation's longer-term economic stability and success, even where doing so might require action that is politically unpopular in the short term." PHH v. CFPB, N. 15-1177, at pg. 8 (D.C. Cir. Jan. 31, 2018). The court also noted that "the CFPB is one of a number of federal financial regulators—including the Federal Trade Commission, the Federal Reserve, the Federal Deposit Insurance Corporation, and others—that have long been permissibly afforded a degree of independence."Id. at 18.

2 The court noted that the language that Congress used in the Consumer Financial Protection Act for the removal of the CFPB Director is the same language that was upheld by the US Supreme Court in Humphrey's Executor as related to the Federal Trade Commission. Humphrey's Executor v. United States, 295 U.S. at 619, 629-32 (1935); see 15 U.S.C. § 41.

3 Press Release, "Federal Reserve Board invites public comment on two proposals; corporate governance and rating system for large financial institutions," Aug. 3, 2017.

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