Last week's Appeals Court ruling strikes at the heart of the authority of the Consumer Financial Protection Bureau. While most of the media attention has focused on the court's holding that the CFPB's organizational structure is unconstitutional, the court made two other critical rulings that put a stop to the CFPB's aggressive exercise of its enforcement authority.

The decision is also noteworthy for its tone. The DC Circuit is the Court of Appeals that primarily hears appeals from administrative decisions and determines whether the agency has acted correctly. It is not unusual for the court to reverse an agency's decision or to vacate its actions. But here, the unanimous court went further, as it was harsh in its criticisms of the CFPB and questioned the agency's commitment to following the rule of law. Such a decision is very rare.

First, the court rejected in its entirety the CFPB's position that it is not subject to any statute of limitations with respect to administrative enforcement actions that the CFPB commences.

Second, the court rejected the CFPB's attempt to rewrite Section 8 of the Real Estate Settlement Procedures Act, holding that that provision is subject to statutory interpretation by the court, and not entitled to any agency deference with respect to its meaning.

The court's strong rebuke of the CFPB makes clear that the court has rejected the CFPB's enforcement efforts against PHH Corp. as an arbitrary and unlawful exercise of the statutory authority that Congress vested in the CFPB.

In rejecting the various legal positions taken by the CFPB, the court excoriates the rationale advanced by the CFPB for its unsustainable interpretation of its enforcement authority. Indeed, it is probable that these rulings contributed to the court's decision regarding the unconstitutionality of the agency's structure, as reflected by the comment that the more traditional commission structure for independent agencies reduces the risk of arbitrary decision making and abusive power, and therefore helps protect individual liberty.

Bureau is Subject to Statute of Limitations

The court held that the CFPB is subject to all of the substantive limitations periods for the 19 statutes that Congress delegated in the Dodd-Frank Act to the CFPB for enforcement. In the case, the CFPB took the extraordinary and unprecedented view that, when it exercises its discretion to use an administrative enforcement proceeding, as opposed to a court action, it is not subject to the statute of limitations—the CFPB contended that it is subject to the limitations period only if it chooses to commence an action in a district court.

The court said that the absurdity of the CFPB's position is illustrated by CFPB's assertion, in response to a hypothetical question, that it has the discretion to bring an administrative enforcement action as long as 100 years after the allegedly unlawful conduct. "This court looks askance now at the idea that the CFPB is free to pursue an administrative enforcement action for an indefinite period of time after the relevant conduct took place," the decision states.

As the court noted, if this proposition was accepted, the statute of limitations would not apply to any of the 19 statutes that the CFPB enforces when the CFPB pursues enforcement actions administratively as opposed to judicially. The court held that the CFPB misread the enforcement provisions of the Dodd-Frank Act, specifically Section 5563 that provides that the CFPB may enforce the various federal laws "unless such Federal Law specifically limits the bureau from conducting a hearing or adjudication proceeding."

As the court tartly stated: "Obviously, one such 'limit' is a statute of limitations."

The court rejected the CFPB's strained attempt to draw a semantic distinction between Congress' use of the word "proceedings" as compared to the word "actions", noting that the Dodd-Frank Act itself repeatedly used the "action" to encompass both court actions and administrative proceedings. It concluded that, if Congress had intended to relieve the CFPB of compliance with the statute of limitations, the text of the statute should have expressly so stated.

The court held that CFPB's interpretation "is especially alarming because the agency can seek civil penalties in these administrative actions. But the Supreme Court has emphatically stressed the importance of statutes of limitations and civil penalty provisions."

No Deference on Statutory Interpretation

In the ruling regarding the CFPB's interpretation of Section 8 of the Act, the court held both that the CFPB's interpretation was wrong as a matter of law and that the CFPB's attempt to apply retroactively its new interpretation rejecting the decades-long interpretation of Section 8 by the Department of Housing and Urban Development was a clear violation of due process.

The court expressly rejected the CFPB's interpretation that Section 8 prohibited a mortgage insurer's payment for reinsurance if it was part of a tying arrangement. In addition to noting that tying arrangements are ubiquitous and are outlawed only in certain specific circumstances, the court hheld that "A payment for a service pursuant to a tying arrangement does not make the payment any less bona fide, so long as the payment for the service reflects reasonable market value."

The decision states that the CFPB's interpretation "flouts that statutory goal and upends the entire system of unpaid referrals that has been part of the market for real estate settlement services."

The court specifically rejected the CFPB's attempt to use Chevron deference as a shield, holding that there was no ambiguity in the statute and that therefore no deference was due to the agency. Under the Chevron doctrine developed by the Supreme Court, courts will defer to an agency's judgment when it concerns an issue of interpreting and applying general directions and prohibitions enacted by Congress. An agency, however, is not accorded that deference when the question is what Congress' words mean. Construction of statutes is an exclusive province of the courts.

The court would not permit the CFPB to change the law. "The CFPB obviously believes that captive reinsurance arrangements are harmful and should be illegal," the decision states. "But the decision whether to adopt a new prohibition on captive reinsurance arrangements is for Congress and the President when exercising the legislative authority. It is not a decision for the CFPB to make unilaterally."

Violation of Due Process

Further, the court held that, even assuming that the CFPB's interpretation of Section 8 is permissible, the CFPB's "complete about-face from the federal government's longstanding prior interpretation of Section 8" retroactively was a clear violation of due process. The court rejected the CFPB's argument that there was no prior government position.

The court concluded by mocking the CFPB using the following metaphor: "Put aside all the legalese for a moment. Imagine that a police officer tells a pedestrian that the pedestrian can lawfully cross the street at a certain place. The pedestrian carefully and precisely follows the officer's direction. After the pedestrian arrives at the other side of the street, however, the officer hands the pedestrian a $1,000 jaywalking ticket. No one would seriously contend that the officer had acted fairly or in a manner consistent with basic due process in that situation. Yet, that's precisely this case. Here the CFPB is arguing that it has the authority to order PHH to pay a $109 million even though PHH acted in reliance upon numerous government pronouncements authorizing precisely the conduct in which PHH engaged."

Based on these two substantive rulings, the court remanded the action to the CFPB to determine solely whether, consistent with the applicable three-year statute of limitations, the relevant mortgage insurers paid more than reasonable market value to the PHH-affiliated reinsurer.

In sum, the Court of Appeals' decision constitutes a comprehensive rejection of the legal positions taken by the CFPB as well as a rebuke of the CFPB's aggressive and unprecedented assertion of authority. In addition to the constitutional change in the CFPB's structure, the CFPB is now bound by all of the statutes of limitations incorporated in the 19 statutes that the CFPB is charged to enforce. Further, the CFPB will not be permitted to rewrite or expand Section 8 of the Act to prohibit tying relationships in the real estate servicing industry. And finally, the decision may well cast meaningful doubt about the fairness of the CFPB's actions and the perception that the agency is willing to act within its legal constraints.

Originally published in Asset Securitization Report on October 20, 2016.

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