When the Consumer Financial Protection Bureau (CFPB) filed its notice of charges against New Jersey-based mortgage lender, PHH Corp. in January 2014, there were few observers outside of the mortgage and real estate industries who paid much attention. Now, more than three years later, the legal battle has evolved into a constitutional challenge that the CFPB has suggested may be “the most important separation-of-powers case in a generation.” PHH’s case against the controversial federal consumer watchdog has captured the attention of not only the financial services industry, but lawmakers, state attorneys general, legal scholars, consumer advocacy groups and many consumers themselves.
Why has this legal battle drawn so much attention? Because the outcome of this case could dramatically alter the leadership, mission, or even the very existence of the CFPB, an agency whose presence is felt, for better or for worse, by the entire financial services industry and by consumers across the country.
A lot has taken place since the inception of the case in January 2014. Here’s what you need to know about the legal battle – how it began, where the case stands currently, and where it might go from here.
On January 29, 2014, the CFPB initiated legal proceedings in an administrative forum against PHH Corp. In a notice of charges (similar to a complaint filed in federal court), the CFPB alleged that PHH accepted illegal reinsurance kickbacks in violation of Section 8 of the Real Estate Settlement Procedures Act (RESPA).
Cameron Elliot, an Administrative Law Judge (ALJ) from the Securities and Exchange Commission (SEC), was assigned to the proceeding. In November 2014, Elliot released his decision in which he found that PHH had accepted reinsurance premiums in violation of RESPA dating back to July 2008 and recommended imposition of an injunction and disgorgement of over $6.4 million against PHH.
Appeal of ALJ Recommended Decision
On December 4, 2014, PHH filed its appeal of the ALJ’s decision which would be heard by the CFPB itself. In fact, CFPB Director Richard Cordray would preside over the case.
In its appeal, PHH stated that it took exception to the recommended decision, “including but not limited to, all findings of liability and all relief recommended by the hearing officer, on the grounds that the findings of fact, conclusions of law, and proposed relief are arbitrary, capricious, an abuse of discretion, not in accordance with law, and/or unsupported by reliable, probative, and substantial evidence.”
The next week, the CFPB filed its own notice of appeal which subtly suggested that the Bureau believed PHH should have been found liable for loans closed before July 2008 and therefore subject to a much larger monetary penalty than the ALJ imposed. In a brief filed several weeks later, the CFPB asserted that the ALJ’s finding of liability for RESPA violations should be affirmed but also argued that the penalty should be increased to $493 million to account for RESPA violations that occurred between as far back as 1995.
On June 4, 2015, Cordray issued his final decision, in which he affirmed the ALJ’s finding that PHH violated REPSA but also reached major decisions differently from the ALJ. Ultimately, Cordray found PHH liable for each payment it accepted on or after July 21, 2008 and increased the monetary penalty against PHH from $6.4 million to more than $109 million.
Appeal to the DC Circuit
PHH petitioned the DC Circuit to review Cordray’s final decision and order. The court granted the petition and assigned the appeal to a three-judge panel consisting of Judge Brett Kavanaugh, Judge Raymond Randolph, and Judge Karen Henderson. All three judges were appointed by Republican presidents.
During briefing, PHH presented several arguments including claims that Cordray misinterpreted RESPA and ignored the applicable statute of limitations when rendering his decision. PHH also argued that the CFPB’s structure violates the US Constitution’s separation of powers doctrine.
DC Circuit Panel Declares CFPB Unconstitutional
In October 2016, the three-judge panel reversed Cordray’s decision on significant issues of RESPA interpretation and administrative law. The panel rejected Cordray’s interpretation of RESPA, which departed from HUD’s prior interpretation. The panel also determined that even if the Bureau’s RESPA interpretation was correct, its attempt to apply its new interpretation retroactively violated due process. More significantly, the panel declared the CFPB’s single-director-removable-only-for-cause structure unconstitutional. The panel remedied that defect by severing the removal-only-for-cause provision from the Dodd-Frank Act so that the President “now has the power to supervise and direct the Director of the CFPB, and may remove the Director at will at any time.” The panel remanded the matter back to the CFPB to proceed in accordance with that opinion.
Rehearing En Banc
In November 2016, the CFPB filed a petition asking the DC Circuit to grant a rehearing en banc. The DC Circuit granted that petition and set aside the mandate issued by the three-judge panel pending a decision by the full court. The opinion continues to exist, however.
While all issues of the case may be argued and decided by the DC Circuit en banc, the court specifically instructed the parties to brief the following three questions:
- Is the CFPB’s structure as a single-Director independent agency consistent with Article II of the Constitution and, if not, is the proper remedy to sever the for-cause provision of the statute?
- May the court appropriately avoid deciding that constitutional question given the panel’s rulings on the statutory issues in this case?
- If the en banc court, which has today separately ordered en banc consideration of Lucia v. S.E.C., 832 F.3d 277 (D.C. Cir. 2016), concludes in that case that the administrative law judge who handled that case was an inferior officer rather than an employee, what is the appropriate disposition of this case?
President Trump’s Authority to remove CFPB Director Cordray
Most of the discussion of this case has revolved around whether the President has the constitutional authority to remove the CFPB Director without cause. Currently, the opinion of the three-judge panel is the most detailed discussion of that question, and that provides some judicial support for removing the Director without cause. But the mandate implementing that opinion has been set aside, pending the decision of the full panel of judges.
For months, there has been speculation that President Trump might attempt to remove Director Cordray without cause even before the case reaches a resolution in the DC Circuit. The argument made in support of such a maneuver is that the President could remove Director Cordray before the appeal is resolved if the Executive Branch determines that the statutory “for cause” restriction on removal is unconstitutional. In that case, it would be up to Director Cordray to challenge the removal. There are various venues in which the Director could attempt to make such a case (e.g., the Court of Claims for the pay he would not receive), and the Director might persuade a court to conclude that he was wrongfully removed.
The general consensus is that if Trump intended to take such an action, he would have done so by now. It is more likely that the Trump Administration has eschewed that strategy due to the unpredictability of such litigation and because of the presumed political backlash that would follow.
Trump could instead attempt to fire Cordray by following the existing removal provision in Dodd-Frank which permits the President to oust the CFPB Director “for inefficiency, neglect of duty or malfeasance in office.” Such a move would require the President to provide a basis for the “for-cause” dismissal. While there has been considerable speculation about possible grounds for dismissal, none of those theories appear likely to hold up in court if Cordray challenged the removal.
As such, it is likely that President Trump will have to let the PHH litigation run its course before acting to remove Director Cordray.
If the DC Circuit en banc does not conclude that the Director can be removed without cause, Cordray would presumably remain the head of the agency either until the end of his term which expires in July 2018, or until the Supreme Court reached a contrary decision in the event that the case is appealed to the Supreme Court.
Even if President Trump reluctantly leaves Director Cordray in place, Cordray and CFPB will face an uphill battle to advance significant rulemaking under the Trump Administration. President Trump has issued several executive orders designed to limit agency authority to issue new rules. Additionally, Congress appears ready to call upon a special set of procedures in the Congressional Review Act through which Congress nullify final regulations issued by a federal agency.
Here are a few of the options that the en banc court has to dispose of or resolve this case (in order from least likely to most likely to occur):
- Dismiss PHH’s appeal from Director Cordray’s decision. This would leave Director Cordray’s RESPA interpretations and $109 million penalty in place. This would not address the constitutional issue so the CFPB’s structure would remain untouched.
- Adopt reasoning similar to that set forth in the three-judge panel’s October 2016 opinion and re-impose the panel’s mandate.
- Determine that the ALJ was inappropriately appointed, which could be remedied in various ways including dismissal of the proceedings.
- Issue an opinion addressing matters of statutory interpretation but conclude that it is unnecessary for the court to reach the constitutional questions.
- Decide both the questions of interpretation and the constitutional questions.
No matter how the DC Circuit en banc rules, it can be expected that one of the parties will wish to appeal the decision to the US Supreme Court. However, it is likely that the CFPB will face significant obstacles on its path to the Supreme Court. The CFPB must seek permission from the Solicitor General of the United States to file a certiorari petition.
In light of the DOJ’s recent amicus brief, it is virtually unimaginable that the Trump administration or Solicitor General will reverse course and side with the CFPB. The Solicitor General would have several options if he disagrees with the CFPB’s position. Mostly obviously, the Solicitor General could deny the CFPB’s request to file a petition for certiorari with the Supreme Court. That would effectively bring the legal battle to an end. Alternatively, the Solicitor General could permit the CFPB to file petition for certiorari while continuing to oppose the agency by filing an amicus brief in opposition. While a rarity, this scenario has occurred in the past where the Solicitor General has allowed other independent agencies to defend themselves or their policies in the Supreme Court despite the Solicitor General’s taking a contrary position.
Earlier this month, PHH filed its opening brief arguing that the DC Circuit should “strike down the CFPB in its entirety.” That same day, there were seven amicus briefs filed in support of PHH.
On March 20, the Trump Administration’s Department of Justice (DOJ) filed an amicus brief in which it joined PHH in opposing the CFPB. Unlike PHH, however, the DOJ argued that the appropriate remedy is to “sever the provision limiting the President’s authority to remove the CFPB’s Director, not to declare the entire agency and its operations unconstitutional.”
Briefs for the CFPB and amici curiae are due March 31 and oral arguments are set for May 24. Most observers anticipate that the en banc court will publish its decision sometime in the late third quarter or early fourth quarter of this year.