A three-judge panel on the DC Circuit Court of Appeals declared the CFPB structure unconstitutional. According to the panel, the Bureau violated the Constitution’s separation of powers doctrine because its sole director, Richard Cordray, is not sufficiently accountable to the president. In its decision, the court explained that CFPB’s single director leadership structure is unlike other independent agencies that are not accountable to the president because their leadership is checked by multiple commissioners or board members.
The case was initiated in 2014 when the CFPB brought action against PHH, a New Jersey-based mortgage lender. An administrative law judge recommended $6.5 million dollar fine against PHH for allegedly requiring unlawful kickbacks from mortgage insurers in violation of the Real Estate Settlement Procedures Act (RESPA). Eventually, Director Cordray overruled that recommendation and increased the fine to $109 million. PHH appealed the decision to the DC Circuit Court of Appeals.
During oral arguments, PHH argued that the CFPB should be shut down on the basis of its unconstitutional structure. The court rejected the suggestion and opted for a more narrow remedy. Instead, the appeals court ruled that the CFPB must give the president the power to remove the Bureau’s direct at will and to supervise and direct his actions. Before the ruling, the director could only be removed by the president “for cause.”
The court also ruled in favor of PHH on each of its statutory objections, explaining that the CFPB made numerous errors in its enforcement action against PHH. Perhaps the Bureau’s most glaring misstep was its decision to retroactively apply its novel interpretation of Section 8 of RESPA to PHH’s conduct that occurred before the Bureau ever issued its interpretation. This is to say nothing of the fact that the CFPB’s interpretations were a dramatic departure from the Department of Housing and Urban Development interpretations that the mortgage industry had relied upon for decades.
The court ultimately held the Bureau’s retroactive application of a new RESPA interpretation violated PHH’s due process rights. The Bureau argued that Congress did not set a time limit for bringing administrative proceedings. The court declared, however, that the Bureau is bound by the three-year statute of limitations for RESPA violations, even in administrative actions. The appeals courts elaborated on the decision by calling the Bureau’s position “absurd” and questioning how Congress could ever have intended to permit the CFPB to bring administrative actions for an indefinite period of time.
Observers note that the court’s ruling will likely make the CFPB a more political agency than it is currently. The White House will be able to exercise more control over the agency’s direction. The next president will have more latitude when it comes to removing Director Cordray before his term expires in 2018. Additionally, the court’s ruling against the Bureau on retroactive enforcement of amended legal interpretations will severely undermine the agency’s practices by limiting its ability to seek damages for past conduct.
The CFPB can ask the DC Circuit to rehear the case with a full panel of judges. The case may ultimately make its way before the Supreme Court.
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