On April 12, 2016, the US Circuit Court of Appeals for the District of Columbia held oral arguments in PHH Corporation v. Consumer Financial Protection Bureau (CFPB). PHH, a mortgage lender, is challenging the CFPB’s constitutionality as well as the Bureau’s interpretation of the Real Estate Settlement Procedures Act (RESPA).
The case began in January 2014 when the CFPB alleged that PHH had violated the anti-kickback provisions in Section 8 of RESPA. PHH contested the CFPB’s charges and brought the case before an administrative law judge (ALJ). In November 2014, the ALJ ruled in favor of the CFPB, granting injunctive relief and ordering PHH to pay $6.4 million in damages. PHH appealed the ALJ’s decision to CFPB Director Richard Cordray. In June 2015, Director Cordray affirmed the ALJ’s decision and increased the penalty to $109 million.
In its appeal to the D.C. Circuit, PHH challenges Director Cordray’s interpretations of RESPA and the CFPB’s view that no statute of limitations applies to RESPA violations in an administrative proceeding. PHH also asserts that the CFPB’s enforcement action is void because the CFPB itself is unconstitutional.
Before last week’s hearing, the three members of the D.C. Circuit panel issued an order instructing the parties to be prepared to address two specific questions at oral argument regarding the constitutionality issue. The first question asked, “What independent agencies now or historically have been headed by a single person?” The other asked what the appropriate remedy would be if the court found a single-director structure unconstitutional and if the appropriate remedy would be to “sever the tenure and for-cause provisions” contained in the Dodd-Frank Act. Observers remarked that the order indicated that the D.C. Circuit was troubled by the CFPB’s structure and signaled the panel’s willingness to declare that the CFPB is an unconstitutional agency.
While the court posed questions about RESPA and the statute of limitations during oral arguments, the most compelling line of inquiry revolved around the structure, authority, and constitutionality of the CFPB. In particular, the panel aggressively questioned the CFPB’s structure, particularly the amount of power placed in the hands of a single director. PHH argued that the Dodd-Frank Act grants the CFPB director broad legislative, executive, and judicial authority that violates the U.S. Constitution’s separation of powers doctrine and that the director’s lack of accountability to the President or Congress is only checked by the courts. Unlike other federal agencies governed by non-partisan or bi-partisan commissions, the CFPB is led by a single director whom the President may only remove “for cause.” During the hearing, Judge Kavanaugh noted, “You’re concentrating in a single person a huge amount of power and the president has no authority over that.”
When asked what the remedy should be if the court determined that the CFPB’s structure was unconstitutional, the Bureau suggested that severing Dodd-Frank’s “for cause” provision would be appropriate. While this remedy would permit the President to remove the director without cause, it would also allow Director Cordray to reconsider the case. PHH, on the other hand, claimed that it would not be appropriate for the D.C. Circuit to invalidate the “for cause” provision and send the case back to Director Cordray for reconsideration. PHH posited that because the CFPB is not subject to Congressional appropriations for funding – which further insulates the Bureau from executive or legislative supervision – removing the “for cause” provision would be appropriate but insufficient to remedy the CFPB’s unconstitutional structure. Instead, PHH recommended that the court vacate Director Cordray’s decision in the case, declare that Director Cordray cannot continue as Director and require Congress to create the agency in a constitutional way before someone else can be appointed to the position.
The panel also expressed concern regarding the CFPB’s interpretations of RESPA. Judge Kavanuagh second-guessed the CFPB’s decision to discard the Department of Housing and Urban Development’s (HUD) guidance regarding RESPA’s anti-kickback provisions and questioned whether the mortgage industry received sufficient notice of the CFPB’s RESPA interpretations that diverged from HUD guidance that PHH and the entire mortgage industry had relied upon for years. The panel also seemed troubled by Director Cordray’s ostensibly arbitrary approach to RESPA’s statute of limitations. According to the CFPB, the RESPA statute of limitations only applies to court or judicial proceedings, not to agency actions. Judge Kavanaugh expressed skepticism of the CFPB’s position, pointing out that under its theory, the CFPB could “bring an action decades after the event.”
The panel’s written decision is expected this summer or early this fall. While the panel’s hostility toward the CFPB’s defense of its constitutionality is widely viewed as an indication that the DC Circuit will invalidate Director Cordray’s order, the odds of an appeal are high no matter the outcome of the case. It is anticipated that the disappointed party will either seek a rehearing by the full D.C. Circuit or perhaps seek review by the Supreme Court.
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