In a 110-page decision issued on Oct. 11, 2016, the United States Court of Appeals for the District of Columbia Circuit declared the Consumer Financial Protection Bureau’s (CFPB) single-director structure unconstitutional and vacated a $103 million fine against PHH.  The Court found that the current structure allows the Commissioner to wield too much power that is unchecked by any other part of government.  To remedy this concern, the Court severed the “for cause” provision from the statute, placing the agency under the direct supervision of the president.  The Court also vacated the Order against PHH, finding that the CFPB’s interpretation of RESPA violated PHH’s due process rights in several respects. First, the Commissioner erred in disregarding long-standing guidance from the Department of Housing and Urban Development (HUD) recognizing that Section 8 of RESPA allows captive reinsurance arrangements so long as the amount paid by the mortgage insurer for the reinsurance does not exceed the reasonable market value of the reinsurance.  The Court declared that Section 8 shall continue to have the meaning ascribed to it by HUD.  Secondly, in calculating the penalty against PHH, the Commissioner had improperly included loans that had closed more than three years prior to the action.  The Court rejected the CFPB argument that it was not subject to any statute of limitations, and ruled that the agency was subject to the three-year limitations period that has traditionally applied to agency actions to enforce RESPA.

As we wrote about previously, this case stems back to a June 2015 CFPB order in which CFPB Director Richard Cordray singlehandedly increased a $6 million fine levied by an administrative law judge against PHH for allegedly referring consumers to mortgage insurers in exchange for kickbacks in violation of the Real Estate Procedures Act (RESPA).  The ALJ’s fine was based upon loans closed on or after July 21, 2008..  PHH appealed that ruling to the Director.  Cordray issued a final order that required PHH to disgorge $109 million – all the reinsurance premiums it received on or after July 21, 2008.On appeal, PHH challenged Cordray’s authority to levy the additional fine and challenged the constitutionality of the CFPB itself.

The Court first addressed PHH’s overarching argument that the fine levied against it was unconstitutional because the structure of the CFPB itself was unconstitutional.  The Court framed the question before it as whether Supreme Court precedent supports “this novel, single-Director agency structure for an independent agency.”  Although the power to enforce federal laws rests with the executive branch of government, since 1935, the Supreme Court has permitted Congress to create independent agencies that exercise executive power.  Executive agencies and independent agencies are typically structured in different ways, the Court explained.  “The President is a check on [Executive] agencies.” “Those agencies are accountable to the President.  The President in turn is accountable to the people of the United States for the exercise of executive power in the executive agencies.”  Unlike executive agencies, “the overarching constitutional concern with independent agencies is that the agencies are unchecked by the President, the official who is accountable to the people and who is responsible under Article II for the exercise of executive power.”  Therefore, the Court explained, “to keep power in check, Congress has traditionally required multi-member bodies at the helm of every independent agency to prevent arbitrary decision-making and thereby to protect individual liberty.”

Against this back-drop, the Court turned to the CFPB’s structure.  In contrast to the traditional multi-member structure, the CFPB is headed by a single director who “unilaterally enforces 19 federal consumer protection statutes, covering everything from home finance to student loans to credit cards to banking practices.  The Director alone decides what rules to issue; how to enforce, when to enforce, and against whom to enforce the law; and what sanctions and penalties to impose on violators of the law.”  “It is the Director’s view of consumer protection law that prevails over all others,” the court explained.  “In essence, the Director is the President of Consumer Finance.  The concentration of massive, unchecked power in a single Director marks a departure from settled historical practice and makes the CFPB unique among traditional independent agencies.”  In short, the court writes, the director of the CFPB is the “single most powerful official in the entire U.S. Government, other than the President,” in terms of unilateral power.  “As an independent agency with just a single Director, the CFPB represents a sharp break from historical practice, lacks the critical internal check on arbitrary decision-making, and poses a far greater threat to individual liberty than does a multi-member independent agency,” the court writes. “All of that raises grave constitutional doubts about the CFPB’s single-Director structure.”  Thus, the Court concluded, the CFPB’s structure is unconstitutional because it accumulates too much power in a single director.  The Court declined, however to disband the CFPB altogether, as PHH had urged.  It determined that the appropriate remedy was to sever the statute’s “for-cause only termination provision, give the President the power to remove the Director at will, and to supervise and direct the Director.  “The CFPB therefore will continue to operate and to perform its many duties, but will do so as an executive agency akin to other executive agencies headed by a single person, such as the Department of Justice and the Department of the Treasury.”  The President now will be a check on, and accountable for, the actions of the CFPB. Because of the decision, the CFPB now will operate as an executive agency. The president of the United States now has the power to supervise and direct the Director of the CFPB, and may remove the Director at will at any time.

The Court agreed with PHH’s due process arguments concerning the CFPB’s interpretation of RESPA.  First, the Court sided with PHH’s argument that Section 8 of RESPA allows captive reinsurance arrangements so long as the amount paid by the mortgage insurer for the reinsurance does not exceed the reasonable market value of the reinsurance.  On remand, the CFPB will be required to demonstrate that mortgage insurers in fact paid more than reasonable market value to the PHH-affiliated reinsurer for reinsurance, thereby making disguised payments for referrals in contravention of Section 8. The Court also admonished the CFPB by alternatively holding that even if the CFPB’s interpretation was permitted under any reading of RESPA, the CFPB’s attempt to retroactively apply its 2015 interpretation violated due process.  By departing from prior interpretations issued by [HUD] that were consistent with PHH’s conduct, and then applying that interpretation retroactively against PHH, the [CFPB] violat[ed] PHH’s due process rights.”

Finally, the Court concluded that the Commission had improperly calculated the fine by including alleged misconduct that occurred outside of the three-year statute of limitations for RESPA actions.  The CFPB had argued that there is no statute of limitations for any CFPB administrative actions to enforce any consumer protection law under Dodd-Frank.  The Court disagreed, explaining that Dodd-Frank incorporates the statutes of limitations of the underlying statutes enforced in administrative proceedings.  Accordingly, RESPA’s three-year statute of limitations applies to all CFPB enforcement actions to enforce Section 8, whether brought in court or administratively.  The court explicitly declined to address the CFPB’s claim that each mortgage insurance payment made in violation of RESPA triggers a new three-year statute of limitations for that payment.

The Court remanded the case to the CFPB for consideration of whether PHH violated RESPA as interpreted by HUD.