The U.S. Court of Appeals for the D.C. Circuit recently issued its long-awaited ruling in the PHH v. Consumer Financial Protection Bureau case, finding the structure of the Consumer Financial Protection Bureau (CFPB) is constitutional, but reinstating the previous panel decision rejecting CFPB's interpretations of the Real Estate Settlement Procedures Act (RESPA) and the relevant statute of limitations. While most of the attention has been paid to the constitutional rule, equally important is that the court's Jan. 31, ruling reinstated a panel ruling rejecting CFPB's interpretation of RESPA.

Background

The case stems from a 2014 administrative proceeding before CFPB, in which the bureau alleged that PHH, a mortgage originator, created a kick-back scheme that violated RESPA through the practice of referring mortgage insurance business in exchange for reinsurance business for PHH's reinsurance affiliate.

In a proceeding, PHH argued that the reinsurance premiums it received were lawful under RESPA Section 8(c) (2), which does not forbid compensation for “services actually performed.” PHH further argued that this position had long been accepted by HUD, which administered RESPA prior to the CFPB. The administrative law judge ruled against PHH, holding that PHH had not shown that the premiums were reasonable, thus not “services actually performed,” and imposed a $6.4 million penalty.

PHH appealed this ruling to CFPB director Richard Cordray. The director actually increased the penalty, ruling that any payment tied to the referral of business could not be exempt under 8(c) (2), and thus all premiums paid to PHH violated RESPA. He also rejected the application of any statute of limitations, resulting in an order disgorging all premiums received since July 2008 for an estimated total of $109 million.

PHH appealed, and on Oct. 11, 2016, a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit declared the CFPB's single-director structure unconstitutional, and vacated the disgorgement order. In doing so, the panel found CFPB's structure allowed the director to wield too much power, in violation of the separation of powers. The panel also rejected the CFPB's interpretations of RESPA, finding that the due process clause prohibited the CFPB from reversing the long-standing guidance from HUD, the CFPB's interpretation contradicted the language of the statute, and the three-year statute of limitations applied.

CFPB obtained en banc review of the order, vacating the prior ruling, and the full court heard oral argument on May 24, 2017.

The D.C. Circuit's Jan. 31 Ruling

• Constitutional Analysis

The court's ruling rejected the constitutional concerns raised by PHH, and held “Congress' decision to establish an agency led by a director removable only for cause is a valid exercise of its Article I legislative power.” The ruling examined whether the characteristics of CFPB (a single director with a five-year term, exemption from the congressional appropriations process, and broad scope of authority) impinged on the president's authority to “take care that the laws be faithfully executed” under Article II of the Constitution. It concluded that, while the CFPB structure may be different than other federal agencies, such differences did not violate the Constitution.

The court's ruling relied heavily on the rulings of Humphrey's Executor, Free Enterprise Fund, and Morrison, each of which upheld for-cause removal clauses for other federal agencies. The ability to remove the director “for cause” was held to be sufficient authority to allow the president to exercise his Article II powers. Similarly, the court found no issue with the CFPB's budgetary independence, citing other examples of administrative agencies (the Federal Reserve, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency) which have similar exemptions from congressional appropriations. The court found the single-director structure did not meaningfully affect the analysis, highlighting that other agencies have a single director and that prior cases on the removal power indicated that the leadership structure of the agency was not significant. Even the combination of all of these attributes, the court held, did not create a constitutional concern.

Notably, the court focused on how the president can control the CFPB. It highlighted that the director can be removed for “inefficiency, neglect of duty, or malfeasance in office,” and Congress has no role in approving or denying any such removal. The court described that authority as “very broad,” and two other judges wrote concurring opinions stressing that point. Moreover, the court highlighted that the FSOC, a super-majority of whose members are directly appointed by the president, can stay or veto any CFPB regulation by a two-thirds vote of its members.

The court further rejected all other theories regarding CFPB's unconstitutionality, holding that its powers, while broad, “are not out of the ordinary for a financial regulator,” and comparing the CFPB's powers to those of the FTC and other financial regulators.

• The CFPB's Interpretation of RESPA

Notably, the en banc decision reinstated the previous panel decision rejecting the CFPB's interpretation of RESPA. “The panel opinion … related to the interpretation of RESPA and its application to PHH and Atrium in this case, is … reinstated as the decision of the three-judge panel on those questions.”

Because the panel decision rejected CFPB's interpretation of RESPA section, the result is that the case was remanded to the CFPB's administrative process to determine whether the relevant mortgage insurers paid more than reasonable market value to the captive reinsurer. The CFPB will bear the burden of proof on this point, and it will be bound by a three-year statute of limitations.

What Happens Next?

Given the changes in CFPB leadership, PHH may elect not to appeal this decision and proceed through the administrative process. With the burden resting on the CFPB to show that the reinsurance premiums were not reasonable, PHH may be optimistic about its chances. CFPB could also abandon the enforcement proceeding as inconsistent with its current interpretation of RESPA, or settle with PHH on more favorable terms. An appeal to the U.S. Supreme Court is not a certainty.

However, other cases involving CFPB enforcement proceedings have raised similar constitutional arguments relating to separation of powers, the removal power of the president, and encroachment on the president's ability to “take care” that the laws be faithfully executed. This issue may yet reach the Supreme Court for a final determination.

Key Takeaways

The decision of the D.C. Circuit is not binding on other federal district courts other than the D.C. Circuit which means defendants are free to pursue constitutional claims in other district and circuit courts. It is unclear if the Supreme Court will rule on this issue in the near term, as changes in both CFPB leadership and potential legislation may diminish the appetite for parties to press this issue.

The interpretation of RESPA is extremely important for the real estate finance industry. The PHH decision reinstates the long-held interpretation of RESPA that Section 8(c) (2) protects reasonable payments for goods and services actually provided, even in the context of a referral. This interpretation may be consistent with the CFPB's views under new leadership, but any new interpretation by a future administration would likely have to take the form of new rule-making or official guidance before any enforcement action would be accepted by the courts.

Andrew S. Wein is a regulatory, litigation, and corporate attorney with Greenberg Traurig's West Palm Beach office who represents financial services clients. His national practice focuses primarily on mortgage companies and other consumer financial institutions, assisting them with both litigation and regulatory compliance, including federal and state consumer protection statutes, including RESPA, TILA, FDCPA, FCRA, TCPA, and HMDA.