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In a major setback for the Consumer Financial Protection Bureau (“CFPB”), the D.C. Circuit issued a significant ruling today that found the CFPB’s single director structure unconstitutional, ruled against the CFPB on important statutory interpretations – including the Bureau’s position that it was not subject to any statute of limitations in enforcement proceedings – and tossed out a $109 million penalty against a mortgage company.  Today’s decision follows arguments in the case in April, which we reported on here.

As we noted previously, CFPB Director Richard Cordray, in the Bureau’s first appellate decision PHH Corp. v. Consumer Financial Protection Bureau, imposed a $109 million penalty on PHH for alleged Real Estate Settlement Procedures Act (“RESPA”) violations involving improper kickbacks related to mortgage reinsurance where agreements were in place with lenders, a dramatic increase over the $6 million penalty that had been imposed by the administrative law judge at the trial level.  Among the issues on appeal in PHH was Director Cordray’s decision not to follow the Department of Housing and Development’s (“HUD”) previous interpretation of RESPA as it relates to mortgage reinsurance arrangements.  HUD was the agency responsible for enforcing RESPA before the CFPB assumed responsibility for enforcement in 2011.  Other issues on appeal included the CFPB’s position that no statute of limitations applies to administrative actions and whether the Bureau is constitutionally structured.

Today’s decision included four major holdings:

  • The CFPB is unconstitutional as structured, but will survive.

 Unlike other federal agencies governed by nonpartisan or bipartisan commissions or by a director who serves at the pleasure of the President, the CFPB is headed by a single director who is removable only “for cause.”  Moreover, the Bureau receives funding outside of Congressional appropriations, further insulating it from any effective executive or legislative supervisions.  The D.C. Circuit determined that these features of the Bureau’s structure rendered it unconstitutional, expressing particular concern about the lack of protection against arbitrary decisionmaking and abuses of power by the sole director.

However, the D.C. Circuit stopped short of accepting PHH’s argument that the remedy for this constitutional defect should be to shut down the CFPB.  Instead, the court severed the “for cause” removal provision from the Dodd-Frank Act, allowing the CFPB to continue to operate as an executive agency and providing the President with the power to supervise, direct, and remove the CFPB Director at will.

  • The same statutes of limitation apply whether a CFPB action is brought in court or in an administrative proceeding.

The D.C. Circuit also rejected the CFPB’s argument that statutes of limitations are inapplicable in administrative enforcement actions, finding that the Bureau’s administrative enforcement authority (as well as judicial enforcement authority) is specifically tied to the statutes of limitation in the consumer protection laws it is charged with enforcing.  Section 5563 of the Dodd-Frank Act provides the CFPB with administrative enforcement authority for nineteen federal consumer protection laws, in addition to other rules and regulations, “unless such Federal law specifically limits the Bureau from conducting a hearing or adjudication proceeding.”  12 U.S.C. § 5563(a)(2).  According to the D.C. Circuit, “[o]bviously, one such ‘limit’ is a statute of limitations.” (emphasis in original).  It also specifically held that CFPB administrative actions are subject to RESPA’s three-year limitations period.

  • The plain text of RESPA Section 8 permits captive reinsurance arrangements and payments for other services actually performed.

According to the D.C. Circuit, “[t]he basic statutory question in this case is not a close call.”  In the decision on appeal, Director Cordray concluded that captive reinsurance arrangements—where a mortgage lender refers borrowers to a mortgage insurer and the insurer buys reinsurance from a reinsurer affiliated with the referring mortgage lender—violate RESPA.  The D.C. Circuit had no difficulty rejecting this interpretation, holding that the plain language of Section 8(c) of RESPA permits captive reinsurance arrangements – as well as payments for other services actually performed – where mortgage insurers pay no more than reasonable market value for the service, and “specifically bars the aggressive interpretation of Section 8(a) advanced by the CFPB in this case.”  In doing so, the D.C. Circuit explained:

Section 8(a) proscribes payments for referrals.  Period.  It does not proscribe other transactions between the lender and mortgage insurer.  Nor does it proscribe a tying arrangement, so long as the only payments exchanged are bona fide payments for services and not payments for referrals.

  • The CFPB violated PHH’s due process rights.

The D.C. Circuit also determined that even if the CFPB’s interpretation of Section 8 was correct, the Bureau still violated PHH’s due process rights by departing from consistent prior interpretations issued by HUD permitting such conduct and retroactively applying its new interpretation against PHH.  Repeating Judge Kavanaugh’s colorful commentary in oral argument, the court analogized the Bureau’s sanction of PHH to a police officer “tell[ing] a pedestrian that the pedestrian can lawfully cross the street at a certain place” and then “hand[ing] the pedestrian a $1,000 jaywalking ticket” once the pedestrian crossed to the other side.  “The Due Process Clause does not countenance the CFPB’s gamesmanship.”

In summary, the D.C. Circuit’s opinion allows the CFPB to survive, but the court made clear that the CFPB’s attempts to unilaterally reinvent long-standing agency guidance and avoid well-established limitations on actions will not be countenanced.

The next move is up to the Bureau, but it is almost certain that today’s opinion is not the last word.  While the D.C. Circuit remanded the case for further proceedings, potentially including factual determinations as to whether the relevant mortgage insurers paid more than the reasonable market value to the reinsurer, it is likely that the Bureau will seek further review in the form of panel rehearing, rehearing en banc, or petition for certiorari to the Supreme Court.