October 11, 2016

In Long-awaited Decision, D.C. Circuit Reverses CFPB Enforcement Ruling and Finds CFPB Structure Unconstitutional In Part

Today the D.C. Circuit issued its opinion in PHH Corporation v. Consumer Financial Protection Bureau. In the long-anticipated decision, the court found the CFPB’s structure unconstitutional in insulating the Director from removal by the President, rejected several of the Bureau’s interpretations of RESPA, held the Bureau’s efforts to apply that interpretation retroactively violated due process, and clarified that RESPA’s three-year statute of limitations applies to all the Bureau’s enforcement actions, whether in court or before an administrative law judge. The D.C. Circuit did not invalidate the Bureau in its entirety, holding that the Bureau’s unconstitutional structure could be remedied by severing the unconstitutional tenure provision of the statute.

Today, the United States Court of Appeals for the District of Columbia Circuit issued its long-awaited opinion in PHH Corporation v. Consumer Financial Protection Bureau (No. 15-1177), the first-ever court challenge to an administrative adjudication by the Bureau. The Bureau had held that the reinsurance of mortgage insurance policies in a case it adjudicated had violated the Real Estate Settlement Procedures Act (RESPA). In an opinion covering over 100 pages, the three-judge panel concluded 1) the Bureau’s single-Director structure was unconstitutional in part, due to separation of powers principles, 2) the Bureau’s interpretation of RESPA was wrong, 3) the Bureau’s attempt to apply its novel reinterpretation of RESPA retroactively violated due process, and 4) the three-year limitations period included in RESPA applied to the CFPB’s administrative enforcement of the statute. The decision was unanimous as to the RESPA and due process issues. 

There was a partial dissent by Judge Henderson, who agreed with disposition of the RESPA and due process issues but stated that the court should not have decided the separation-of-powers question because it was unnecessary to do so. Judge Randolph filed a separate concurrence agreeing with the majority and arguing that, in addition, the Administrative Law Judge (ALJ) who heard the case had not been appointed in a manner consistent with the Constitution.

The Bureau could seek review by the en banc D.C. Circuit (a rehearing petition would be due November 25, 2016) and, failing that, by the Supreme Court. 

Goodwin attorneys Tom Hefferon and Willy Jay were among the counsel for PHH on this appeal. The content and opinions of this document are ours alone, and do not necessarily reflect the views of our client PHH or of other clients.


Under the relevant provisions of the Dodd-Frank Act, the Bureau is headed by a single Director, who serves a five-year term and cannot be removed by the President except for cause. Under the Director’s supervision, the Bureau enforces 19 consumer statutes, including RESPA.

The Bureau accused PHH Corporation and several of its affiliated companies (collectively, PHH) of violating RESPA by referring borrowers to certain mortgage insurance companies allegedly in exchange for a percentage of insurance premiums those insurers received from borrowers. In the first-ever litigated CFPB enforcement action, an ALJ found that PHH had violated RESPA and recommended that PHH be ordered to disgorge over $6 million. Director Richard Cordray heard the administrative appeal from this decision; among other rulings, the Director affirmed the finding of a RESPA violation, concluded that there was no statute of limitations on Bureau administrative proceedings, and increased the disgorgement amount to $109 million.

PHH sought review in the D.C. Circuit, and a panel of that court had stayed the Bureau’s order pending appeal.

The Bureau’s Structure Is Unconstitutional In Part

The D.C. Circuit first held that “the CFPB is unconstitutionally structured because it is an independent agency headed by a single Director.” Slip Op. at 64. In reaching this holding, the panel examined the history of federal agencies, and observed that they fell into two categories—executive agencies directly overseen by the President and independent agencies headed by multi-member bodies. Id. at 5.  A “sharp break” from traditional agency structures, the CFPB fit into neither of those traditional structures:  its head—the Director—is independent because he could be removed by the President only “for cause,” yet the Director runs the Bureau alone and not as part of a multi-member body.  Id. at 53.  The D.C. Circuit concluded that structure violates the separation of powers.  Id. at 64.

Despite this unconstitutional structure, the D.C. Circuit declined to strike the agency down completely. Instead, the court concluded the remedy for this constitutional violation was to strike the “for cause” restriction on the removal of the Director, making the Bureau an executive agency under the direct supervision of the President and making the Director removable at the pleasure of the President.  Id. at 69. The D.C. Circuit also stated its view that this remedy would not “affect the ongoing operations of the CFPB.”  Id. at 10.

The Director’s $109 Million Disgorgement Award Falls

 The D.C. Circuit then reversed the $109 million disgorgement award issued by Director Cordray, making three separate legal holdings, each of which the court found required reversal.

First, it held that RESPA Section 8 permits 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.” Id. at 12. Although the court grounded its decision in the text of RESPA itself, and therefore did not implicate questions of administrative deference, the court also explained that Regulation X and previous Department of Housing and Urban Development (HUD) guidance interpret the statute the same way.  Id. at 76. Importantly, the D.C. Circuit held that Section 8(c) creates a “safe harbor,” a ruling which expressly overrules the Director’s conclusion that Section 8(c) clarified, rather than limited, Section 8(a)’s prohibition on kickbacks. Id. at 73. The D.C. Circuit also concluded that Section 8(c) is an element of the statute rather than an affirmative defense, and so on remand the CFPB would bear the burden of proving that reinsurance premiums exceeded fair market value.  Id. at 89-90, n. 27.

Second, the D.C. Circuit held that even if the Bureau’s interpretation were a permissible one, it could not retroactively apply that interpretation to PHH’s past conduct without violating the Due Process Clause. In reaching this conclusion, the court first found that the CFPB’s RESPA interpretation diverged from that of HUD, which enforced RESPA before the Bureau’s creation. Entities like PHH, the D.C. Circuit found, had followed HUD’s interpretation of RESPA for decades, and had carefully crafted their captive reinsurance entities to comply with that interpretation. Id. at 82. The Director’s later decision that those “captive reinsurance agreements were prohibited by Section 8” all along was not consistent with due process. Id. at 83. The court made clear that both this holding and its holding regarding RESPA interpretation are binding precedent and cannot be dismissed as dicta.

Third, the D.C. Circuit held that RESPA’s three-year limitations period applies to administrative enforcement actions just as it does to actions in court. The Bureau took the position that no limitations period applied to its administrative enforcement because the Dodd-Frank Act does not specify a limitations period for administrative enforcement, and RESPA speaks only of limitations on “actions,” which the Bureau argued meant lawsuits.  Id. at 91. Noting that the Bureau’s position would apply to “all 19 of the consumer protection statutes the CFPB enforce” (id. at 91-92), the D.C. Circuit rejected the Bureau’s position. The court first explained that Dodd-Frank incorporates the limitations periods in the underlying statutes, and under RESPA “a three-year statute of limitations applies to all CFPB enforcement actions to enforce Section 8, whether brought in court or administratively.” Id. at 12-13. The panel did not decide whether each “above-reasonable-market value” payment for reinsurance “triggers a new three-year statute of limitation for that payment,” leaving that question for remand. Id. at 100, n. 30.

Final Words

The court’s decision was lengthy and detailed, and is important reading for those interested in RESPA issues or who are regulated by the Bureau.  As noted in Judge Henderson’s separate opinion, the D.C. District Court also has before it another case challenging the Bureau’s structure and operations, which had been held in part by that court pending the decision to be handed down in the PHH case.  State Nat’l Bank of Big Spring v. Lew, No. CV 12-1023 (ESH), 2016 WL 3812637, at *1 (D.D.C. July 12, 2016).  Now that the D.C. Circuit has spoken, further developments in the law related to the Bureau’s structure are likely.