Today the United States Court of Appeals for the DC Circuit issued its long-awaited ruling in the PHH v. CFPB appeal (opinion here). LLW has written about the PHH case here and here before, and below are some quick takeaways from the court’s 110-page ruling for industry watchers:
- The court determined that “the CFPB is unconstitutionally structured” because the CFPB is headed by a single person, who can only be removed for cause. In examining the history of federal agencies, the Court observed that the President has had “at will” removal authority over all officers except in the case of independent agencies headed by a multi-party commissions or boards. It found the CFPB’s unique structure as an independent agency headed by one official to be a “sharp break” from historical experience, and, for that and other reasons, a violation of separation-of-powers principles.
- The Court then held that the remedy for this “constitutional flaw” was to sever the “for cause” provision, thereby making the CFPB director removable by the President and subject to the President’s direction and supervision. The court stated its view that this remedy “will not affect the ongoing operations of the CFPB.”
The court went on to address the RESPA statutory issues that PHH raised regarding the validity of the CFPB’s $109 million order against PHH. Regarding RESPA, among other issues, the court held the following:
- First, the court agreed with PHH “that Section 8 of the Act 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.” It made this determination based on the plain language of the statute, but added that both Regulation X and previous HUD guidance interpret the statute the same way.
- Next, the decision explicitly held that Section 8(c) creates a “safe harbor.” This ruling is in direct contrast to Director Cordray’s opinion below, which concluded that Section 8(c) clarified Section 8(a)’s prohibition on kickbacks, rather than limited it. In a footnote, the opinion also noted that Section 8(c) is not an affirmative defense, meaning that in any challenge, the burden would be on the CFPB to prove a violation, rather than on the industry target to prove compliance.
- Further, the court found that the CFPB Director’s decision to depart from a prior Department of Housing and Urban Development (HUD) interpretation of RESPA and to “then retroactively apply its new interpretation of the Act against PHH  violat[ed] PHH’s due process rights.” The court made clear that its rulings on Section 8 and due process are both binding precedent and neither can be dismissed as dicta.
- The court also agreed with PHH that the RESPA three-year statute of limitations did in fact apply to the CFPB’s RESPA enforcement actions. Director Cordray’s opinion previously had determined that there was no statute of limitations under Dodd-Frank for any administrative enforcement actions, including RESPA enforcement actions. The court disagreed, holding instead that “the Dodd-Frank Act incorporates the statutes of limitations in the underlying statutes enforced by the CFPB in administrative proceedings. And under the Real Estate Settlement Procedures Act, a three-year statute of limitations applies to all CFPB enforcement actions to enforce Section 8, whether brought in court or administratively.”
The court attempted to “underscore” what it believes are “the important but limited real-world implications” of its ruling. It specifically noted that “the CFPB will continue to operate and perform its many critical responsibilities, albeit under the ultimate supervision and direction of the President.” Likewise, the court concluded “Section 8 [of RESPA] will continue to mean what it has traditionally meant: that captive reinsurance agreements are permissible so long as the mortgage insurer pays no more than reasonable market value for the reinsurance. And the three-year statute of limitations that has traditionally applied to agency actions to enforce Section 8 will continue to apply.”
The opinion was unanimous as to the RESPA issues. There was a partial dissent by Judge Henderson, agreeing with the disposition of the RESPA and due process issues but stating the view that the court should have not decided the separation-of-powers question, because it was unnecessary for it to have done so. In addition, Judge Randolph filed a concurring opinion, agreeing with the majority opinion but adding the additional concern that the administrative law judge in the case had not been properly appointed to act. The decision is subject to a possible rehearing petition (which would be due November 25), and ultimately to potential Supreme Court review.
The result of the case is significant in many ways, not the least because it is the most prominent decision by an appellate court on significant legal and procedural issues raised by the CFPB. The implications of the decision will require detailed analysis over the coming days, including in how it applies to practices other than captive mortgage reinsurance, how it applies to statutes other than RESPA, and whether it has any impact on the legality of previous actions undertaken by CFPB.
**Editor’s Note: The opinions and analysis in this post are LLW’s, and do not necessarily reflect the views or opinion of PHH or of other Goodwin clients.