Banking and Finance Law Daily En banc rehearing of suit invalidating CFPB structure granted
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Thursday, February 16, 2017

En banc rehearing of suit invalidating CFPB structure granted

By Richard A. Roth, J.D.

The U.S. Court of Appeals for the District of Columbia Circuit has granted the Consumer Financial Protection Bureau’s request for a full-court rehearing of PHH Corp. v. CFPB, in which a majority of a three-judge panel decided that constitutional separation of powers principles prevents the Dodd-Frank Act’s organization of the CFPB. According to the panel decision, it is impermissible for the bureau to be structured as an independent agency whose director can be removed by the president only for cause (see Banking and Finance Law Daily, Oct. 11, 2016). The panel said that the bureau is instead to be treated as an executive agency whose director can be removed at the president’s pleasure.

Today’s per curiam order by the full court explicitly vacates the panel’s decision.

RESPA enforcement suit. The origin of the case was a CFPB administrative enforcement action against PHH Corp. that alleged violations of the Real Estate Settlement Procedures Act ban on kickbacks and unearned fees. The bureau reinterpreted RESPA’s application to captive insurance companies, applied its new interpretation to PHH Corp.’s prior business activities, found a RESPA violation, and entered a $109 million disgorgement order.

PHH Corp. appealed the bureau’s administrative enforcement proceeding, asserting both that the CFPB was unconstitutional and that the retroactive application of RESPA had denied the company due process.

Panel RESPA decision. The three-judge panel unanimously rejected the bureau’s RESPA arguments. The CFPB’s interpretation of RESPA was wrong, the judges decided. Moreover, even if the bureau’s interpretation was right, it could not be applied to prior conduct that was legal under the prior interpretation.

The new interpretation could at most apply only to conduct within the three-year statute of limitations, the judges added. They unanimously rejected the bureau’s claim that there was no time limit on administrative enforcement proceedings.

Separation of powers. Two of the three judges, over the objections of a dissenter, also decided that the bureau’s single director structure violated the Constitution’s separation of powers requirements. Noting that the Constitution neither condemned nor approved the bureau’s arrangement, the majority based its conclusions on a lack of precedent.

Historical practices consistently allowed an executive agency to have a single director but required independent agencies to have multi-member boards, the majority said. The use of a multi-member board provides a check against arbitrary actions and abuses of power because power is not concentrated in the hands of one person.

However, the majority declined the sweeping remedy that PHH Corp. desired—the invalidation of the entire CFPB. The Dodd-Frank Act included a severability clause that made clear Congress’s intent. The removal-for-cause requirement was to be severed from the remainder of the act and the bureau was to continue to operate.

The dissenter argued that the case should have been decided based on the interpretation of RESPA. It was unnecessary to consider the larger constitutional issue.

Issues outlined by the court. The order granting rehearing asked the parties to address three specific issues:

  1. Is the single director structure a violation of the separation of powers principles and, if not, is severing the removal for cause requirement the proper remedy?
  2. Would it be proper to decide the case based on the RESPA interpretation issues and avoid deciding the larger constitutional issue?
  3. What effect, if any, would a decision in Lucia v. SEC have on the PHH Corp. case?

Lucia v. SEC has the potential to influence PHH Corp. v. CFPB. The issue in Lucia is whether Securities and Exchange Commission administrative law judges are inferior officers under the Constitution or SEC employees who are outside of the scope of the Appointments Clause.

The court could be signaling that it sees some connection between the two cases, given the explicit question in the PHH Corp. order, that the court granted en banc rehearings of both cases on the same day, and that oral arguments in both cases are scheduled for the same day.

Possible results. There are three likely results of the en banc rehearing:

  1. The effects of the panel decision could be affirmed. In that case, it would be up to the CFPB to decide whether to ask the Supreme Court to hear an appeal. Of course, whether President Trump would attempt to remove CFPB Director Richard Cordray in the interim, and what the result of such an attempt might be, would be open questions.
  2. The panel’s decision could be rejected, with the full court deciding that the single-director structure does not violate the Constitution.
  3. The full court could decide that the CFPB’s administrative order should be overturned based on the RESPA issues. In that case, the court could exercise judicial restraint and decline to consider the constitutional issues.

A complete CFPB victory, however, seems unlikely. The weakness of the bureau’s RESPA arguments, the unanimous and forceful rejection of those arguments by the three-judge panel, and the questions on which the full court asked the parties to focus their arguments imply that the CFPB will find it very difficult to convince the full court to reinstate the administrative order and required disgorgement.

Oral arguments are scheduled for May 24, 2017.

Attorneys: Thomas M. Hefferon (Goodwin Procter LLP) and Mitchel Howard Kider (Weiner Brodsky Kider PC) for PHH Corp., PHH Mortgage Corp., and PHH Home Loans, LLC. John Robert Coleman for the Consumer Financial Protection Bureau.

Companies: PHH Corporation; PHH Mortgage Corporation; PHH Home Loans, LLC

MainStory: TopStory CFPB DistrictofColumbiaNews DoddFrankAct Mortgages RESPA

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