U.S. Court of Appeals: CFPB is Constitutionally Flawed

On Tuesday, October 11, 2016, the D.C. Circuit Court of Appeals handed down a ruling in the much anticipated case of PHH Corp. v. CFPB, which questioned whether the CFPB is constitutional. 

This case began as a CFPB enforcement action against mortgage lender PHH for alleged violations of Section 8 of the Real Estate Settlement Procedures Act (RESPA). In an administrative action before an Administrative Law Judge (ALJ), the CFPB claimed PHH received kickbacks from referrals to mortgage insurers in the form of reinsurance premiums paid to a PHH reinsurance subsidiary. The ALJ ruled in favor of the CFPB and ordered PHH to disgorge $6.4 million. This decision was appealed to the CFPB Director Richard Cordray (as required by the Dodd-Frank Act), and he increased the scale and scope of the RESPA violations. As a result, PHH was ordered to disgorge $109 million. PHH appealed Director Cordray’s decision claiming a lack of due process, incorrect interpretations of RESPA, and unconstitutionality of the CFPB.


Director Cordray’s decision was appealed to the U.S. Court of Appeals for the District of Columbia. A panel of three judges unanimously ruled in favor of PHH on all the outstanding RESPA issues, vacated the CFPB’s order, and remanded the case for further proceedings.


On the first issue of whether RESPA allows for captive reinsurance arrangements, the Court held “Section 8 of the Act allows for such arrangements so long as the amount paid by the mortgage insurer for the reinsurance does not exceed the reasonable market value of the reinsurance.”


On the second issue of whether CFPB violated PHH’s due process rights by retroactively applying its new interpretations of RESPA against PHH, the Court ruled in favor of PHH.


On the third issue of whether statutes of limitations apply to CFPB administrative enforcements, the Court ruled against the Bureau stating “the Dodd-Frank Act incorporates the statues of limitations in the underlying statutes enforced by the CFPB in administrative proceedings.” In this case, RESPA’s three-year statute of limitations sets the boundary for what actions the agency may claim violate the Act’s prohibitions.


The Court, however, did not stop with vacating the CFPB order. In a majority opinion (2-1) weighing on fundamental principles of constitutional law, the Court ruled the CFPB is “unconstitutionally structured.” Conducting a study of the history and practice of independent agencies – or those insulated from presidential oversight – the Court remarked on how new and different the CFPB is from its peer group and stressed how much power has been placed in the hands to the CFPB Director.


In short, when measured in terms of unilateral power, the Director of the CFPB is the single most powerful official in the entire U.S. Government, other than the President. Indeed, within his jurisdiction, the Director of the CFPB can be considered even more powerful than the President. It is the Director’s view of consumer protection law that prevails over all others. In essence, the Director is the President of Consumer Finance.


Although the Court recognized the legality of independent agencies, the Court found the CFPB, unlike traditional independent agencies, lacked the important safeguard of multi-member boards or commissions serving as a “critical substitute check on the excesses of any individual independent agency head – a check that helps to prevent arbitrary decisionmaking and thereby to protect individual liberty.” In light of these divergences from historical practice, the Court found the CFPB to be unconstitutionally structured and ruled the President has the power to remove, supervise and direct the CFPB Director at his pleasure. In all other respects, however, the CFPB may continue to operate and perform its statutory functions.

Following the court's ruling, CBA President and CEO Richard Hunt issued a statement applauding the decision and underscoring the need for a five-person, bipartisan board in efforts to preserve the Bureau as an effective regulator.