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February 7, 2018
Following nearly three years of litigation, the D.C. Circuit handed down a 7 to 3 ruling in PHH Corp. v. Consumer Financial Protection Bureau. The two hundred fifty page opinion addressed not only the constitutional challenges to the Consumer Financial Protection Bureau (CFPB), but also the way in which certain legal interpretations were retroactively applied against PHH. While not a full victory for the finance industry, commentators have generally viewed the result as a victory. The conclusions reached by the court were that: (i) the CFPB was constitutionally formed and structured, (ii) the CFPB violated constitutional “fair notice” principles by retroactively applying its interpretations to PHH’s actions, and (iii) the three-year statute of limitations founds in Real Estate Settlement Procedures Act (RESPA) applied to agency administrative actions, not just “actions” in court.
At issue is whether PHH, as a mortgage lender, could refer mortgage insurance and reinsurance business to a mortgage insurer, who, in turn, reinsured with the lender’s captive insurance affiliate. In 2014, the CFPB Director, Richard Cordray, determined that this structure violated the anti-kickback provisions of the Real Estate Settlement Practices Act (RESPA)—12 U.S.C. § 2607(a). The CFPB alleged that “[t]he premiums ceded by [mortgage insurers] to PHH through [its captive]: (a) were not for services actually furnished or performed, or (b) grossly exceeded the value of any such service.” Though the administrative law judge recommended a $6 million fine, Director Cordray increased the penalty to $103 million.
Constitutional Challenges to the CFPB
In October 2016, PHH prevailed on its constitutional challenges before a judicial panel of the D.C. Circuit. This opinion was from an en banc hearing by the entire Circuit. In addressing the constitutionality of the CFPB, the court concluded that the CFPB’s single-director for a five-year term structure was constitutional and that s/he may only be removed for “inefficiency, neglect of duty, or malfeasance in office.” (Opinion, p. 17). The court determined that “for cause” removal limitations were consistent with restrictions developed for other financial regulators to insulate each from political pressures. In addition, the use of a single director may, in fact, bolster accountability and was consistent with presidential oversight of other agencies that regulate industries, rather than articulate policies or exercise “core executive functions.”
Application of RESPA to Insurance Referral Programs
Having decided that the CFPB was constitutionally formed and structured, the court next addressed the imposition of the penalty against PHH. The court reinstated the judicial panel’s decision that the CFPB has misread the anti-kickback provisions of RESPA. By reinstanting the original panel decisions, the court concluded that “bona fide payments” did not violate Section 8(c) of RESPA and that payments for reinsurance to a captive affiliate fell within a safe harbor where the payments reflected the “reasonable market value” of the product or service. (Opinion, p. 17). In perhaps the most important ruling, the en banc court concluded that Director Cordray’s interpretations of the RESPA penalties were an “unlawfully retroactive reversal of the federal government’s prior position.” They also affirmed the conclusion of the panel that “a three-year statute of limitations applies to both administrative proceedings and civil actions enforcing RESPA.”
So Now What?
It is unclear whether PHH will seek certiorari from the United States Supreme Court to reexamine the en banc decision. In the meantime, the case is now remanded to the CFPB for further proceedings consistent with the panel’s decision on the application of RESPA. With Mick Mulvaney as the acting director of the CFPB, PHH may choose to forego the appeal and instead rely on proceedings before the CFPB. Acting Director Mulvaney clearly articulated his disdain for regulation through enforcement. These prior positions indicate that PHH’s chances before the CFPB should be significantly improved with its new leadership. It is unlikely, given the current leadership at the CFPB that the bureau has a strong appetite to continue the fight to impose the higher penalty.
Consumer advocacy organizations also had cause to celebrate the ruling. Many cite the decision on the constitutionality of the CFPB’s structure as a major win for consumers. They point to the fact that the current climate at the CFPB is only temporary and that the long-term effect will be an independent director that can only be removed for cause.
Dramatic Changes at the CFPB
The dramatic change in leadership at the CFPB can be both a curse and a benefit for the industries it regulates. While many industries view Mulvaney’s leadership as a welcome change from Cordray, some are concerned that the dramatic shifts in policy may lead to the future politicization of the bureau and potential pendulum swings following future elections. Beyond the direct impact within the CFPB, many industry participants report an increased interest in regulation from state regulators who are seeking to fill the void created by the CFPB’s increased leniency with financial industries and the postponement of the CFPB’s regulatory initiatives, such as ability to repay (ATR) regulations and prepaid card rules changes. Unfortunately, as the role of a national regulator diminishes, industry is sometimes faced with fifty different regulators with divergent goals, policies, and priorities.
 See, e.g., Email from Acting Director Mulvaney released by ProPublica, “On regulation, it seems that the people we regulate should have the right to know what the rules are before being charged with breaking them. This means more formal rulemaking on which financial institutions can rely, and less regulation by enforcement,” https://www.documentcloud.org/documents/4357880-Mulvaney-Memo.html; Budget Request for $0.00 for Second Quarter 2018, http://files.consumerfinance.gov/f/documents/cfpb_fy2018_q2_funding-request-letter-to-frb.pdf; “The Consumer Financial Protection Bureau today announced that it is issuing a call for evidence to ensure the Bureau is fulfilling its proper and appropriate functions to best protect consumers…. The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by regularly identifying and addressing outdated, unnecessary, or unduly burdensome regulations, by making rules more effective, by consistently enforcing federal consumer financial law, and by empowering consumers to take more control over their economic lives,” https://www.consumerfinance.gov/about-us/newsroom/acting-director-mulvaney-announces-call-evidence-regarding-consumer-financial-protection-bureau-functions/; Mulvaney editorial for the Wall Street Journal, “CFPB Has Pushed Its Last Envelope,” https://www.wsj.com/articles/the-cfpb-has-pushed-its-last-envelope-1516743561.
 “Consumers win appeal for CFPB independence,” ConsumerAction, https://www.consumer-action.org/press/articles/consumers_win_appeal_for_cfpb_independence; “Court Affirms Consumer Watchdog’s Independence; Trump Must Appoint an Independent Director,” National Consumer Law Center, https://www.nclc.org/media-center/court-affirms-consumer-watchdog-independence.html.
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