On April 12, 2016, the U.S. Circuit Court of Appeals for the District of
Columbia held oral arguments in PHH Corporation v. Consumer Financial
Protection Bureau (“CFPB”). PHH, a mortgage lender, is challenging
the CFPB’s constitutionality as well as its interpretation of the
Real Estate Settlement Procedures Act (“RESPA”).
The case began in January 2014 when the CFPB alleged that PHH had violated
the anti-kickback provisions of Section 8 of RESPA. PHH contested the
CFPB’s charges and brought the case before an administrative law
In November 2014, the ALJ ruled in favor of the CFPB, granting injunctive
relief and ordering PHH to pay $6.4 million in damages. PHH appealed the
ALJ’s decision to CFPB Director Richard Cordray. In June 2015, Director
Cordray affirmed the ALJ’s decision and increased the penalty to
In its appeal to the D.C. Circuit, PHH challenged Director Cordray’s
interpretations of RESPA and the CFPB’s view that no statute of
limitations applies to RESPA violations in an administrative proceeding.
PHH also asserted that the CFPB’s enforcement action is void because
the CFPB itself is unconstitutional.
Before last week’s hearing, the three members of the D.C. Circuit
panel issued an order instructing the parties to be prepared to address
two specific questions at oral argument regarding the constitutionality
issue. The first question asked, “[W]hat independent agencies now
or historically have been headed by a single person?” The other
asked what the appropriate remedy would be if the court found a single-director
structure unconstitutional and if the appropriate remedy would be to “sever
the tenure and for-cause provisions” contained in the Dodd-Frank
Act. Observers remarked that the order indicated that the D.C. Circuit
was troubled by the CFPB’s structure and signaled the panel’s
willingness to declare that the CFPB is an unconstitutional agency.
While the court posed questions about RESPA and the statute of limitations
during oral arguments, the most compelling line of inquiry revolved around
the structure, authority, and constitutionality of the CFPB. In particular,
the panel aggressively questioned the CFPB’s structure, particularly
the amount of power placed in the hands of a single director. PHH argued
that the Dodd-Frank Act grants the CFPB director broad legislative, executive,
and judicial authority that violates the U.S. Constitution’s separation
of powers doctrine and that the director’s lack of accountability
to the President or Congress is only checked by the courts. Unlike other
federal agencies governed by non-partisan or bi-partisan commissions,
the CFPB is led by a single director whom the President may only remove
“for cause.” During the hearing, Judge Kavanaugh noted, “[Y]ou’re
concentrating in a single person a huge amount of power and the president
has no authority over that.”
When asked what the remedy should be if the court determined that the CFPB’s
structure was unconstitutional, the CFPB suggested that severing the Dodd-Frank’s
“for cause” provision would be appropriate. While this remedy
would permit the President to remove the director without cause, it would
also allow Director Cordray to reconsider the case. PHH on the other hand,
claimed that it would not be appropriate for the D.C. Circuit to invalidate
the “for cause” provision and send the case back to Director
Cordray for reconsideration.
PHH posited that because the CFPB is not subject to Congressional appropriations
for funding – which further insulates the CFPB’s from executive
or legislative supervision – removing the “for cause”
provision would be appropriate but insufficient to remedy the CFPB’s
unconstitutional structure. Instead, PHH recommended that the court vacates
Director Cordray’s decision in the case, declare that Director Cordray
cannot continue as Director and require Congress to create the agency
in a constitutional way before someone else can be appointed to the position.
The panel also expressed concern regarding the CFPB’s interpretations
of RESPA. Judge Kavanuagh second-guessed the CFPB’s decision to
discard the Department of Housing and Urban Development’s (“HUD”)
guidance regarding RESPA’s anti-kickback provisions. He further
questioned whether the mortgage industry received sufficient notice of
the CFPB’s interpretation of RESPA that diverged from HUD guidance
which PHH and the entire mortgage industry had relied upon for years.
The panel also seemed troubled by Director Cordray’s ostensibly arbitrary
approach to RESPA’s statute of limitations. According to the CFPB,
the RESPA statute of limitations only applies to court or judicial proceedings,
not to agency actions. Judge Kavanaugh expressed skepticism of the CFPB’s
position, pointing out that under its theory, the CFPB could “bring
an action decades after the event.”
The panel’s written decision is expected this summer or early fall.
While the panel’s hostility toward the CFPB’s defense of its
constitutionality is widely viewed as an indication that the D.C. Circuit
will invalidate Director Cordray’s order, the odds of an appeal
are likely no matter the outcome of the case. It is anticipated that the
losing party will either seek a new hearing by the full D.C. Circuit or
perhaps seek review by the Supreme Court.
If you have any questions
contact Jaspreet Kaur or call our main office at (949) 298-8050.