Today, a three-judge panel of the United States Court of Appeals for the District of Columbia Circuit issued a ruling overturning a $109 million monetary penalty imposed by the Consumer Financial Protection Bureau (“CFPB” or “Bureau”).  The decision in PHH Corporation v. CFPB, written by Circuit Judge Brett Kavanaugh, addressed the unconstitutionality of the Bureau’s structure and its retroactive application of a new RESPA interpretation, and imposed RESPA’s three-year statute of limitations on the Bureau. 

As indicated above, the D.C. Circuit’s decision addressed the following three issues:

  • It held, by a 2-1 vote, that the Bureau’s structure violates the Constitution’s separation-of-powers principles—because there is no multi-member bipartisan Commission and the single Director may be removed by the President only “for cause.” The court’s remedy was to invalidate the statutory provision permitting the President to remove the Director only for cause during the Director’s five-year term; if the decision stands, it will have the effect of permitting a President to remove the Director at will.
  • The court unanimously rejected the Bureau’s interpretation of Section 8 of the Real Estate Settlement Procedures Act (“RESPA”), which had ruled certain payments unlawful under RESPA’s anti-kickback provision that HUD’s prior guidance expressly permitted. The court went on to hold, also unanimously, that the retroactive application of the Bureau’s new interpretation of Section 8 violated due process.
  • The court, again unanimously, rejected the Bureau’s claim that its administrative enforcement actions were not subject to any statute of limitations, holding that the Bureau was bound by RESPA’s three-year statute of limitations.

The court, therefore, granted PHH’s petition for review, vacated the CFPB’s order requiring PHH to pay $109 million for allegedly accepting kickbacks, and remanded the case to the CFPB for further proceedings.

This case arose out of the CFPB’s enforcement action against PHH, a large home mortgage lender.  The Bureau claimed that PHH did business exclusively with mortgage insurance companies that agreed to purchase reinsurance from a wholly-owned PHH subsidiary at inflated rates—and that this arrangement violated RESPA’s anti-kickback provision.  In his final ruling against PHH, Director Cordray required PHH to disgorge all of the mortgage reinsurance premiums its subsidiary received from mortgage insurers over a twenty-year period—$109 million in all (compared to the $6 million penalty imposed by the administrative law judge)—on the theory that such premiums constituted kickbacks for referrals by PHH of the initial mortgage insurance business.

The court rejected the CFPB’s interpretation of Section 8 of RESPA as incorrect and inconsistent with the statute.  The CFPB took the position that Section 8(c)(2), which provides that nothing in Section 8 prohibits reasonable payments in return for goods, facilities or services actually provided, does not provide a substantive exception to RESPA’s anti-kickback provisions.  The court, however, disagreed.

Judge Kavanaugh emphasized that one of RESPA’s goals was to allow providers to refer customers to each other without payments for such referrals and that Section 8(c) “contains a series of qualifications, exceptions, and safe harbors” allowing “bona fide” payments by a mortgage insurer to a lender for services the lender actually provides.  The court defined “bona fide” payments as payments of reasonable market value and directed the industry to look to long-standing advice from HUD on the matter.  The court expressly stated that there is no basis for treating fair market value payments as prohibited payments for referrals if services were actually provided and that HUD’s view should prevail; therefore, only the amount of any excess over fair market value may be presumed to be a disguised referral fee.  The court concluded that “the CFPB’s interpretation flouts not only the text of the statute but also decades of carefully and repeatedly considered official government interpretations.”  The court reminded the CFPB that the decision as to whether to adopt a new prohibition under RESPA is for Congress and the President when exercising their legislative authority, and is not a unilateral decision for the CFPB.

Based on the foregoing principles, the court remanded the PHH case to the CFPB for further proceedings, noting the only relevant questions are whether the reinsurance was actually provided and whether payment from the mortgage insurer to the reinsurer was commensurate with the reasonable market value of the reinsurance.  The court directed the CFPB on remand to determine whether the relevant mortgage insurers were paid reasonable market value for the reinsurance, and, if excessive payments were made, to define the disgorgement remedy as the amount paid above reasonable market value.  According to the court, the CFPB has the burden to prove by a preponderance of the evidence that the mortgage insurer paid more than reasonable market value and, therefore, made a disguised payment for the referral.

The court’s analysis appears to provide a basis for upholding marketing services and advertising arrangements that settlement service providers had put on hold pending the outcome of the PHH case.  If, as the court held, and contrary to the CFPB’s stated position in recent enforcement proceedings, Section 8(c) of RESPA provides an exception to the anti-kickback provisions for reasonable payments in return for actual goods, facilities, or services provided—even where referrals also may be present (as long the referrals are not compensated)—then settlement service providers should be able to enter into services agreements as long as payments under such arrangements do not exceed the fair market value of actual goods, facilities, and service provided.

In addition to finding the CFPB’s RESPA interpretation impermissible under the statute, the court held that the CFPB’s retroactive imposition of a new RESPA interpretation reversing the prior HUD guidance violated PHH’s due process rights.  The court described at great length HUD’s repeated announcements that captive reinsurance arrangements were permissible if the mortgage insurer paid fair market value for actual reinsurance received.  It noted that HUD’s views were published, well known, and relied on throughout the mortgage lending industry, and had also been acknowledged and approved by various courts.  The court chided the CFPB for its retroactive application of a new RESPA interpretation, stating that “retroactivity . . .  contravenes the bedrock due process principle that the people should have fair notice of what conduct is prohibited” so they may conform their conduct to what the law requires.

The court determined that PHH did not have fair notice of the CFPB’s interpretation of Section 8 at the time of the conduct at issue, and that the CFPB therefore violated due process by applying the changed position retroactively with no notice to PHH.  The court stated:  “When a government agency officially and expressly tells you that you are legally allowed to do something, but later tells you ‘just kidding’ and enforces the law retroactively against you and sanctions you for actions you took in reliance on the government’s assurances, that amounts to a serious due process violation.  The rule of law constrains the governors as well as the governed. . . . The Due Process Clause does not countenance the CFPB’s gamesmanship.”

The court also held that the CFPB is subject to a three-year statute of limitations under RESPA in its both judicial and administrative enforcement proceedings.  The court restated the general presumption that federal causes of action must be subject to statutes of limitations.  It rejected the CFPB’s contention that it is subject to a three-year statue of limitations in judicial proceedings under RESPA but is not subject to any limitations period whatsoever in administrative proceedings.  The court held that Congress did not authorize the CFPB to bring administrative actions for an indefinite period (which would allow the agency to impose sanctions years or even decades after the challenged conduct), and that—with respect to all 19 consumer protection statutes the CFPB has authority to enforce—the CFPB is subject to the statutes of limitations contained in those statutes.

In this case, the court stated Section 1053 of the Dodd-Frank Act (12 U.S.C. § 5563) makes clear the CFPB was bound by any statute of limitations located in RESPA in the case against PHH, and Section 16 of RESPA (12 U.S.C. § 2614) sets forth a three-year statute of limitations for both administrative proceedings and court actions by the government.

In addition, the court held that the CFPB’s single-director structure is unconstitutional.  It explained that the Bureau differs from other independent agencies, such as the SEC, because it is headed by a single Director—not a bipartisan, multi-member commission—and that the President may not remove the Director from office at will, but rather only “for cause.” Moreover, the court noted that the Director “possesses enormous power over American business” because of the broad scope of the Bureau’s rulemaking and enforcement power. The court explained that the “combination of power that is massive in scope, concentrated in a single person, and unaccountable to the President triggers the important constitutional question in this case.”

The court held the Bureau’s structure unconstitutional because of the lack of checks and balances on the Director’s authority (in contrast to the checks that members of a multi-member commission provide on one another).  Rather than invalidate the Bureau entirely, however, the court severed the for-cause limitation on the President’s removal authority. This choice of remedy means that, unless this decision does not go into effect, CFPB directors will be removable by the President at will. However, the Bureau still will be able to continue operating and retains authority to prescribe rules, pursue enforcement actions, and impose legal and equitable relief.

The court declined to address the effect of this constitutional ruling on the Bureau’s past enforcement and regulatory actions, stating that it had no occasion to do so because the PHH order was invalid on the grounds discussed above. Based on past precedent involving separation-of-powers challenges to administrative agencies, parties subject to enforcement actions who have challenged those actions in court and raised the constitutional issue may be able to have the Bureau’s order set aside and the case remanded to the Director for reconsideration. The same may be true of regulations issued by the Director and subject to challenge in court on constitutional grounds.

The court’s two statutory rulings—construing Section 8 and holding the Bureau’s administrative proceedings subject to statutes of limitations applicable to enforcement actions in court—represent a significant rejection of the Bureau’s broad construction of its own authority. The Bureau may decide to seek review of these rulings, and of the constitutional rulings as well, by the en banc D.C. Circuit.  (The three-judge panel stayed the effect of its decision pending the expiration of the period for seeking en banc review.)

If these rulings stand, however, they may encourage other businesses subjected to enforcement actions or regulations based on the Bureau’s expansive views of its authority to seek review of the Bureau’s determinations in court.