After the controversial decision that declared the Consumer Financial Protection Bureau’s (CFPB) single-director structure “unconstitutional,” the authors of the legislation that created the bureau and a group of consumer rights advocates have something to say about the matter.

  • The authors of the legislation that created the CFPB and a group of consumer rights advocates filed two "friends of the court" briefings about the PHH/CFPB court battle.
  • On Oct. 11, a three-judge appeals court panel ruled in the case that the CFPB’s concentration of executive power in director Richard Cordray is unconstitutional.
  • The CFPB has asked all 11 appeals court justices to weigh in on the matter.
  • PHH and the Solicitor General must file responses to this request by Dec. 22.
  • The two "friends of the court" briefings were filed without invitation and support the CFPB's current structure.

After the controversial decision that declared the Consumer Financial Protection Bureau’s (CFPB) single-director structure “unconstitutional,” the authors of the legislation that created the bureau and a group of consumer rights advocates have something to say about the matter.

As we wait to see how mortgage lender PHH Corp. — and the Solicitor General of the United States — will respond to a petition for federal appellate court review of the decision, the authors of the sweeping legislation that created the bureau and a group of consumer rights advocates have something to say about the matter.

Richard Cordray

Richard Cordray

On Nov. 18, the CFPB asked the U.S. Court of Appeals for the District of Columbia to review what it called “a dramatic and unprecedented ruling” issued by a three-judge panel on Oct. 11, which concluded that the CFPB’s concentration of executive power in director Richard Cordray “not only departs from settled historical practice, but also poses a far greater risk of arbitrary decision-making and abuse of power, and a far greater threat to individual liberty, than does a multimember independent agency.”

‘The most important separation of powers case in a generation’

The bureau’s petition for a rehearing en banc — a review of the three-judge panel’s decision by all 11 of the court’s judges — is the latest volley in a two-year court battle between PHH and Cordray.

Cordray is seeking a $109-million penalty against PHH for allegedly setting up captive reinsurance agreements dating back to the mid-1990s and disguising kickbacks as reinsurance fees in violation of the Real Estate Settlement Procedures Act (RESPA). PHH has contended that its reinsurance practices were RESPA-compliant.

Much of the protracted legal battle has focused on whether Cordray overstepped his authority in overruling an administrative law judge’s early decision in the case, and using the CFPB’s administrative adjudication power instead of filing a federal court lawsuit to evade RESPA’s three-year statute of limitations.

The court’s Oct. 11 decision handed PHH its first victory on those arguments, with the three-judge panel noting that Cordray “enjoys more unilateral authority than any other officer in any of the three branches of the U.S. government, other than the president.”

The CFPB has asked the court’s full panel of judges to reexamine this decision, calling it “the most important separation of powers case in a generation.”

PHH, U.S. government to respond by Christmas

On Nov. 23, the court ordered PHH and the Solicitor General — the official who determines the federal government’s legal position in Supreme Court cases — to file responses to the CFPB’s petition, giving each party 15 days and 15 pages to opine on the bureau’s request.

The Solicitor General’s office requested more time to respond, as it “will require extensive consultation within the Department of Justice.”

Bowing to the demands of the holiday season and other oral arguments by the Solicitor General in the Supreme Court, the court gave both parties until Dec. 22 to file responses.

Caren Enloe, ‎partner in the Raleigh, N.C., law firm of Smith Debnam Narron Drake Saintsing & Myers LLP, noted that “the fact that a response was required does not bode well for PHH.

“I think it is indicative of the importance of the issues, particularly the constitutionality ruling, and likely a bad sign,” said Enloe, whose practice focuses on consumer financial services litigation. “I believe the majority [of the court’s judges] are Democratic appointees, so it could be interesting.”

In the meantime, two groups have asked the court to invite each of them to file an amicus curiae — or “friend of the court” — briefs due to their particular interests in the court’s ruling.

Case’s controversy attracts many ‘friends of the court’

The first group, comprising the Congressional leaders responsible for the passage of the Dodd-Frank Act — including the legislation’s namesake, former Massachusetts Rep. Barney Frank — told the court they are “particularly well situated to provide the court with insight into why Congress put in place the structure it did when it established the CFPB” and “have a strong interest in preserving the regulatory scheme that Congress established when it enacted Dodd-Frank.”

In addition, a coalition of 10 nonprofit consumer rights organizations are seeking to offer the court consumer perspectives on the practical impact of the panel’s decision. Filing this request for an invitation were:

  • The Americans for Financial Reform
  • The California Reinvestment Coalition
  • The Center for Responsible Lending
  • The Consumer Federation of America
  • The Leadership Conference on Civil and Human Rights
  • The National Community Reinvestment Coalition, the National Consumer Law Center
  • The National Council of La Raza
  • The U.S. Public Interest Research Group Education Fund Inc.
  • The Woodstock Institute

Neither the Congressional leaders nor the coalition submitted briefs in the case brought before the three-judge panel.

During that phase of the proceedings, a slew of parties filed briefs in support of both sides, with 17 parties filing a total of six briefs in support of PHH, including the National Association of Realtors (NAR), the Real Estate Services Providers Council Inc. (RESPRO) and the Mortgage Bankers Association (MBA), among other industry trade associations.

The sudden desire of these new parties to participate in a potential rehearing of the case was not lost on PHH, which pointed out to the court that if it does, in fact, invite them to file briefs, “other potential amici, including members of Congress who opposed the Dodd-Frank Act and the creation of the CFPB, may emerge.”

But PHH has another problem with the parties’ requests: Instead of waiting for the court to actually invite them to file briefs, they preemptively submitted their planned briefs, along with their motions.

This, according to attorneys for the mortgage lender, appears to conflict with Circuit Rule 35(f), a federal appellate court procedural rule which provides that “no amicus curiae brief in response to or in support of a petition for rehearing en banc will be received by the clerk except by invitation of the court.”

Without taking any position on the motions or the content of the briefs themselves, attorneys for PHH argued that this rule “seems to prohibit a party from submitting an amicus brief concerning rehearing unless the court has invited one.”

Attorneys also argued that allowing potential “friends of the court” to submit briefs before they are invited “undermines the purpose of the rule, which is meant to prevent burdening the court… .”

Because the court has granted such motions in the past, the company requested clarification from the court as to whether Rule 35(f) permits the submission of amicus curiae briefs at the rehearing stage of the game.

At press time, the court had not yet responded to PHH’s request to say whether it will allow the parties to file briefs.

Briefs: Cordray should stay

What any of these parties has to say about whether the court should grant a rehearing en banc in the case may be moot, as the court isn’t obligated to do so.

Appellate courts order rehearings only in cases concerning “a matter of exceptional public importance” or if the panel’s decision appears to conflict with a prior decision of the court.

En banc rehearings are not favored and rarely granted,” Enloe said.

Nevertheless, the groups’ prospective briefs make strong arguments for continuing the current single-director structure of the CFPB.

Lawmakers’ arguments: ‘That was plainly wrong’

First, the group of lawmakers — many of whom were responsible for the passage of Dodd-Frank and its creation of the bureau — noted that the CFPB “is the only agency with the sole responsibility of protecting American consumers from bad actors in the financial services industry.

“By concluding that the CFPB’s leadership structure is unconstitutional and severing the provision that made its director removable only for cause, the panel decision fundamentally altered the CFPB and hampered its ability to function as Congress intended,” the lawmakers contended.

“It also called into question the constitutionality of other regulatory agencies with similar structural features … such as the Federal Housing Finance Agency, Office of the Comptroller of the Currency and Social Security Administration.”

The lawmakers urged the court to rehear the case because it involves a question of “exceptional importance,” but they also said the court should take it up again because the original panel’s decision “is at odds with not only the Constitution’s text and history, but also longstanding Supreme Court precedent” — several cases in which the High Court recognized that “Congress may choose to shield the heads of independent regulatory agencies from presidential removal at will.”

“The panel’s conclusion that the CFPB’s structure is unconstitutional flatly contradicts all of these decisions, and it does so principally because it views multimember commissions as superior to agencies led by a single director,” the lawmakers argued.

“The panel improperly elevated that policy judgment — one properly made by Congress — into a holding of constitutional law. That was plainly wrong, and consideration by the en banc court is thus warranted.”

Consumer advocate groups: ‘The CFPB’s design is working’

The consumer advocate groups expressed the same analysis in their prospective brief, and added that the panel’s decision “ignores the fact that the CFPB’s design is working.

“Since the CFPB began operating in July 2011, it has proven to be highly effective in identifying violations of consumer protection law and remedying problems with precision and agility,” the groups asserted.

“The bureau has overhauled mortgage lending rules, reined in abusive debt collectors, prosecuted hundreds of companies and extracted nearly $12 billion from businesses in the form of canceled debts and consumer refunds.”

The CFPB’s effectiveness, and its ability to respond to unlawful practices quickly, is actually “attributable in part to its leadership by a single director and its insulation from political influence and industry capture,” the groups stated.

What happens in the meantime?

While we wait to see if the court will decide to rehear all or part of the case, Cordray will remain at his post, and the current structure of the CFPB will remain unchanged, said Ken Trepeta, executive director of RESPRO.

“Some thought President-elect Trump could replace Richard Cordray upon taking office, but he cannot. He must await the resolution of this appeal,” Trepeta explained.

Email Amy Swinderman

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