When a federal appeals court made a controversial decision that the Consumer Financial Protection Bureau’s (CFPB) single-director organizational structure is “unconstitutional,” it was no surprise that the CFPB asked the court to reconsider.

  • In October, a federal appeals court ruled that the CFPB's single-director structure was "unconstitutional" in a case involving mortgage lender PHH.
  • The CFPB has asked the appeals court to revisit the decision, while PHH has asked the court not to.

When a federal appeals court made a controversial decision that the Consumer Financial Protection Bureau’s (CFPB) single-director organizational structure is “unconstitutional,” it was no surprise that the CFPB asked the court to reconsider.

And it is also no surprise that mortgage lender PHH Corp., which is hoping to bring an end to its nearly three-year, contentious legal tangle with the CFPB, would prefer that the court let the decision stand.

Trouble brewing

Trouble began for the New Jersey-based lender in January 2014, when CFPB Director Richard Cordray filed a notice of charges accusing PHH and its mortgage insurance partners of engaging in a mortgage reinsurance kickback scheme since the 1990s, a violation of Section 8 of the Real Estate Settlement Procedures Act (RESPA).

Cordray elected to use the CFPB’s administrative adjudication power rather than filing a lawsuit in federal court to skirt RESPA Section 8’s three-year statute of limitations for federal court claims.

In November 2014, an administrative law judge found the companies liable for RESPA violations and recommended disgorgement of about $6.4 million in premiums that PHH paid to reinsurers.

Dissatisfied with that recommendation, Cordray appealed this decision, this time seeking as much as $493 million in disgorgement as well as $256.5 million in civil money penalties.

But Cordray had the authority to oversee the appeal process and eventually ordered PHH to pay more than $109 million in disgorgement — “an 18-fold increase” in the original amount the director sought, as PHH has noted in court proceedings.

“The CFPB sued PHH in the agency’s own in-house court, arguing that PHH’s affiliated-reinsurance arrangements violated RESPA. An administrative law judge found that PHH did not comply with the statute in some respects and recommended injunctions and disgorgement of $6.4 million. On internal appeal, the director pronounced a brand-new interpretation of RESPA, rejecting HUD’s historic interpretation and the plain language of Section 8(c),” PHH stated in its court filings.

The battle begins

PHH and its subsidiaries became the first companies to strike back against a CFPB enforcement proceeding, asking the U.S. Court of Appeals for the District of Columbia Circuit to review Cordray’s final decision and order “on the grounds that it is arbitrary, capricious and an abuse of discretion” under federal law.

After a six-month nail-biting wait, PHH finally scored its first victory in the protracted legal battle in October, when the court ruled that the CFPB’s concentration of executive power in one director “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.”

“We therefore hold that the CFPB is unconstitutionally structured,” the court ruled, and elected to sever a for-cause provision in the Dodd-Frank Act which allows for the removal of the CFPB director for just cause. This gave the president of the United States the power to remove the director at will, and to supervise and direct that individual.

The CFPB has asked the court for a rehearing to consider some of these issues, but in a Dec. 22 court filing, PHH asserted that the court’s decision was a “meticulous, well-reasoned opinion … adhering to Supreme Court precedent,” so “there is no justification for the full court to devote its limited resources to retreading this ground.”

Appellate courts rarely grant rehearings unless cases concern “a matter of exceptional public importance” or if a decision appears to conflict with a prior decision of the court.

“The panel grounded its decision in existing Supreme Court precedent and other settled authority,” PHH stated in response to the CFPB’s request. “It remedied a violation of the separation of powers by allowing the agency to continue to operate subject to basic constitutional constraints, without addressing the decision’s effect on past actions.”

RESPA questions remain

Although much of the litigation has focused on the scope of Cordray’s authority, the case is still, at its core, about whether PHH’s mortgage reinsurance agreements violated RESPA.

PHH has maintained all along that its practices were RESPA-compliant, as they were set up within the scope of Section 8(c)(2) of the statute, which sets forth various exemptions from its prohibitions on paying for referrals and splitting fees.

The company’s practices also adhered to informal guidance issued by the CFPB’s predecessor, the Department of Housing and Urban Development (HUD), which stated that “so long as payments for reinsurance under captive reinsurance arrangements are solely ‘payment for goods or facilities actually furnished or for services actually performed,’ these arrangements are permissible under RESPA Section 8 (c)(2).”

The court’s October decision unanimously agreed with PHH’s arguments, finding the “basic statutory question” of whether RESPA allows for affiliated reinsurance agreements was “not a close call.”

“That decision is consistent with every other court to consider the question,” PHH stated in its response to the CFPB’s petition. “Far from ‘defeating the core aim’ of RESPA, the decision merely restores RESPA’s settled meaning, providing renewed certainty to industry and consumers. The CFPB’s position would make this court an outlier, creating a circuit split and crying out for Supreme Court review.”

“This court should deny the petition for rehearing,” PHH concluded.

Email Amy Tankersley

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