What does it look like when a federal department changes its mind? And if that department’s opinion has been offered in an ongoing court case involving a federal agency — what does that mean?

  • Whether or not the president has the power to remove the Consumer Financial Protection Bureau's director has become a central issue in a case between the CFPB and mortgage lender PHH that began in 2014.
  • An appeals court ruled the CFPB's structure unconstitutional last fall, and the Department of Justice is no longer on the bureau's side.

What does it look like when a federal department changes its mind?

And if that department’s opinion has been offered in an ongoing court case involving a federal agency — what does that mean?

This is the current scenario describing the Department of Justice’s (DOJ’s) stance toward the Consumer Financial Protection Bureau (CFPB), which is embroiled in a regulatory battle with mortgage lender PHH.

That regulatory argument involves RESPA (the Real Estate Settlement Procedures Act) and how PHH managed its partnerships — but how the CFPB is structured and whether or not the president has the power to remove the CFPB’s director (and when the president can do so) has become a central issue to the case. Tomorrow, March 21, the House Financial Services Committee will hold a hearing titled “The Bureau of Consumer Financial Protection’s (CFPB’s) Unconstitutional Design” that will undoubtedly examine the president’s ability to fire the bureau’s director at will.

The next oral arguments in the case are scheduled for April and May, but two recently filed amici curiae briefs — also known as “friend of the court” briefs — explain how the DOJ’s view has shifted and what the National Association of Realtors (NAR) thinks is important about the case.

October: The CFPB is ‘unconstitutionally structured’

“Today, PHH scored a big coup over the CFPB when a federal appeals court declared the structure of the mortgage industry regulator unconstitutional and negated its controversial interpretation of key portions of RESPA,” wrote Inman reporter Amy Tankersley in October 2016.

In 2014, the CFPB filed the notice of charges against PHH. It alleged that PHH “set up captive reinsurance agreements in the 1990s and took reinsurance fees as kickbacks in violation of RESPA,” reported Tankersley.

Mortgage insurance is required for borrowers with down payments below 20 percent. In the mid-1990s, mortgage lenders like PHH set up captive reinsurance subsidiaries to assume a portion of the mortgage insurance premiums (as well as the risk for insuring those low-down-payment mortgages).

The CFPB took issue with this process because consumers were not given an option for captive reinsurance alternatives. However, instead of filing a federal lawsuit — which is the typical next step if the CFPB suspects wrongdoing — the bureau filed an administrative adjudication claim before a judge.

Richard Cordray

Richard Cordray

“This raised serious questions about the scope of the CFPB’s authority granted by the Consumer Financial Protection Act, as the remedy allowed CFPB Director Richard Cordray to initiate the proceeding, hear PHH’s appeals and ultimately overrule the administrative law judge’s ruling,” wrote Tankersley.

“PHH also noted that the bureau chose this route to get around RESPA’s three-year statute of limitations on federal court claims, as administrative proceedings do not have the same filing restrictions,” she added.

The mortgage lender fought back — the first time a company targeted by the CFPB had done so — against the $109 million enforcement penalty, and after hearing arguments in April 2016, a federal appeals court panel ruled last fall that there were significant issues with the CFPB’s structure.

“The single-director structure of the CFPB represents a gross departure from settled historical practice,” wrote the panel of judges making the decision for the appeals court, adding that “never before has an independent agency exercising substantial executive authority been headed by just one person.”

To fix the situation, the court decided to remove a “for-cause provision,” which stated that the director of the CFPB could be removed “for just cause.” Instead, the president was given the power to remove the CFPB director at will.

November/December: CFPB asks for rehearing; PHH wants the ruling to stand

On November 18, the CFPB filed a petition requesting a rehearing en banc, formally asking the entire court — not just a panel of judges — to reconsider its “unconstitutional” ruling.

The bureau argued that it had been set up according to established case law; Congress has been given the authority to create independent bureaus to regulate and enforce different sectors of the economy, and the CFPB is doing just that, it said.

The CFPB also argued that other bureaus with similar structures — such as the Social Security Administration, the Federal Housing Finance Agency and the Office of Special Counsel — could be affected by the ruling.

Somewhat ironically, the CFPB also accused the panel of judges of misinterpreting RESPA and overstepping its role — which are the same allegations PHH is lobbing against the CFPB.

PHH filed its own petition in December, this one requesting that the court uphold its previous decision. “There is no justification for the full court to devote its limited resources to retreading this ground,” stated the mortgage lender.

November/March: The DOJ supports the CFPB — then PHH

In November when the CFPH requested its rehearing, the DOJ filed an amicus curiae in support of the request. It examines how the panel of judges parsed the “separation of powers” issue — between the president and Congress — in a winding summary of legal precedent and potential consequences.

“Because the panel’s partial invalidation of the statute involves an important constitutional question and rests on an analysis that is at odds with the relevant Supreme Court precedent, review by the full Court is warranted,” the DOJ said in the December amicus.

That was then. On Friday, the DOJ filed a new amicus curiae brief — this one suggesting that the panel of judges acted correctly in replacing the “for cause” provision with an “at will” provision that would allow the president to replace the CFPB director at any time.

“In our view, the panel correctly applied severability principles and therefore properly struck down only the for-cause removal restrictions,” the DOJ wrote.

It added: “Absent the for-cause removal provision, the Dodd-Frank Act and its CFPB-related provisions will remain ‘fully operative.'”

According to Joseph Lynyak III, a partner at international law firm Dorsey & Whitney, the legal position taken by PHH “strongly argues that nothing can correct the constitutional defects inherent in the structure of the CFPB,” but “the Department of Justice argues in its brief that the remedy adopted by the three-judge panel (i.e., striking the “for cause” provision and allowing the president to fire the director of the CFPB without cause) is correct.

“In addition, while the DOJ concedes that the PHH case could be decided without addressing the constitutional issues, it correctly indicates that at some point in the immediate future the constitutionality of the CFPB will have to be addressed,” added Lynyak.

In an analysis piece in The Washington Post, Jonathan H. Adler writes: “Should PHH Corporation lose en banc, there is little question they will seek certiorari, and every reason to expect the Supreme Court to hear the case.

“Should PHH Corporation v. CFPB reach the Supreme Court, we could be faced with the unusual situation of the Justice Department opposing a federal agency before the court.”

March: National Association of Realtors and other industry groups speak up

On March 10 — a week before the DOJ’s amicus curiae was filed — NAR and several other industry groups, including the American Bankers Association, Mortgage Bankers Association, National Association of Home Builders and Real Estate Services Providers Council, submitted an amici curiae brief as “friends of the court” of PHH.

The groups urge the court to vacate the $109 million order against PHH, outlining the ways in which the CFPB overstepped its bounds when it penalized the mortgage lender.

“[T]he practical import of the order is to abandon the relevant RESPA regulation, 12 C.F.R. § 1024.14 — which ‘permits’ the very practices that subjected PHH to a $109 million penalty,” states the brief. “But the Bureau cannot abandon such regulations without issuing a notice of proposed rulemaking and soliciting comments on its proposed amendments.

“The Bureau’s choice to dramatically alter its rules without notice in an enforcement proceeding inflicts another type of harm on industry and consumers,” continues the brief, stating that by essentially changing the rules mid-game, the CFPB is creating an “uneven playing field, with different market actors effectively following different rules based on their respective tolerance for risk.”

It’s having an immediate effect, the brief stated, noting that some risk-averse real estate professionals have “abandon[ed] economically reasonable, historically permissible practices,” and that an uneven playing field translates to fewer choices and higher costs for consumers.

“In sum, the order’s imposition of a $109 million penalty without fair notice is not only grossly unfair to PHH, but is also deeply unsettling for participants in the home lending market,” concludes the brief.

“If the order is permitted to stand, participants in the home lending market will understandably ask what other currently permissible conduct will be next to incur potentially ruinous punishment — and who will be the next target of such unforeseen, retroactive lawmaking.”

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