In a highly anticipated decision and the first judicial review of a Consumer Financial Protection Bureau ("CFPB" or the "Bureau") administrative enforcement action, the United States Court of Appeals for the District of Columbia Circuit ruled in October 2016 that the CFPB's single Director structure violated separation of powers principles and was unconstitutional. PHH Corp. v. Consumer Fin. Prot. Bureau, 839 F.3d 1 (D.C. Cir. 2016).
In January 2014, the CFPB undertook an administrative enforcement action against PHH Corp. for alleged violations of the Real Estate Settlement Procedures Act ("RESPA"). The CFPB alleged that PHH Corp., a large home mortgage lender, required certain borrowers to obtain mortgage insurance, and referred borrowers to mortgage insurers that had agreed to obtain mortgage reinsurance from a wholly owned PHH Corp. subsidiary known as Atrium Insurance Corporation. Id. at 10. One of the stated goals with the enactment of RESPA in 1974 was eliminating certain kickbacks and referral fees that increase settlement values to borrowers. Section 8 of RESPA prohibits such kickbacks and referral fees to be paid to mortgage lenders, but Section 8(c) establishes a safe harbor for certain bona fide transactions. Id. at 11. Prior to the establishment of the CFPB by Congress in 2010, the Department of Housing and Urban Development ("HUD") had interpreted Section 8(c) of the RESPA "to allow captive reinsurance arrangements so long as the mortgage insurer paid no more than reasonable market value for the reinsurance." Id. at 11. When the CFPB was established, Congress provided that the Bureau would take over enforcement of RESPA. The CFPB enforcement action against PHH Corp. was ultimately appealed to CFPB Director Richard Cordray, who found that "Section 8 bars such a captive reinsurance arrangement even when the mortgage insurer pays no more than reasonable market value to the reinsurer for the reinsurance," and ordered substantial disgorgement and injunctive relief against PHH Corp. Id. This interpretation that captive reinsurance arrangements were barred under RESPA even if made for fair market value was in direct contravention of past interpretations of RESPA by HUD. Id.
On appeal from the administrative order of the Director of the CFPB, the D.C. Circuit soundly rejected the CFPB's interpretation of Section 8(c) of RESPA, finding that the "basic statutory question in this case is not a close call," and upheld HUD's prior interpretation of the text of the statute to allow reinsurance arrangements so long as the mortgage insurer paid no more than fair market value. Id. at 41. Further, the D.C. Circuit held that even if its interpretation of Section 8 of RESPA were permissible, the Bureau's retroactive application of its new interpretation of the statute violated PHH Corp.'s due process rights. Id. at 44.
Finally, and most notably, the D.C. Circuit found that the CFPB's structure ran afoul of the separation of powers principles embedded in Article II of the Constitution. The Court explained that historically, independent agencies such as the Federal Communications Commission, the Federal Trade Commission, and the National Labor Relations Board have exercised executive power by bringing enforcement actions and issuing legally binding rules implementing statutes of Congress pursuant to the Supreme Court case Humphrey's Executor v. United States, 295 U.S. 602 (1935). The heads of those independent agencies have historically been able to be removed by the President only for cause rather than at the President's discretion. Id. at 5-6. However, those independent agencies "have historically been headed by multiple commissioners, directors, or board members who act as checks on one another," and "reduce the risk of arbitrary decisionmaking and abuse of power." Id. at 6. By contrast, executive agencies are headed by one secretary or executive officer serving at the consent of the President.
The CFPB was established by Congress as an independent agency headed not by a multi-member commission but by a single Director. The Court stated that the Bureau "Director enjoys more unilateral authority than any other officer in any of the three branches of the U.S. Government, other than the President." Id. at 7. The Court ultimately held that "[i]n light of the consistent historical practice under which independent agencies have been headed by multiple commissioners or board members, and in light of the threat to individual liberty posed by a single-Director independent agency, we conclude that Humphrey's Executor cannot be stretched to cover this novel agency structure," and "that the CFPB is unconstitutionally structured." Id. at 8. The Court declined to follow PHH Corp.'s suggestion to shut down the entire CFPB or invalidate the Dodd-Frank Act, and instead severed the statute's unconstitutional for-cause provision from the remainder of the Dodd-Frank Act, giving the President the power to supervise, direct and remove the Director at will. Id. Thus, pending any Congressional action to put forth a new structure, the CFPB "will continue to operate and to perform its many duties, but will do so as an executive agency akin to other executive agencies headed by a single person, such as the Department of Justice and the Department of the Treasury." Id.
In the wake of the weighty PHH Corp. decision, lenders and other actors in the mortgage and banking fields can rely on the Court's interpretation of RESPA to provide for safe harbor for captive reinsurance arrangements in which mortgage insurers pay fair market value for the provision of reinsurance by a lender or a lender affiliate. However, the future of the CFPB and its operations will likely be subject to review by the Supreme Court and potential Congressional action in the coming months and years.
Fitch Law Partners will continue to monitor changes and occurrences in this developing area of the law.