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D.C. Circuit Rejects Structure of CFPB and Retroactive Enforcement Action against PHH

Posted By USFN, Tuesday, November 29, 2016
Updated: Tuesday, November 1, 2016

November 29, 2016

by Joshua Schaer
RCO Legal, P.S. – USFN Member (Oregon, Washington)

On October 11, 2016 the D.C. Circuit Court of Appeals issued its ruling on an appeal by PHH Mortgage (PHH), which challenged the Consumer Financial Protection Bureau’s (CFPB) enforcement action under Section 8 of the Real Estate Settlement Procedures Act (RESPA). The CFPB had imposed a $109 million penalty on PHH for its captive reinsurance arrangements; however, the court vacated the penalty and remanded the case back to the CFPB for further agency consideration.

Constitutional Problem with the CFPB’s Structure
PHH first contended that the CFPB violates Article II of the U.S. Constitution because it is an independent agency headed by a single director.

The court observed that the heads of both executive and independent agencies have historically been subject to a check on their authority — either through the president, fellow commissioners, or other board members. The CFPB was originally proposed to operate in that manner, but Congress vested all of the agency’s power in a single director instead. The court found that this outcome fails to prevent arbitrary decision making and protect individual liberty; therefore, the CFPB’s structure is unconstitutional.

As a remedy, the court severed the unconstitutional portion of the Dodd-Frank Act; this result allows the president to supervise, direct, or remove the CFPB director. Consequently, the CFPB can still perform its duties, but as an executive agency.

PHH’s Captive Reinsurance Arrangements
PHH next asserted that the CFPB erred in determining that Section 8 of RESPA completely prohibits captive reinsurance arrangements. These arrangements involve referring borrowers to an insurer who purchases reinsurance from an entity affiliated with, or owned by, the lender.

Prior to the CFPB’s creation, the Department of Housing and Urban Development (HUD) interpreted Section 8 of RESPA to permit captive reinsurance arrangements if the amount paid for reinsurance does not exceed its reasonable market value. However, if the amount paid was in excess of market value, a presumption would arise that the payment was for the referral and, therefore, prohibited under Section 8. PHH and other lenders relied on this interpretation.

Nonetheless, in 2015 the CFPB expressed its own contrary interpretation and penalized PHH for captive reinsurance arrangements that had occurred as far back as 2008 — before the CFPB was even founded. The court agreed with HUD’s guidance that engaging in these arrangements is not per se improper, and also found that the CFPB violated due process when it retroactively applied the opposite interpretation to PHH’s conduct.

The court then analyzed the appropriate statute of limitations for enforcement actions under Section 8 of RESPA. The CFPB argued that there is no limitation period for administrative proceedings under the Dodd-Frank Act. The court disagreed, holding that RESPA’s three-year statute of limitations covers both administrative and court actions to enforce Section 8.

On remand, the court’s ruling allows for the CFPB to allege if any insurers paid more than reasonable market value to PHH’s subsidiary, but only within the proper three-year statute of limitations.

The court’s decision is a significant victory for lenders because it reins in the CFPB’s power to take unilateral enforcement actions based on new interpretations of law. The CFPB, like traditional government agencies, is subject to checks on its authority. Thus, other actions taken based solely on the director’s judgment may now also be challenged as unconstitutional. Additionally, the CFPB is constrained to imposing penalties only within a defined limitations period based on the relevant statute.

The 101-page majority opinion in PHH Corporation v. Consumer Financial Protection Bureau (along with concurring and partial dissenting opinions) can be found at:$file/15-1177-1640101.pdf.

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