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PHH wins landmark victory: CFPB ruled unconstitutional

Mortgage lender triumphs over CFPB in fight over $103 million fine

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What was once unthinkable actually happened, as the United States Court of Appeals for the District of Columbia Circuit handed an earth-shattering victory to PHH, declaring the Consumer Financial Protection Bureau’s leadership structure unconstitutional and vacating a $103 million fine against PHH.

PHH, a mortgage lender, made national headlines when it challenged CFPB Director Richard Cordray’s $103 million increase to a $6 million fine initially levied against PHH for allegedly illegally referring consumers to mortgage insurers in exchange for kickbacks.

The case was one of the first occasions that a company fought back against the CFPB, the governmental agency that formed after the financial crisis and was a celebrated achievement of the Dodd-Frank Act, at least by those on the left.

In this case, the issue began in June 2015, when Cordray exercised his authority to layer an additional $103 million fine on top of the original $6.4 million penalty from Administrative Law Judge Cameron Elliot.

The fine centered around Cordray saying that PHH violated the Real Estate Settlement Procedures Act every time it accepted a kickback payment on or before July 21, 2008 – going far beyond Elliot’s ruling, which had limited PHH’s violations to kickbacks that were connected with loans that closed on or after July 21, 2008.

Cordray issued a final order that required PHH to disgorge $109 million – all the reinsurance premiums it received on or after July 21, 2008.

PHH challenged Cordray’s authority to levy the additional fine and the constitutionality of the CFPB, and after much deliberation, the court agreed with PHH on all counts.

In a unanimous decision of the three justices of the United States Court of Appeals for the District of Columbia Circuit, the court ruled that the CFPB’s current structure allows the director to wield far too much power, more than any other agency in the government.

“Because the Director alone heads the agency without Presidential supervision, and in light of the CFPB’s broad authority over the U.S. economy, the Director enjoys significantly more unilateral power than any single member of any other independent agency,” the court writes.

And it gets worse for the CFPB from there.

From the court’s decision:

By “unilateral power,” we mean power that is not checked by the President or by other colleagues. Indeed, other than the President, the Director of the CFPB is the single most powerful official in the entire United States Government, at least when measured in terms of unilateral power. That is not an overstatement. What about the Speaker of the House, you might ask? The Speaker can pass legislation only if 218 Members agree. The Senate Majority Leader? The Leader needs 60 Senators to invoke cloture, and needs a majority of Senators (usually 51 Senators or 50 plus the Vice President) to approve a law or nomination. The Chief Justice? The Chief Justice must obtain four other Justices’ votes for his or her position to prevail. The Chair of the Federal Reserve? The Chair needs the approval of a majority of the Federal Reserve Board. The Secretary of Defense? The Secretary is supervised and directed by the President. On any decision, the Secretary must do as the President says. So too with the Secretary of State, and the Secretary of the Treasury, and the Attorney General.

In short, the court writes, the director of the CFPB is the “single most powerful official in the entire U.S. Government, other than the President,” in terms of unilateral power.

“It is the Director’s view of consumer protection law that prevails over all others,” the court writes. “In essence, the Director is the President of Consumer Finance. The concentration of massive, unchecked power in a single Director marks a departure from settled historical practice and makes the CFPB unique among traditional independent agencies.”

At issue is the CFPB’s status as an independent agency, which, as the court points out, have typically operated with a different leadership structure than the CFPB.

The court points out that other governmental departments, such as the Department of Justice or the Department of the Treasury, are led by a single director, but notes a significant difference.

The difference, as the court notes, is that those agencies are “executive agencies,” operating within the Executive Branch chain of command under the supervision and direction of the President, and those agency heads are removable at will by the President.

“The President is a check on those agencies,” the court notes. “Those agencies are accountable to the President. The President in turn is accountable to the people of the United States for the exercise of executive power in the executive agencies.”

That makes the power structure of those agencies constitutional, whereas the CFPB’s leadership structure, with power concentrated with the agency’s director, is unconstitutional because it is an independent agency, rather than an executive agency.

“As an independent agency with just a single Director, the CFPB represents a sharp break from historical practice, lacks the critical internal check on arbitrary decisionmaking, and poses a far greater threat to individual liberty than does a multi-member independent agency,” the court writes. “All of that raises grave constitutional doubts about the CFPB’s single-Director structure.”

But that’s not the case any more.

As a result of the decision, the CFPB now will operate as an executive agency. The President of the United States now has the power to supervise and direct the Director of the CFPB, and may remove the Director at will at any time.

PHH also asked for both the CFPB and the Dodd-Frank Act to be abolished, and while the CFPB will undoubtedly change, the agency is not being shut down.

“With the for-cause provision severed, the President now will have the power to remove the Director at will, and to supervise and direct the Director,” the court writes.

“The CFPB therefore 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,” the court continues.

“Those executive agencies have traditionally been headed by a single person precisely because the agency head operates within the Executive Branch chain of command under the supervision and direction of the President,” the court continues. “The President is a check on and accountable for the actions of those executive agencies, and the President now will be a check on and accountable for the actions of the CFPB as well.”

Putting aside the foundation-shattering change to the CFPB’s leadership structure, the court was also asked to rule on the fine handed down against PHH.

At issue there was Cordray retroactively applying the law to previous violations, an act that the court did not approve of.

The court explains that decision this way:

Put aside all the legalese for a moment. Imagine that a police officer tells a pedestrian that the pedestrian can lawfully cross the street at a certain place. The pedestrian carefully and precisely follows the officer’s direction. After the pedestrian arrives at the other side of the street, however, the officer hands the pedestrian a $1,000 jaywalking ticket. No one would seriously contend that the officer had acted fairly or in a manner consistent with basic due process in that situation. Yet that’s precisely this case. Here, the CFPB is arguing that it has the authority to order PHH to pay $109 million even though PHH acted in reliance upon numerous government pronouncements authorizing precisely the conduct in which PHH engaged.

“PHH argues that the CFPB violated bedrock due process principles by retroactively applying its new interpretation of the statute against PHH,” the court writes.

“We agree with PHH,” the court continues. “We grant PHH’s petition for review, vacate the CFPB’s order, and remand for further proceedings consistent with this opinion.”

In a statement, a CFPB spokesperson says that the agency “respectfully disagrees” with court’s ruling.

“The Bureau believes that Congress’s decision to make the Director removable only for cause is consistent with Supreme Court precedent and the Bureau is considering options for seeking further review of the Court’s decision,” the CFPB spokesperson said.

“In the meantime, as the court expressly recognized, the Bureau will continue its important work,” the spokesperson continued. “Congress has charged the Bureau with ensuring that the markets for consumer financial products and services are fair, transparent, and competitive and with protecting consumers in these markets from unlawful practices. Today’s decision will not dampen our efforts or affect our focus on the mission of the agency.”

PHH, on the other hand, is “extremely gratified” with the court’s decision.

“We are hopeful that the Court’s opinion will provide greater certainty to the entire mortgage industry regarding the industry’s reliance on long-standing regulation as to how to conduct business consistent with RESPA,” PHH said in a statement.

“Regarding the Court’s decision to remand the case to the CFPB to determine whether any mortgage insurers paid more than reasonable market value to the PHH-affiliated reinsurer, we will continue to present the facts and evidence to demonstrate that we complied with RESPA and other laws applicable to our former mortgage reinsurance activities in all respects,” PHH concluded.

(Update: This article is updated with statements from the CFPB and PHH.)

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