Appeals Court questions constitutionality of CFPB, attacks Director Cordray

D.C. Circuit 'hostile' towards the CFPB

The opening rounds started in the legal battle between PHH and the Consumer Financial Protection Bureau as the U.S. Court of Appeals for the District of Columbia Circuit heard oral arguments on Tuesday.

According to an article in The Wall Street Journal by Yuka Hayashi:

A federal appeals court panel wrestled Tuesday with the question of the Consumer Financial Protection Bureau’s authority, with one judge persistently asking about the constitutionality of the watchdog agency’s structure, saying it concentrates “huge power” in its top official.

The issues dates back to August when a D.C. Circuit Court issued a stay against a $109.2 million fine levied against PHH by CFPB Director Richard Cordray.

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 Administrative Law Judge Cameron Elliot’s ruling, which had limited PHH’s violations to kickbacks that were connected with loans that closed on or after July 21, 2008 — a mere $6.4 million penalty.

After a five-page petition from PHH, a three-judge appeals panel said the balance of hardships and the public interest heavily favor a stay.

In advance of the hearing, the U.S. Court of Appeals for D.C. sent both parties a list of questions that they should be prepared to brief on.

The questions, according to a Compass Point note, lean in favor of PHH. "While a consideration of the CFPB’s structure was already expected, we view the court’s questions regarding similarly structured agencies and potential remedies if the structure is found to be unconstitutional as a signal that the court could look favorably on PHH’s arguments," the note said.

The case finally made it to the courtroom Tuesday. From The Wall Street Journal:

Judge Brett Kavanaugh repeatedly questioned the CFPB’s single-director structure, calling it “very problematic” that such a powerful official was able to make a decision that aimed to overturn a practice long seen by companies as acceptable.

“You are concentrating huge power in a single person and the president has no power over it,” Judge Kavanaugh said. The consumer bureau, he said, has a “very unusual structure” that has “few precedents.”

The WSJ article noted that the panel is expected to issue a decision in several weeks, and any decision against the CFPB is expected to be appealed.

This case is so momentous since it is once of the first successful cases against the bureau.

Jennifer Lee, a partner at the international law firm Dorsey & Whitney in its banking and financial services practice and a former CFPB enforcement attorney, commented on the case stating, “Today’s oral argument was the Super Bowl for CFPB. The D.C. Circuit was hostile towards the CFPB’s arguments on statute of limitations, separation of powers, constitutionality of the agency, penalty calculation, and the CFPB’s interpretation of the Real Estate Settlement Procedures Act when it comes to defining a kickback.”

“The judges’ questions revealed that they were not persuaded by the CFPB’s argument that other agencies have a single director such that it is constitutional for the CFPB to have a single director. The judges’ questions focused on whether an agency that has extremely broad powers and authorities can truly be held accountable as a government entity in the absence of a bipartisan or non-partisan commission at the helm,” Lee continued.

 Lee said there were two key items that stood out to her. “What was most interesting about the judges’ questions was that they revealed the court’s underlying assumption that if a practice is widespread in the industry, it must be because industry actors held a widespread belief that the practice was legal under RESPA,” she said.

“This is an underlying assumption that the CFPB does not share. If anything, the CFPB airs on the side of assuming the opposite, which is essentially the driver of each issue that was before the court today and which is what led the CFPB Director to issue its order in the first place,” Lee said.

“What is also interesting is that the original intent in establishing the agency was to allow consumers to have a watchdog to protect their interests. But today, the CFPB faced a federal appellate court asking, which consumers were protected by the director’s order given that other insurance companies were charging about the same price such that no consumer paid more as a result of the so-called illegal referrals,” she said. “At a minimum, the agency may need to revisit its RESPA enforcement program and scrub its investigations docket to parse out actual harm versus theoretical harm cases.” 

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