A federal appeals court has ruled in favor of PHH Corp. in an action challenging a Consumer Financial Protection Bureau order and its structure.
In June 2015, CFPB Director Richard Cordray issued an order requiring PHH to pay $109 million over kickbacks received for reinsurance.
The hundreds of millions of dollars received by PHH were in violation of the Real Estate Settlement Procedures Act, according to the regulator.
Cordray’s action reversed a
November 2014 recommendation by an administrative law judge that called for PHH to disgorge more than $6 million.
So
PHH filed an appeal with the U.S. Court of Appeals for the District of Columbia seeking to vacate the CFPB order.
On Tuesday, a decision was published.
In the decision, the court wrote that it agrees with PHH that its captive reinsurance arrangements
don’t violate RESPA as long as the amount paid by the mortgage insurer doesn’t exceed the reasonable market value of the reinsurance.
PHH issued a statement indicating that it is hopeful that the opinion will provide greater certainty to the entire mortgage industry about reliance on long-standing RESPA regulation.
The court also agreed with PHH that the CFPB can’t try to prove that reinsurance payments prior to three years earlier exceeded
market value because of a three-year statute of limitations.
In addition, the court agreed with PHH’s claim that the CFPB violated PHH’s due process rights by departing from the prior interpretations of RESPA issued by the Department of Housing and Urban Development.
“In sum, we grant PHH’s petition for review, vacate the CFPB’s order against PHH, and remand for further proceedings consistent with this opinion,” the decision states. “On remand, the CFPB may determine among other things whether, within the applicable three-year statute of limitations, the relevant mortgage insurers paid more than reasonable market value to the PHH-affiliated reinsurer.”
PHH said it
will continue to present facts and evidence demonstrating that it complied with RESPA and other laws applicable to its former mortgage reinsurance activities.
The decision indicated that independent agencies like the CFPB, which aren’t subject to presidential supervision and direction, “pose a significant threat to individual liberty and to the constitutional system of separation of powers and checks and balances.”
While most independent agencies are headed by a multi-member commission, the CFPB is headed by a single director — giving Cordray “more unilateral authority than any other officer in any of the three branches of the U.S. government, other than the president.”
“The director of the CFPB possesses enormous power over American business, American consumers, and the overall U.S. economy,” the decision states. “The director unilaterally enforces 19 federal consumer protection statutes, covering everything from home finance to student loans to credit cards to banking practices.”
The court said that the single-director structure of the CFPB is a gross departure from settled historical practice. In addition, it poses a much greater risk of arbitrary decision making and abuse of power.
As a result, the CFPB — which wields vast power over the U.S. economy — lacks the critical check and structural constitutional protection provided by multi-member commission.
“We therefore hold that the CFPB is unconstitutionally structured,” the decision states.
While PHH has called for the entire CFPB to be shut down, the appellate court instead, citing Supreme Court precedent, will now give the president authority to terminate and supervise the CFPB director.
“The bureau respectfully disagrees with the court’s decision,” a CFPB spokesperson said in a written statement. “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 statement went on to say, “Today’s decision will not dampen our efforts or affect our focus on the mission of the agency.”
Mortgage Bankers Association President and Chief Executive Officer David H. Stevens said the trade group
is gratified by the court’s “extremely thoughtful opinion.” But he acknowledged that the case is far from settled and expects the government to continue to litigate it.
“We will continue to fight on behalf of our members, particularly on the RESPA and due process issues, as they go to the heart of a core argument that MBA has been making for several years now — that lenders need clear, consistent and reasonable interpretations of the rules in order to be able to best serve their borrowers and contribute to a smoothly functioning real estate market,” Stevens stated.
The National Association of Federal Credit Unions said in a written statement that it supports pending legislation that would replace the single-director structure with a five-person commission.
In the meantime, the trade group is calling for drastic measures.
“NAFCU urges an immediate moratorium at the CFPB on any rulemaking not already implemented,” NAFCU President and CEO Dan Berger said in the statement. “The bureau should also consider ceasing and desisting all rulemakings until the legality is resolved.”
Also weighing in on the decision was
Joseph Lynyak III, a partner at Dorsey & Whitney LLP, who called the decision a victory for the mortgage industry.
But he noted that issues remain unresolved.
“While the D.C. Circuit prospectively cured the CFPB’s constitutional infirmity by severing a provision of the CFPB’s enabling statute to make the position of the director of the CFPB subject to the hiring and firing authority of the president, it left open the issue whether all the past actions of the CFPB — including billions of dollars of penalties collected — are void or voidable,” Lynyak said.
While PHH’s counsel, Weiner Brodsky Kider PC, didn’t immediately respond to a request for a comment, Weiner Brodsky Chairman and Managing Partner Mitchel H. Kider previously explained that the court’s decision could have an impact on other RESPA-related issues such as marketing service agreements.
