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Is the Dragon Dead?

The magazine’s legal eagle believes the CFPB is more annoyed than wounded by the federal appellate court’s ruling that its single-director structure is unconstitutional.

December 2016, F&I and Showroom - Feature

by Tom Hudson

On Oct. 11, the consumer finance world sent up a joyous cry. A court had declared that the Consumer Financial Protection Bureau (CFPB)’s structure violates the federal Constitution. This was wonderful news for critics like me of the most out-of-control federal agency in memory, as someone had done the dragon in.

Then I read the court’s opinion. It turns out that the dragon ain’t dead. It has a pretty serious “owie,” but it still has long claws and still breathes fire.

Here’s what happened: The case involved mortgage company PHH Corp. In January 2014, the CFPB challenged the firm’s captive reinsurance arrangement. It seems PHH referred its mortgage customers to mortgage insurers that, in turn, purchased reinsurance from a PHH affiliate. In an administrative action, the CFPB deemed the reinsurance payments improper kickbacks under the Real Estate Settlement Procedures Act (RESPA) and imposed a $109 million penalty. PHH appealed the CFPB’s action to the U.S. Court of Appeals for the District of Columbia Circuit, where a three-judge panel heard the case.

PHH made three arguments. The one that got the most attention was an attack on the constitutionality of the CFPB’s structure. PHH also advanced a due process challenge, and additionally argued that the CFPB’s assertion that it was not subject to statutes of limitations was wrong.

The appellate court agreed that the CFPB’s structure is unconstitutional, finding that the director of the CFPB “enjoys more unilateral authority than any other officer in any of the three branches of the U.S. government, other than the President.” The court ruled that the CFPB can continue to operate, 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[,]” and will be removable by the president.

The court also rejected the CFPB’s $109 million penalty against PHH. The court agreed with PHH that Section 8 of the RESPA allows captive reinsurance arrangements, provided that the amount paid by the mortgage insurer for the reinsurance does not exceed the reasonable market value of the reinsurance.

The PHH reinsurance program had passed muster under the RESPA standards imposed by the Department of Housing and Urban Development, only to be declared illegal by the CFPB (which had, under the Dodd-Frank Act, taken over HUD’s duties under the RESPA). PHH claimed that this governmental U-turn violated the due process clause of the U.S. Constitution. The court agreed the CFPB violated due process by retroactively applying a new interpretation of the RESPA against PHH.

Lastly, the appellate court disagreed with the CFPB’s contention that, under the Dodd-Frank Act, there is no statute of limitations for a CFPB administrative action to enforce any consumer protection law. Instead, the court found that there is a three-year statute of limitations applicable to a CFPB action under Section 8 of the RESPA.

So, after the dust settled, the results are that the CFPB director can be removed by the president, the CFPB can’t change the rules in the middle of the game, and the CFPB cannot ignore statutes of limitations in its enforcement ­actions.

Remember, though, that this is a decision by a three-judge panel of the appellate court. That means the CFPB is likely to appeal. If the opinion stands, though, the court’s unconstitutionality determination may have some additional unexpected ripple effects.

Just a few days after the PHH decision, House Financial Services Committee Chairman Jeb Hensarling (R-Texas) notified CFPB Director Richard Cordray by letter that the ruling means the bureau must now follow executive orders requiring agencies to ensure the benefits of their proposed regulations outweigh the costs. Hensarling also asserted that the CFPB must now abide by executive orders requiring consultation with Indian tribal governments and state and local officials about its rulemaking activities.

In his letter to Cordray, Hensarling summarized several of the executive orders that now apply to the bureau and requested “written assurance that the CFPB will comply in full” before it issues any future final rules. As of this writing (Nov. 2), Cordray has not responded.

So now we have a very annoyed dragon that should be, but probably isn’t, chastened by a federal appellate court. My prediction is the dragon’s wounds are, unfortunately, nowhere near fatal.

Tom Hudson is a partner in the law firm of Hudson Cook LLP and the author of several compliance manuals available at Copyright 2015, all rights reserved. Based on an article from Spot Delivery. Single print publication rights only, to F&I and Showroom. HC# 4851-1192-7611 v.1 (12/16).

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