Looking Beyond the CFPB’s Constitutionality Question

By Dawn Causey, Thomas Pinder and Andrew Doersam

When considering the ongoing case of PHH Corp. v. Consumer Financial Protection Bureau, the adage that “one should not lose sight of the forest for the trees” comes to mind. The hysteria in the headlines recently has focused on the often-discussed issue of the constitutionality of the CFPB’s structure. But looking beyond the headlines, this case has wider implications on when and how the CFPB exercises its enforcement powers.

The banking industry is hoping the D.C. Circuit will declare the CFPB’s structure unconstitutional. This result, while appealing, is unlikely and ignores other important issues that may have lasting effects on the industry.

In June 2015, CFPB Director Richard Cordray overruled an administrative law judge’s recommendation for a $6.5 million fine against mortgage lender PHH for allegedly requiring unlawful kickbacks from mortgage insurers in violation of RESPA Section 8. Cordray demanded that PHH pay 18 times more—or $109 million—for each time it accepted a kickback on or after July 21, 2008.

Although RESPA sets a three-year statute of limitations, Cordray determined that it did not apply to the agency’s administrative proceedings, but only in federal district court actions. In oral argument, Judge A. Raymond Randolph appeared concerned with this determination. He explained that even if the statute was silent, the court has historically borrowed a statute of limitations from another state or federal statute. However, if the D.C. Circuit upholds the CFPB’s view, it could open the door for the agency to bring even more penalties against companies for past conduct.

In a notable shift away from guidance issued by the Department of Housing and Urban Development, Cordray found that RESPA Section 8(c)(2) does not exempt payments that are tied in any way to a referral. PHH argued that its captive mortgage reinsurance agreements were exempt under Section 8(c)(2) because they were “bona fide” payments for services actually performed. What is troubling about Cordray’s decision is that he pulled the plug on HUD’s interpretation of RESPA, which has been trusted by an entire industry for two decades.

PHH argued that the CFPB’s new interpretation of Section 8(c)(2) deprived it of due process by retroactively imposing a new statutory interpretation in an administrative proceeding. Traditionally, the government communicates its statutory interpretations by issuing a proposed rule, seeking comment and then issuing a final rule. Instead, Cordray applied his new interpretation of RESPA to punish PHH for conduct that was approved by HUD.

Not only did Cordray punish PHH without fair notice through his new interpretation of RESPA Section 8, he then increased PHH’s fine eighteen-fold. Such an exponential expansion by the CFPB should have be applied only after the industry was given fair notice of the new interpretation. To retroactively apply a penalty for previously legal behavior goes well beyond statutory and regulatory norms. As Judge Brett Kavanaugh explained in oral argument, a policeman could not tell an individual that it was okay to cross a street and then immediately give the person a ticket upon reaching the other side.

Although the constitutional issue of the CFPB’s structure will get the most notice in the headlines, the industry cannot afford to overlook these other issues at stake in this case.

Dawn Causey is general counsel at ABA, where Thomas Pinder is SVP for litigation and Andrew Doersam is a paralegal.