Appeals Court Upholds Constitutionality of CFPB

A federal appeals court today upheld the constitutionality of the Consumer Financial Protection Bureau’s leadership structure — a single powerful director who can be removed by the president only “for cause,” not at will — reversing a three-judge panel’s decision in 2016. However, the full court upheld the three-judge panel’s findings with respect to the statutory claims of PHH, a mortgage lender fined by the CFPB under the Real Estate Settlement Procedures Act.

In a complex ruling with two concurring opinions, one opinion concurring in the judgment and three dissenting opinions in addition to the court’s majority opinion, the D.C. Circuit Court of Appeals held that the limitation on the president’s power to remove is consistent with Supreme Court rulings on other federal agencies, including the Federal Trade Commission and the Securities and Exchange Commission. “The Supreme Court has never struck down a statute conferring the standard for-cause protection at issue here,” the court held.

The case arose in 2015, when then-CFPB Director Richard Cordray overruled an administrative law judge’s recommendation for a $6.5 million fine against mortgage lender PHH for allegedly engaging in unlawful arrangements in violation of the Real Estate Settlement Procedures Act. Cordray demanded that PHH pay 18 times more — or $109 million — for each time it received a payment deemed improper by the bureau on or after July 21, 2008. PHH objected, arguing that the bureau was misinterpreting Section 8 of RESPA in forbidding the kind of captive reinsurance arrangement that PHH used, as well as changing prior RESPA interpretations long since issued by the Department of Housing and Urban Development and applying them retroactively.

The full circuit court left intact the panel’s holding that retroactive applying of a new RESPA interpretation violated PHH’s due process rights and that the bureau is bound by the three-year statute of limitations for RESPA violations, even in administrative actions. In so doing, the court sided with the American Bankers Association’s amicus brief in the case, which argued that agencies cannot ignore their own regulations and adopt interpretive constructions that conflict with their own rules.

ABA has long believed that a five-member, bipartisan commission — as originally envisioned in drafts of the Dodd-Frank Act — would balance the bureau’s needs for independence and accountability while broadening perspectives on rulemaking and enforcement and providing appropriate checks and balances. Should the case be appealed to the U.S. Supreme Court, ABA will continue to monitor it closely. For more information, contact ABA’s Rod Alba, Tom Pinder or Jonathan Thessin.