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A Day of Reckoning for the CFPB?

Philip R. Stein

Virtually ever since its inception on July 21, 2011, the Consumer Financial Protection Bureau (CFPB) has inspired wariness and skepticism `in the financial institutions and financial services providers subject to this new agency’s rather ill-defined “jurisdiction” and enforcement authority. As the CFPB embarked on an unmistakably aggressive campaign to exert authority over various sectors of the consumer finance world, industry professionals’ concerns rapidly escalated. They grew into impassioned pleas that someone, somewhere do whatever could be done to bring about elimination of the CFPB entirely, or to greatly curtail the scope of its powers. A recent oral argument in the United States Court of Appeals for the District of Columbia Circuit may offer those most disturbed by the CFPB’s practices their greatest basis to date for hope that the agency will be reined in going forward. The dispute that led up to the appellate court oral argument may serve as an “Exhibit A” for anyone wishing to claim that the CFPB exceeds its mandate in various ways, and can be, at times, recklessly punitive towards the companies it oversees. On January 29, 2014, the CFPB issued a notice of charges alleging that PHH Corp. was involved in a kickback scheme. The CFPB alleged that PHH referred mortgage insurance business to mortgage insurers in exchange for mortgage reinsurance contracts which those insurers entered into with PHH’s wholly-owned subsidiary, Atrium Insurance Corporation.

A trial on these charges took place, adjudicated not in court, but rather by a CFPB (yes, CFPB) administrative law judge. That judge found that when a mortgage insurer entered into a reinsurance contract with Atrium, it typically would then receive substantial mortgage insurance business from PHH. Moreover, on the occasions when those reinsurance contracts were terminated, referrals from PHH to the mortgage insurer would decrease substantially. The CFPB administrative law judge found that this relationship constituted a prohibited kickback under Section 8(a) of the Real Estate Settlement Procedures Act (RESPA). The result: a $6.4 million disgorgement penalty and injunctive relief against PHH.

The recourse available to PHH to challenge this adverse decision by a CFPB administrative law judge was to appeal the decision—to the Director of the CFPB, Richard Cordray. On June 4, 2015, acting as judge, jury and (some might say) executioner, the Director rendered a decision almost entirely in favor of the CFPB. But he did not stop there.  Instead, the Director of the CFPB increased the $6.4 million penalty to a staggering $109 million.

But it was the reasoning, as well as the result, that appalled many who were already not fans of this agency. In his ruling, the Director held that the CFPB was not bound by RESPA’s statute of limitations when proceeding administratively and that the concept of disgorgement under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) reached gross revenues, and was thus not limited to costs or losses incurred through the challenged practices. The Director also made clear that his agency would not be bound by interpretations issued by the Department of Housing and Urban Development (HUD), which historically enforced RESPA.

PHH at this point, having exhausted its administrative appeals, was permitted to make its next appeal to the United States Court of Appeals for the District of Columbia Circuit. Fate appeared to be on its side when it came time for a random selection of the three Circuit judges who would serve as the panel hearing this appeal. There are 11 judges who serve on the D.C. Circuit bench. Seven of them are appointees of Democratic presidents.  Four were appointed by Republicans. In a wildly improbable random selection, three of the four Republican appointees were selected to hear PHH’s appeal.

PHH’s appeal raised both fundamental constitutional challenges to the CFPB’s structure and authority, as well as challenges to the CFPB’s alleged misapplication in this particular case of RESPA provisions and precedents. The constitutional challenges included, among other things, a separation of powers argument related to the fact that there is just a single CFPB director, and that even the President’s authority to remove him from office is severely limited. Both in its identification prior to the oral argument of specific questions that counsel for both parties should be prepared to address, and in its questions to counsel at the appellate argument itself, the three-judge panel appeared to strongly signal that it had substantial and fundamental concerns about the scope of the CFPB’s authority, as well as its single Director structure. For good measure, one of the judges also stated at the argument that the notion that an agency can simply ignore the statute of limitations was counter to more than a century of precedent, and was simply an “abomination.”

A decision is expected in the next several months. To say that the court’s ruling will merit attention would be a gross understatement.

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