Court of Appeals finds CFPB’s single-director structure unconstitutional

The D.C. Court of Appeals ruled today that the CFPB’s unchecked leadership by a single director is unconstitutional. The long-awaited decision in the case of PHH Corp. v. CFPB involved a $109 million fine for alleged violations of the Real Estate Settlement Procedures Act (RESPA). In addition to the constitutionality ruling, the court also struck down the fine assessed by CFPB Director Richard Cordray, ruling that he was not permitted to ignore the statute of limitations or retroactively apply a reinterpretation of policy.

As detailed in my earlier post about the case, the CFPB charged PHH, a mortgage lender, with violating RESPA by accepting reinsurance premium payments from mortgage insurers as compensation for referrals. Director Cordray found against PHH, rejecting several defenses, including a statute of limitations defense and an argument that the CFPB enforcement action was based on a new interpretation of policy that the CFPB had inherited from the Department of Housing and Urban Development (HUD). On appeal, PHH advanced these same arguments and also contended that the CFPB unconstitutionally empowered a single individual to make determinations with no check from the President or anyone else.

The D.C. Court of Appeals first determined that the CFPB’s single-director structure is unconstitutional. The court detailed the history of agency enforcement and rulemaking, explaining that “no independent agency exercising substantial executive authority has ever been headed by a single person. Until now.” Explaining the problem with this structure, the court wrote:

Indeed, within his jurisdiction, the director of the CFPB can be considered even more powerful than the president. It is the director’s view of consumer protection law that prevails over all others. In essence, the director is the President of Consumer Finance. The concentration of massive, unchecked power in a single Director marks a departure from settled historical practice and makes the CFPB unique among traditional independent agencies.

Although the court found this single-director structure unconstitutional, it rejected PHH’s invitation to “shut down the entire CFPB.” Instead, the CFPB will operate like an executive agency such as the Department of Justice, and “the President now will be a check on and accountable for the actions of the CFPB.”

The court next turned to the specifics of the PHH case. The court struck down the $109 million disgorgement order, finding that contrary to Director Cordray’s interpretation, RESPA “allows captive reinsurance arrangements so long as the amount paid by the mortgage insurer for the reinsurance does not exceed the reasonable market value of the reinsurance.” More importantly, Director Cordray’s decision to the contrary was a reinterpretation of the long-standing policy of HUD (which had responsibility for RESPA enforcement before Dodd-Frank). The court determined that Director Cordray’s retroactive application of the CFPB’s new interpretation was unconstitutional. Lastly, the court ruled that Dodd-Frank does not permit the CFPB to ignore statutes of limitations in enforcement actions. Rather, the CFPB is bound by the statutes of limitations set forth in the laws it enforces, including RESPA. With these instructions, the court sent the case back to Director Cordray to determine whether PHH violated RESPA and, if so, to assess an appropriate fine.

The CFPB already has indicated that it is considering its next steps, which may include a request for the D.C. Court to reconsider its decision or an appeal to the Supreme Court. In the meantime, this important decision makes clear that the CFPB’s authority is not unchecked. The CFPB may not retroactively apply new policy interpretations in enforcement actions and is bound by existing statutes of limitations.

The opinion of the D.C. Circuit Court of Appeals is available here.

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