The United States Court of Appeals for the District of Columbia overturned an administrative order requiring a mortgage company (PHH) to pay $109 million, and in the process declared that the structure of the Consumer Financial Protection Bureau (CFPB) is unconstitutional. [1]

The administrative action against mortgage lender PHH arose out of an arrangement known as a “captive reinsurance arrangement.” Under that arrangement, PHH referred homebuyers needing mortgage insurance to insurance companies who, in turn, reinsured some of those mortgage insurance policies with an affiliate of PHH. The CFPB ruled that the arrangement violated Section 8 of the anti-kickback RESPA statute.[2] It did so despite the fact that HUD, which enforced RESPA before the creation of the CFPB in 2010, had a longstanding interpretation of that provision (relied on by the mortgage industry) that held that a “captive reinsurance arrangement” did not violate RESPA as long as the mortgage insurer paid no more than reasonable market value for the reinsurance.

On appeal, the Court of Appeals considered PHH’s challenge to the constitutionality of the structure of the CFPB.

Unlike independent agencies such as the FTC and the SEC, which are governed by multi-member commissions, Congress created the CFPB with a single all powerful Director who cannot be removed by the President except for “cause.” The court said that this concentrated power without accountability to the President, unlike a multi-member independent agency, poses a “far greater risk of arbitrary decision making and abuse of power and a far greater threat to individual liberty.” The court said that Article II required “either (i) the agency’s Director must be removable at will by the President, meaning that the CFPB would operate as a traditional executive agency; or (ii) if structured as an independent agency, the agency must be structured as a multi-member commission.” To achieve compliance with Article II of the Constitution, the court struck the for-cause provision of the statute creating the CFPB, thus making the Director accountable to the President. The decision makes the CFPB an executive agency, like the Department of Justice or the Department of State, whose heads may be removed at will by the President.

Next, the court rejected the CFPB’s interpretation of RESPA as prohibiting captive reinsurance arrangements where the amount paid by the mortgage insurers for the reinsurance does not exceed the reasonable market value of the reinsurance (and is thus not a disguised referral fee). The court remanded the case for a determination on this market-value issue. The court also criticized as a violation of due process the fact that the CFPB applied its incorrect interpretation of RESPA retroactively to conduct that occurred prior to its reversal of the HUD interpretation.

Finally, the court rejected CFPB’s assertion that there is no statute of limitations for any CFPB administrative actions to enforce consumer protection laws because none is provided in the Dodd-Frank Act that created the CFPB. The court found this claim absurd given the fact that the statute being enforced, RESPA, has a statute of limitations. The court held that the three-year statute of limitations in RESPA applies to all CFPB enforcement actions to enforce Section 8 of RESPA, whether brought in court or administratively. The court directed that this limitation be applied to the CFPB enforcement claims on remand.

Gerard Gaeng represents financial services clients and other businesses in a variety of litigation matters, including consumer class actions and regulatory matters.