PHH v. CFPB – Constitutionality Issues Evaluated by the Court – CFPB make up found to be unconstitutional

October 11, 2016; – The District of Columbia Circuit Court issued its ruling in the case of PHH Corporation, et.al. v. Consumer Financial Protection Bureau. The case was argued on April 12, 2016, and it is clear that the Court took great effort to evaluate the issues presented. Two critical points were addressed in the ruling. First, the Court agreed with the PHH position regarding constitutionality issues with the CFPB, finding the constitutional concerns with the Bureau. Second, the Court addresses the validity of reinsurance arrangements under RESPA, finding they are allowable so long as the arrangement adheres to market value.

On the constitutionality issue, the court evaluated the CFPB’s operation within the executive branch. The court observed that the CFPB operates as an independent executive agency because it is head by a single person. Leadership in such agencies can only be removed by the President. The court compared the CFPB to agencies like the FDIC, SEC and FDIC due to their common structure. The problem identified by the court is the need for the CFPB to have some limit on its authority and there must be checks and balances. The court found the CFPB’s single director model to be insulated from Presidential oversight and therefore unconstitutional. “In short, when measured in terms of unilateral power, the Director of the CFPB is the single most powerful official in the entire U.S. Government, other than the President.”

The court made specific reference to Humphrey’s Executor v. United States, 295 U.S. 602 (1935)” – which allows independent agencies and stated “ . . . although the single Director structure does not necessarily give more control to the president over an independent agency, one might say from the other direction that the structure at least does not diminish the President’s power  . . . .”  The CFPB Directors unchecked power is a clear departure from historical precedent.

PHH urged the only adequate remedy to be a complete shut-down of the CFPB. Although the court found “ . . .  the CFPB lacks that critical check and structural constitutional protection, yet wields vast power over the U.S. economy”, the court took a less aggressive approach and instead, severed the “for cause” provision of the CFPB’s authorizing statute, which provides the Director can only be removed “for cause”. Based on this, the CFPB director would no longer be independent and insolated. The Directors actions would be supervised by the President, who could remove the Director at will.

The second important issue included in the court ruling relates to RESPA and the courts finding of due process issues related to CFPB departure from prior HUD guidance on the topic of captive reinsurance arrangements. Particularly, the long standing industry interpretation of the relationship between section 8(a) and 8(c) of RESPA has been that parties who refer business to governed Companies can receive payment so long as the pay is market value for services actually performed. The Court considered a claim that PHH refers MI business to an insurer, if the insurer purchases reinsurance from PHH’s affiliate. The court expressed no concern with such an arrangement, unless it can be shown that the payment was above market value. “HUD’s consistent and repeated interpretation of section 8 was widely known and relied on in the mortgage lending industry”. The pervasiveness of the prior HUD ruling lead the court to hold that the practice was acceptable, within the prescribed limitation.

Finally, and on the issue of reinsurance, the court addressed the issue of Statute of Limitations, applying the RESPA three year Statute of Limitations to the Dodd-Frank created administrative hearing process.

The court’s ruling will not significantly change the direction of the CFPB. However, the case creates some clarity and consistency with the agencies structure.