DC Circuit Finds CFPB Structure and Actions Unconstitutional

By James A. Raborn

In PHH Corp. (PHH) v. Consumer Financial Protection Bureau (CFPB), 2016 U.S. App. LEXIS 18332* (D.C. Cir. October 11, 2016), the US Court of Appeals for the District of Columbia Circuit held that the creation of the CFPB as an independent agency headed by a single director, as opposed to a multi-member commission, violated Article II of the US Constitution.  The Court also addressed the statutory arguments raised by PHH, vacating a $109 million order entered against PHH by CFPB.  As part of its analysis, the Court determined that (1) CFPB incorrectly interpreted the Real Estate Settlement Procedures Act (RESPA) to bar captive reinsurance arrangements, (2) CFPB’s retroactive application of its new interpretation of RESPA violated due process, and (3) CFPB’s claims are subject to the three-year statute of limitations provision.  The matter was remanded to re-assess CFPB’s claims.

While the constitutional authority issue has received the most attention, it will likely have minimal impact on financial institutions subject to CFPB oversight.  However, other parts of the decision may allow financial institutions to challenge the CFPB’s interpretations of other consumer protection laws and the statute of limitations ruling could be broadly applied.

CFPB Structure is Unconstitutional

The Dodd-Frank Act established the CFPB as an independent agency.  Initially, CFPB was to be formed as a traditional multi-member independent agency;1  however, the final legislation created CFPB as an independent agency with only a single director.  PHH challenged the constitutionality of this structure.

The Court noted that Congress granted CFPB broad authority to enforce consumer protection laws (power previously exercised by seven different government agencies).  It further noted that “all of this massive power is lodged in one person – the Director – who is not supervised, directed, or checked by the President or by other directors.”  PHH Corp., slip op. at *32-35.  In fact, the Court concluded that the director “enjoys significantly more unilateral power than any single member of any other independent agency” and that the power was unchecked by the President or any other colleagues.  Id. at *33-34 (emphasis in original).  As such, the Court found that CFPB represents a major departure from settled historical practice, which reflects the deep values of the Constitution, requiring multi-member bodies to oversee independent agencies.  Id. at *35-57.  Moreover, the Court concluded that the structure of CFPB “poses a far greater threat to individual liberty than does a multi-member independent agency . . . raising grave constitutional doubts about the CFPB’s single-Director structure.”  Id. at *73-74.

Finding that CFPB was unconstitutionally structured, the Court determined that the remedy for this constitutional flaw would be to operate as an executive agency, allowing the President to supervise and direct the director of CFPB and remove the director at any time at will.  Id. at *96-97.

CFPB Misinterpreted Provisions of RESPA

Because the constitutional ruling would not halt CFPB’s operations or address the $109 million order against PHH, the Court also considered the statutory arguments raised by PHH.  At issue was one of the stated objectives of RESPA to eliminate the payment of “kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services.”  12 U.S.C. 2601(b)(2).  In particular, the Court focused on the interpretation of Sections 8(a) and 8(c) of RESPA.  12 U.S.C. 2607(a), (c).2

While Section 8(a) prohibits the payment of a referral fee, the Court noted that Section 8(c) qualified Section 8(a) by allowing payments of referral fees so long as the fee was not greater than the reasonable value for the service provided.  Characterizing the “basic statutory question” as “not a close call”, the Court found that “Section 8(c) permits captive reinsurance arrangements where mortgage insurers pay no more than reasonable market value for the reinsurance.”  PHH Corp., slip op. at 101-02.  In reaching this conclusion, the Court found that (i) Congress “explicitly” recognized that the transactions were lawful “so long as reasonable market value was paid and the services were actually performed,” (ii)  the interpretation of Sections 8(a) and 8(c) accords with the “longstanding interpretation” of the Department of Housing and Urban Development (HUD), (iii) HUD’s interpretation was adopted as part of Regulation X which remained in place as a CFPB regulation (12 C.F.R. 1024.14), and (iv) the Court’s interpretation is consistent with the multiple stated purposes of RESPA and the legislative history of RESPA.  Id. at *106-10.  Significantly, the Court additionally concluded:  “The CFPB obviously believes that captive reinsurance arrangements are harmful and should be illegal.  But the decision whether to adopt a new prohibition on captive reinsurance arrangements is for Congress and the President when exercising legislative authority.  It is not a decision for the CFPB to make unilaterally.”  Id. at *109 (emphasis added).

CFPB’s Retroactive Application of Its Interpretation of RESPA Violated Due Process

The Court also noted, as an alternative holding, that CFPB’s decision to retroactively apply a new interpretation to proscribe prior conduct violated due process.  Slip op. at *110-24.  Simply put, the Court determined that CFPB’s attempt to redefine the rules related to captive reinsurance arrangements “contravene[d] the bedrock due process principle that the people should have fair notice of what conduct is prohibited.”  Id. at *115-16.  Later, the Court concluded that “[t]he Due Process Clause does not countenance the CFPB’s gamesmanship.”  Id. at *123.

Claims Raised by CFPB under RESPA Subject to Three Year Limitations Period

In light of these rulings, the Court vacated CFPB’s $109 million order against PHH and remanded the matter to determine whether CFPB could demonstrate whether any mortgage insurers paid more that reasonable market value for the reinsurance under the captive reinsurance agreements.  In so doing, the Court considered PHH’s argument that most of the conduct challenged by CFPB occurred outside of the three year statute of limitations.  CFPB argued that its claims were not subject to any limitations period.

Here, again, the Court rejected CFPB’s statutory arguments, finding that the CFPB is subject to the statute of limitations of underlying statutes enforced by it pursuant to the provisions of the Dodd-Frank Act.  The Court further determined that RESPA included a three year statute of limitations for actions to enforce Section 8 and that the CFPB was subject to this limitations period.  As a result, on remand, CFPB’s claims would be limited to those claims failing within the three year statute of limitations period.


The decision of the Court contains strong language that warns against over-reaching by the CFPB in enforcing the consumer protection laws failing within its purview.  While the determination that the structure of CFPB violated Section II of the Constitution does not directly impact the outcome of this case, it identifies the dangers and abuses that could result from CFPB’s structure.  More importantly, the decision clearly restricts CFPB’s ability to ignore historical pronouncements and regulations of agencies previously responsible for enforcement of certain consumer protection laws – in this case, RESPA and HUD.  The Court further made it clear that due process barred CFPB from deviating from a well-established prior regulatory pronouncement relied upon by financial institutions.  Finally, the Court rejects CFPB’s argument that its enforcement activities are not subject to a limitations period by enforcing the limitation period found in RESPA.

Financial institutions confronted with actions taken by CFPB may be more inclined to challenge similar actions in the future and this decision may afford a basis to do so.

The US Supreme Court approved congressional formation of independent agencies in Humphrey’s Executor v. U.S., 295 U.S. 602 (1935), noting that such agencies (e.g., FRB, FDIC, FTC – to name only a few) traditionally operate as multi-member “bod[ies] of experts appointed by lay and informed by experience.”  Id. at 624 (internal quotes omitted).

2 At issue in the case was a “captive reinsurance arrangement” established by PHH.  Specifically, an arrangement whereby PHH referred borrowers to a mortgage insurer and, in return, the mortgage insurer was required to purchase reinsurance from an affiliate of PHH.

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