CFPB Loss in PHH Case Opens Door for More Enforcement Fights

By Chris Bruce

Oct. 11 — An Oct. 11 federal appeals court ruling complicates the Consumer Financial Protection Bureau's enforcement program and may mean new challenges by targets facing possible CFPB action ( PHH Corp. v. Cons. Fin. Protection Bureau, D.C. Cir., No. 15-01177, 10/11/16 ).

In a much-awaited decision, the U.S. Court of Appeals for the District of Columbia Circuit ruled in favor of PHH Corp., a Laurel, N.J., mortgage company that challenged a $109 million disgorgement order by CFPB Director Richard Cordray in June of last year.

Two judges on the three-judge panel that heard the case said the CFPB’s single-director structure violates the U.S. Constitution, but fashioned a narrow remedy that ensures the CFPB's continued operation. In a footnote on its constitutional holding, the majority said it wasn't addressing “the legal ramifications of our decision for past CFPB rules or for past agency enforcement actions.”

Even so, that footnote opens the door to arguments that past actions were unconstitutional, said Joseph Lynyak III, a partner with Dorsey & Whitney who represents financial institutions.

“I expect they will have Director Cordray reaffirm their past actions, but clearly, adverse actions on their part against individuals will now be subject to challenge,” Lynyak told Bloomberg BNA Oct. 11.

Christopher L. Peterson, formerly an advisor to the CFPB and now a professor of law at the University of Utah who has studied the CFPB's enforcement record, said he sees limited fallout from the decision.

“For the time being, the practical impact of the PHH decision will be relatively modest because there is every reason to believe that the Obama Administration is supportive of the CFPB’s work in general and Director Cordray in particular,” Peterson told Bloomberg BNA.

RESPA Violations Alleged

Judge Brett M. Kavanaugh wrote the opinion, joined by Judge A. Raymond Randolph. Judge Karen L. Henderson dissented on the constitutional question and the majority's remedy, saying there was no need for the court to reach the issue.

Despite their differences on the constitutional question, all three judges agreed on other matters, saying the CFPB violated PHH’s due process rights by retroactively applying a new and erroneous interpretation of RESPA. They also rejected the CFPB's assertion that no statute of limitations applies to cases brought in its administrative forum.

The case arose after the CFPB brought an administrative action against PHH, saying it violated the Real Estate Settlement Procedures Act (RESPA) by referring business to mortgage insurers with whom PHH had captive reinsurance agreements. The CFPB called payments it received unlawful “kickbacks.”

An administrative law judge (ALJ) recommended a mixed ruling, including a recommendation for the company to give up $6.5 million. PHH appealed the decision to Cordray, who expanded upon the ALJ's decision. He said PHH violated RESPA each time it accepted payments at issue in the case, and ordered PHH to disgorge $109 million. He also said the Dodd-Frank Act applies statutes of limitation to CFPB actions brought in court, but not to administrative actions.

PHH quickly asked the D.C. Circuit to stay the CFPB's action, calling Cordray's ruling “a radical new interpretation” of RESPA.

The D.C. Circuit granted the stay in August 2015, saying PHH met the “stringent requirements” for such requests.

Limitations Question Vital

The CFPB's stance on the statute of limitations question has been an especially important aspect of the case. If upheld, it would allow the agency to use administrative actions to pursue companies for conduct reaching far in the past.

That would allow the CFPB to initiate cases that couldn't be brought in court, giving the agency more flexibility and negotiating power while making those actions harder for companies to defend.

The D.C. Circuit's ruling on the statute of limitations question is the real game-changer in the case, according to former CFPB enforcement attorney Maria Earley, a partner in the Washington offices of Reed Smith.

“The CFPB has threatened to sue in administrative courts, where it argued there is no applicable statute of limitations, as a major point of leverage against banks and other financial institutions,” she said.

The CFPB's stance has been a factor not just in the PHH case, but in others, including an ongoing administrative case against Integrity Advance LLC, a Newark, Del., online lender. Integrity Advance has appealed to Cordray a decision (which is sealed) against it last month by an administrative law judge.

Among other points, Integrity Advance has contested the CFPB's claim that no statute of limitations applies to CFPB administrative actions to enforce the Truth in Lending Act and the Electronic Fund Transfer Act. The D.C. Circuit explicitly referenced the Integrity Advance case in its decision.

Fallout Seen

Andrew Sandler, chairman and executive partner of BuckleySandler in Washington, also sees fallout in the enforcement arena. For one thing, he said, the CFPB will be less able to seek restitution for periods prior to statutes of limitation in cases where a statute of limitation applies.

He also cited likely impact from the court's refusal to accept the CFPB's reading of RESPA, a statute previously administered by the Department of Housing and Urban Development. The CFPB, he said, “will no longer be able to seek restitution for past periods where it interprets a rule, regulation or interpretation of another agency insofar as the subject company’s actions were consistent with the prior rule, regulation, or agency interpretation.”

Sandler also said the constitutional question also may have its own effects. “I would expect to see lawyers looking to see if challenges are appropriate,” he said.

Some aren't waiting. The National Association of Federal Credit Unions Oct. 11 called on the CFPB to freeze any rulemaking not already underway, citing the D.C. Circuit's holding that the CFPB's structure is unconstitutional.

“NAFCU urges an immediate moratorium at the CFPB on any rulemaking not already implemented,” NAFCU President and Chief Executive Dan Berger said in a statement. “The bureau should also consider ceasing and desisting all rulemakings until the legality is resolved.”

Adjustments Predicted

When the case was argued in April, the CFPB's lawyer said the agency's preferred remedy, should it lose on the constitutional question, would be severing language in Dodd-Frank that allows removal of the CFPB director only for cause.

The D.C. Circuit panel's majority took exactly that route, saying the CFPB will now operate as an executive branch agency “under the ultimate supervision and direction of the President.”

Alan S. Kaplinsky, who leads the consumer financial services group at Ballard Spahr, Oct. 11 said that may mean some adjustments for the White House and the CFPB.

“The White House and the president’s people are now obligated to supervise and manage Director Cordray, so it seems that before the CFPB takes action from a regulatory or enforcement standpoint it’s going to have to clear everything with the White House,” Kaplinsky said. “I don’t think they’re geared up for that, and they may have to hire people with the appropriate consumer financial services expertise.”

More Action Ahead

More appellate action is expected. One near-term option is for the CFPB to seek en banc review, urging the full D.C. Circuit to give the Oct. 11 three-judge panel ruling a second look.

According to Peterson, although the D.C. Circuit grants those petitions only rarely, “there is some chance that the Bureau will seek and be granted en banc review because of the importance of the ruling on the work and future of the agency.”

Jaret Seiberg, a financial institutions analyst with Cowen and Co., said he expects the CFPB will seek review at the U.S. Supreme Court, a request perhaps complicated by the still-vacant seat held by Justice Antonin Scalia before his death last year.

“There is likely still plenty of time for the case to be appealed and docketed so it can be decided before the court's term ends in June 2017,” Seiberg said. “Whether the justices take the case, in our view, will depend upon who fills the seat vacated by the death of Justice Scalia. If Democrats control that nomination, the odds favor the court taking the case while a Republican nominee could tilt the justices against accepting the appeal.”

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To contact the editor responsible for this story: Mike Ferullo at

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