PHH Corp. v. CFPB:Six Issues to Watch

By Chris Bruce

Aug. 4 — A federal appeals court is soon expected to release one of the most eagerly awaited opinions in years when it rules on a challenge to a Consumer Financial Protection Bureau (CFPB) enforcement action by PHH Corp ( PHH Corp. v. Cons. Fin. Protection Bureau, D.C. Cir., No. 15-cv-01177, argued 4/12/16 ). Bloomberg BNA asked financial services lawyers what they’ll look for when the opinion finally comes down.

PHH, a mortgage company in Mount Laurel, N.J., wants the U.S. Court of Appeals for the District of Columbia Circuit to vacate a June 2015 enforcement ruling by CFPB Director Richard Cordray that said PHH violated anti-kickback provisions in Section 8(a) of the Real Estate Settlement Procedures Act (RESPA) and had to give up $109 million in what Cordray said were ill-gotten mortgage reinsurance premiums.

The case is important on several levels. It tests a reading of RESPA by Cordray that PHH says is contrary to law and previous interpretations by the Department of Housing and Urban Development (HUD). It tests a separate CFPB argument that its RESPA administrative action against PHH is not subject to a statute of limitation. And finally, the court will decide PHH's claim that the “unprecedented structure of the CFPB” and an “unaccountable Director” violates the U.S. Constitution.

Phillip L. Schulman, a partner in the Washington, D.C., offices of Mayer Brown and a member of the firm's consumer financial services group, called the case one of the most important involving the CFPB.

“Very few companies have been willing to take on the CFPB,” he said. “Many companies have settled even when the law and the facts were favorable to them. It's a critical case.”

Issue 1: Tone

Stephen H. Meyer, special counsel in Sullivan & Cromwell's financial services group, said the tone of the ruling could be important. If the court issues an opinion dismissive of the agency’s positions, that could be a negative for the CFPB in other contexts, he said.

But even if the agency loses the overall case, a dissent could cast the case in a different light.

“Government agencies worry about their reputation in the courts,” Meyer said Aug. 4. “But even if two judges rule against the Bureau, a strong dissent saying there’s legal support for the CFPB’s position on RESPA and the statute of limitations, for example, could reduce the negative impact.”

Issue 2: Constitutional Claim

How the court handles the constitutional claim will set the framework for the decision and its impact, said Benjamin K. Olson, formerly the CFPB's deputy assistant director for the Office of Regulations and now a partner in the Washington, D.C., office of BuckleySandler

“There are two paths that the court can take,” Olson told Bloomberg BNA Aug. 2. “Do they rule on RESPA and the specific issues of interpretation, or are they going to go right to the constitutionality of the Bureau? Those are two very different cases; the RESPA questions are important in the relatively small world of regulatory wonks, while the constitutional question will have dramatic implications for how Congress sets up and delegates power to agencies generally.”

The D.C. Circuit already has signaled a high level of interest in the constitutional issues. In April, one week before the case was argued, the court ordered the parties to prepare for questions about independent agencies headed by a single director, and about possible remedies if the CFPB's structure is held unconstitutional.

Issue 3: Avoid Constitutional Issue?

The court may opt to avoid the constitutional issue altogether, said Robert M. Jaworski, a partner in the Princeton, N.J., offices of ReedSmith.

One scenario is for the D.C. Circuit to focus simply on Cordray's reading of RESPA Section 8(c)(2), Jaworski said.

That's a critical question in itself. Mayer Brown's Schulman, who called treatment of Section 8(c)(2) the biggest question in the case, said Cordray interpreted Section 8(c)(2) as merely a clarification on how to interpret Section 8(a), and not a substantive exception.

“This goes against 40 years of guidance from HUD, and interpretation by circuit courts for the last decade, and it also appears to be contrary to the plain language of the statute,” Schulman said.

According to Jaworski, the D.C. Circuit might decide that Cordray misinterpreted Section 8(c)(2) and send the matter back to the CFPB for more findings on how to understand and apply the statute, without ever tackling PHH's constitutional claim.

“Courts are normally reluctant to address constitutional arguments if they can decide the case based on some other argument and leave the constitutional argument for another day or another court,” Jaworski said July 29. “Here, that is certainly possible.”

That happened in July when Judge Ellen Segal Huvelle of the U.S. District Court for the District of Columbia deferred a ruling in a separate separation-of-powers case against Cordray brought by a Texas bank, saying the D.C. Circuit was considering the “same constitutional challenge” in the PHH case.

Brian S. Marshall, policy counsel for Americans for Financial Reform, a broad-based coalition of more than 200 consumer, community and advocacy groups, said Aug. 3 that it's better if the court doesn't bypass the constitutional claim.

“It would be helpful for the court to lay to rest some of the constitutional questions because these issues continue to be raised as a matter of course in litigation against the CFPB,” Marshall told Bloomberg BNA.

But the constitutional questions won't go away, according to Joseph Lynyak, III, a partner in the Washington, D.C., and Southern California offices of Dorsey & Whitney. He said the CFPB is vulnerable to constitutional challenges that, at some point, will require resolution by the U.S. Supreme Court.

“Whether the determination is made in this case or another case, eventually an inferior court will issue a decision adverse to the CFPB that will force the U.S. Supreme Court to take up the case,” Lynyak said.

Issue 4: RESPA

Quyen T. Truong, a former CFPB assistant director and deputy general counsel, Aug. 4 called the constitutional issue the biggest question in the case, but said RESPA matters are not far behind.

“If the court determines that the CFPB’s structure is constitutional, then it’s likely to address the very weighty RESPA issues, which are themselves very significant and which will have great impact for the industry,” said Truong, who joined the Washington, D.C., offices of Stroock & Stroock & Lavan as a partner this year. “For the industry, it’s important to have clarity on the RESPA issues.”

The court may address the RESPA questions by reference to positions taken by the CFPB's regulatory predecessors, Marshall added.

“On RESPA, the real import will be if the D.C. Circuit provides more guidance to the agency on which interpretive statements of its predecessors it needs to formally overrule before it can take enforcement action,” Marshall said.

No matter what such a ruling might be, he said, it should allow the CFPB to make any needed modifications to its process.

“It could be a significant homework assignment because that work might have to go back several decades,” Marshall said. “But I think it's more likely to be a speed bump than a roadblock.”

Issue 5: Statute of Limitations

Others will look right away to see how the D.C. Circuit handles the statute-of-limitations issue — a significant question that could shape enforcement action for years.

In the administrative case against PHH, the administrative law judge (ALJ) and Cordray both concluded that no statute of limitations applies when the CFPB enforces RESPA in an administrative proceeding. According to the CFPB, although a three-year statute of limitations applies to RESPA court actions, the Dodd-Frank Act provided no limitations statute for administrative actions.

If the D.C. Circuit agrees, the CFPB might be free to challenge practices under other laws or authority based on alleged violations going back several years, even beyond the July 21, 2011, effective date of the agency's enforcement authority.

But a contrary holding would have a different effect on CFPB enforcement actions going forward, according to Lucy E. Morris, a partner in the Washington, D.C., office of Hudson Cook and formerly the CFPB's deputy enforcement director for litigation who was in charge of the administrative case while at the CFPB. She left the agency before Cordray rendered his ruling in the case.

“If the court rules against the CFPB on that issue, the Enforcement Office will be under increased pressure to complete investigations,” Morris told Bloomberg BNA Aug. 2. “My guess is that the Bureau would close some of its older investigations and accelerate its handling of others to file within the statute of limitations period. At the same time, the Bureau would appeal an adverse ruling to the Supreme Court.”

Issue 6: Disgorgement

There's another statute-of-limitations question that could be in play, Morris said. Although the ALJ recommended that PHH disgorge $6.5 million, Cordray's June 2015 ruling increased that amount to $109 million.

If the court sees the increased disgorgement amount as a penalty, that could raise a separate statute-of-limitations question, Morris said.

“I’d also look at how the court handles the question of disgorgement and the Director’s decision to multiply the ALJ’s disgorgement amount, and whether the court treats that as a penalty,” Morris said. “If they do that, it would have far-reaching impact beyond this case because it would mean that regardless of the RESPA statute-of-limitations question, the order could be subject to the five-year general statute of limitations on penalties. That’s an unsettled area.”

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