Appeals Panel Deals Setback to Consumer-Watchdog Agency

Federal three-judge panel rules structure of CFPB is unconstitutional, but rejects idea of shutting down agency

A federal appeals-court panel ruled the structure of the Consumer Financial Protection Bureau is unconstitutional, setting aside an enforcement action against a mortgage lender and handing a blow to the five-year-old agency.

The decision Tuesday by a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit said the consumer-finance watchdog violated the Constitution’s separation of powers because its director isn’t sufficiently answerable to the president .

It rejected the idea of shutting down the CFPB and instead said the remedy is to give the president the power to remove the bureau’s director at will and to supervise and direct the watchdog’s chief.

That change could make the CFPB a more political agency than it is now, because the White House would be able to exert more control over its direction. For example, the ruling would give the next president a freer hand to remove Director Richard Cordraybefore his term expires in 2018.

In addition to rejecting the structure of the CFPB, the appeals-court panel said the agency made considerable legal errors in its enforcement action against mortgage lender PHH Corp. Among them, the CFPB adopted a new interpretation of a real-estate industry law and wrongly applied that interpretation retroactively to business conduct that took place before the switch, the panel said.

The CFPB, created by a Democratic Congress after the 2008 financial crisis and long criticized by Republicans, is headed by a single director who can be removed by the president only for cause.

“In light of the consistent historical practice under which independent agencies have been headed by multiple commissioners or board members, and in light of the threat to individual liberty posed by a single-Director independent agency….We therefore hold that the CFPB is unconstitutionally structured,” the court said.

The ruling, written by Judge Brett Kavanaugh, allowed the CFPB to continue operating as an agency, but ordered a restructuring of how it operates in the executive branch. “The CFPB therefore will continue to operate and to perform its many duties, but will do so as an executive agency akin to other executive agencies headed by a single person, such as the Department of Justice and the Department of the Treasury,” the court said.

A CFPB spokeswoman said the agency is reviewing the ruling and doesn’t have comment at this time.

The appeals-court panel was unanimous in faulting how the CFPB brought an enforcement action against PHH. Judge Karen Henderson dissented on the constitutional question, saying the court didn’t need to address that to resolve the case. All three judges were appointed by Republican presidents.

The CFPB had ordered mortgage lender PHH to disgorge $109 million in ill-gotten gains for allegedly violating the Real Estate Settlement Procedures Act by accepting kickbacks from mortgage insurers. The bureau said New Jersey-based PHH engaged in an unlawful kickback scheme that boosted costs for home buyers who needed mortgage insurance. The CFPB also said PHH referred borrowers to insurers with whom it had financial relationships, which weren’t necessarily the insurers with the lowest rates.

The CFPB alleged PHH’s kickback scheme lasted for about 15 years and continued into at least 2009.

The decision by the appeals court sent the PHH matter back to the CFPB, telling the bureau to limit elements of its case against the mortgage lender to a three-year statute of limitations.

“On remand, the CFPB may determine among other things whether, within the applicable three-year statute of limitations, the relevant mortgage insurers paid more than reasonable market value to the PHH-affiliated reinsurer,” the ruling said.

One of the issues raised in the PHH case that has received relatively less notice was the question of whether a statute of limitations applies to the matter. The CFPB has taken the position that Congress didn’t set a limit for bringing certain civil actions and administrative proceedings. The court, however, said a three-year limit applies to enforcement of the alleged kickback violations.

The case first went to an administrative judge, who found PHH violated the law but ordered a relatively small sanction: a $6.4 million disgorgement. CFPB Director Richard Cordray took a much stiffer view of the law and of the extent of PHH’s alleged violations, imposing the disgorgement penalty of $109 million.

Most CFPB enforcement cases have produced settlements with companies. Because of the lack of litigated cases, the PHH dispute was considered one of the first big tests of the agency’s authority.

An array of banking and business groups filed amicus briefs supporting PHH in the case, including the American Financial Services Association, the U.S. Chamber of Commerce and the National Association of Home Builders.

Brent Kendall, Yuka Hayashi, Mark Anderson, “Appeals Panel Deals Setback to Consumer-Watchdog Agency” Wall Street Journal, October 11 2016. Accessed via: