Full D.C. Circuit Rejects CFPB Interpretation of RESPA, Holds Agency Structure Constitutional

The full D.C. Circuit Court of Appeals on Wednesday reinstated a three-judge panel’s decision holding that the CFPB’s interpretation of Section 8 of the Real Estate Settlement Procedures Act (RESPA) is contrary to law and violated PHH’s due process rights.  By reinstating the panel’s unanimous decision regarding RESPA, the court settles a long-running dispute in favor of the financial services industry.

The case stems from an administrative enforcement action brought by the CFPB against PHH.  Former Director Richard Cordray reversed nearly two decades of agency guidance by adopting and retroactively applying a new interpretation of RESPA that ignored Section 8(c)(2)’s safe harbor and would have prohibited any payment for services performed where there has also been a referral, regardless of the value of the services.

Rejecting this new interpretation of RESPA, a panel of the D.C. Circuit previously held that Section 8 permits captive reinsurance arrangements so long as mortgage insurers pay no more than reasonable market value for the reinsurance services provided, concluding that the bona fides of a payment are determined not by the intent of the parties, but rather by whether payments exceed the fair market value of the services actually rendered.  That decision was vacated pending rehearing before the full court of appeals.  The D.C. Circuit’s reinstatement of the opinion provides much needed certainty for lenders and settlement service providers.

In a concurring opinion joined by Judges Pillard and Millett, Judge Tatel stated that, in his opinion, former Director Cordray had authority to re-interpret RESPA, but that he nonetheless agreed with the rest of the court that the CFPB “ran afoul” of the due process clause by failing to give PHH adequate notice before imposing $109 million in disgorgement penalties for past conduct.  Thus, the entire court was in agreement that the retroactive application of the former Director’s new interpretation of RESPA violated PHH’s constitutional right to due process.  The en banc court remanded the matter to the CFPB for further proceedings.

The majority also reinstated the three-judge panel’s ruling that RESPA’s three-year statute of limitations applies to both administrative enforcement proceedings and civil actions in court, rejecting former Director Cordray’s conclusion that the limitations period applied only to “actions” in court.  The three-judge panel previously concluded that such a statutory interpretation, effectively removing all limitations periods for administrative actions but not for court actions, was unprecedented.

The en banc court separately reversed the portion of the panel decision that held unconstitutional a provision of the Dodd-Frank Act shielding the CFPB Director from at-will removal by the President.  The three-judge panel previously held that a Dodd-Frank Act provision offering for-cause removal protection to the single director of the CFPB violated the Constitution’s separation of powers doctrine by impermissibly limiting the President’s ability to carry out his constitutional duties.  To remedy the constitutional defect, the panel severed the removal provision from Dodd-Frank.

On rehearing en banc, a seven-judge majority of the appeals court overturned the panel decision, concluding that the for-cause removal provision was not unconstitutional.  The court reasoned that for-cause protections for the heads of independent agencies, including financial regulators, had been upheld since 1935, when the Supreme Court, in Humphrey’s Executor v. United States, sustained the constitutionality of the independent Federal Trade Commission (FTC).  The en banc court did not find the distinction between the single-director structure of the CFPB and the multi-member structure of the FTC sufficiently significant to parse the Supreme Court’s decision in Humphrey’s to reach a different outcome.

Judge Wilkins, in a concurring opinion joined by Judge Rogers, added that the CFPB Director’s adjudicatory functions are the only powers at issue in this case, further undermining the separation-of-powers challenge.

Judge Griffith, in yet a third concurring opinion, agreed that the CFPB’s for-cause removal provision does not violate the Constitution, reasoning that the removal restrictions place only minimal restrictions on the President’s removal power, and therefore the CFPB’s structure does not impermissibly interfere with the President’s constitutional duties.

Although in agreement with the majority’s reinstatement of the panel’s RESPA decision, Judges Kavanaugh, Henderson, and Randolph each filed dissenting opinions in disagreement with the majority’s ruling on the constitutionality of the removal provision.

The opinion is PHH Corp. v. Consumer Financial Protection Bureau, No. 15-1177 (D.C. Cir. Jan. 31, 2018).

Weiner Brodsky Kider PC has represented PHH in this matter since its inception before the CFPB.  For further information about this matter please contact Mitchel Kider, David Souders, or Michael Trabon.