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Structure of CFPB declared unconstitutional in PHH Mortgage holding

ABSTRACT: In a long-awaited opinion, the D.C. Circuit Court held that the structure of the CFPB, as it exists currently, is unconstitutional. The Court also rejected the Director's argument that the applicable statute of limitations does not apply to a CFPB administrative action.

Financial institutions and their compliance counsel across the nation waited with bated breath for the U.S. Court of Appeals in the D.C. Circuit to rule in PHH Corp. v. Cons. Fin. Protection Bureau, and the decision finally arrived in October. The D.C. Circuit vacated a June 2015 enforcement ruling from CFPB Director Richard Cordray, in which PHH was found to have violated RESPA Section 8(a) and was ordered to disgorge in excess of $109 million received in mortgage insurance premiums. 

In its holding, the Court rejected Director Cordray’s ruling that certain fees received in exchange for services provided were wrongful under RESPA Section 8. Particularly, while Section 8(a) of the Act prohibits payments for referrals, or “kickbacks,” in real estate settlement services, the Court overturned Cordray’s order and found that the safe harbors and exceptions carved out in Section 8(c)(2) could apply, which permit “payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for  services actually performed.”  12 U.S.C. § 2607(c)(2).

In its decision, the D.C. Circuit also expressly rejected Cordray’s ruling that RESPA’s 3-year statute of limitations does not apply in a CFPB administrative enforcement action, reasoning that if the intent of the legislature in the Dodd-Frank Act was to negate the statute of limitations in these proceedings, they would “expect Congress to actually say that there is no statute of limitations for CFPB administrative actions.” However, that language is absent in the Act, so the Court found the 3-year statute of limitations to be enforceable.

Perhaps of most interest to the public, though, was the Court’s holding that the current structure of the CFPB as an agency with a single director, who can only be terminated for cause, is unconstitutional.  The language of the Court’s ruling throughout its Opinion regarding the unprecedented power of the CFPB director is telling; for instance:

“No head of either an executive agency or independent agency operates unilaterally without any check on his or her authority.  Therefore, no independent agency exercising substantial executive authority has ever been headed by a single person. 

Until now.”

The Court followed with its analysis and holding that, because of the substantial amount of unchecked power held by its Director, the CFPB, as it currently exists, is unconstitutional.  While the Court did not agree with PHH’s argument that the CFPB should be dismantled entirely, it did remove the “for-cause” provision, thus allowing the President to terminate the director at-will.

While the decision rendered by the D.C. Circuit suggests that any enforcement orders from the CFPB have been rendered under an unconstitutional structure, because the holding is not binding on other Circuits, the question of its constitutionality will, inevitably, be heavily litigated in the months to come. 

The decision issued by the D.C. Circuit, in its entirety, may be found here